Contents. 01 Section 1 Introduction. 02 Section 2 The basics: Buying your property. 06 Section 3 Mortgage affordability

Guide to Mortgages This guide is intended to give IPSE members a generic overview of the mortgage market, an understanding of mortgage terminology and specifically the options available to them when considering home finance. It describes the different routes available to freelance consultants, self employed people and contractors. Guide to Mortgages 1

Contents 01 Section 1 Introduction Introduction Version Disclaimer 02 Section 2 The basics: Buying your property First steps first, how much can I borrow? Agreeing the price Your mortgage application Exchange and completion of contracts Protecting your investment Buying through a builder Buying at auction Types of property Land tenure Buying in Scotland Shared equity 06 Section 3 Mortgage affordability Introduction How much can I borrow? Interest on your mortgage Deposit payable 08 Section 4 Understanding your repayment options Repayment mortgages Interest only mortgages Split-repayment / Interest only mortgages 10 Section 5 Understanding your mortgage scheme options Traditional mortgages Flexible mortgages Fixed rates Discounted rates Tracker rate Capped rates Adverse credit Cash back Offset/Cheque book mortgages Standing variable rates (SVR)

13 Section 6 Additional information Introduction Mortgage term Home equity release schemes Annual percentage rates Joint mortgages Scottish Home Reports What is included in a Home Report? Who needs a Home Report 16 Section 7 What is a remortgage? Introduction How it works Capital-raising 17 Section 8 Buy to let What is a buy-to-let mortgage? Tax breaks Buy-to-let pros and cons Let to Buy 19 Section 9 Additional costs Introduction Stamp duty Mortgage broker fees Arrangement fees Valuation fees and surveys Solicitor s fees Early repayment charges or exit fees 21 Section 10 Buy to let Introduction Renting Buy to let Building and contents insurance Buildings Cover Contents Insurance 22 Section 10 Continued Arranging your insurance Personal Insurance Life Insurance Critical Illness Insurance Wills Payment protection insurance Income protection/permanent health insurance (PHI) Online cover or via a broker

Section 1 Introduction 1.0 Introduction This guide is intended to give IPSE members a generic overview of the mortgage market, an understanding of mortgage terminology and specifically the options available to them when considering home finance. It describes the different routes available to freelance consultants, self employed people and contractors considering purchasing a property to live in or as an investment. 1.1 Version This is edition 2.0 of the guide, published February 2012. The information contained within was correct at the time of writing. 1.2 Disclaimer This guide does not constitute legal or financial advice and neither IPSE nor any contributor to the guide may be held responsible for any consequences of actions taken as a result of reading it. The reader should use their judgment to decide whether or not they feel competent to arrive at decisions on these matters and, if not, seek bespoke professional advice. Guide to Mortgages 1

Section 2 The Basics Buying your property Introduction As highly motivated individuals, freelancers will often want to enjoy the security, sense of achievement and potential for long term gains that property investment can bring. This guide will help arm you with the detailed knowledge to help ensure that any purchase, remortgage or buy to let investment is a success. We aim to show that you can arrange the finance you need now that you are outside of the confines of a more standard PAYE employment contract. Our freelancer tips will hopefully provide assistance in overcoming many of the challenges you face and help you make the most of the mortgage market. 2.0 First steps first, how much can I borrow? When you start house hunting, it can be both exciting and challenging, with so many options available, but knowing how much you can afford to pay will help you to narrow your search. After taking into account savings, money about to be released from the sale of an existing property, funds from relatives etc in most cases a prospective homebuyer will need to borrow at least part of the purchase price and so will approach a bank or building society for mortgage finance. A mortgage is a form of loan which is taken out using a property as security, with the debt paid back over a number of years. The definition of property may include a house, a flat, or an apartment but mortgages cannot be taken out against assets, such as a vehicle, stocks and shares or other investments. The easiest way to set your budget is with an agreement in principle from the lender of your choice and it can also act as a great bargaining tool when you are negotiating on a property because it proves you are good for the money! A visit to your bank, a search online or working with an independent mortgage adviser can get you an agreement in principle within a few hours and you should not have to pay a fee for this service. A preliminary credit search is carried out in most cases and this will help satisfy the lender that you have conducted your financial affairs responsibly in the past and represent a good risk for any future mortgage. The lender will use various means to gauge your income and will then apply a multiple to this to give you an amount that they are happy to lend in principle so you can get started on your house search straight away. Freelancers Tip 1 Avoid getting multiple agreements in principle as each time these are carried out they can feature a credit search that leaves a virtual footprint against your name. Too many of these against your record can have a very detrimental effect on your credit rating and the next lender could well decline your eventual application simply because you have been diligently shopping around. Guide to Mortgages 2

2.1 Finding the property Online property search tools can be useful for finding a property and for some, can begin to be a really entertaining pastime. Gone are the days when you needed to register with every estate agent in town to be sure of not missing out on your dream home. However, the online approach can still take up a lot of your time as you inevitably have to view several properties before you find one that meets your requirements. If you are busy with your client or family commitments a property acquisition service can take the hassle out of home buying. These services are very popular with American and Australian buyers as the Realtor will take your requirements and then find a short list of properties to match them. They can even do your viewings for you and then present you with their findings, saving even more time. 2.2 Agreeing a price Once you have settled on that dream property, you will negotiate with the seller s estate agent. Stick to your guns and do not be edged up to a level of purchase price above the amount you can afford. The key to negotiating is to know approximately how much the house is worth. You can check what the house was previously bought for and gauge the current value using websites, such as Zoopla, that display houses by postcode or street name. This knowledge will give you the upper hand in any negotiation and will help to ensure you don t pay over the odds for a house in your chosen area. Once you have made an offer, the estate agent will act as go-between for you and the seller. After you have agreed a purchase price for the property, you can kick-start the mortgage application. 2.3 Your mortgage application Having surveyed the market for a competitive mortgage scheme you will decide or you and your mortgage adviser will agree a lender and interest rate that meets your needs. Again there should be no need to pay for the services of a mortgage broker but whichever route you take you will be provided with an indication of monthly costs and terms called a key features illustration. Mortgage options will be covered in more detail later in this guide. You will need to instruct a solicitor to handle the legal side of the process. A number of checks are carried out in order to assess if the property is worth what you have offered to pay for it. A survey will be made of the property to ensure that it is structurally sound, land registry and local authority searches will be undertaken to make sure that the plot, area and title to the property that your buying has no unforeseen problems and once all of these have been completed and any potential problems dealt with, a mortgage advisor will push your lender to issue a formal mortgage offer. 2.4 Exchange and completion of contracts The next step is for both parties to sign the contracts. You will liaise with your solicitor to ensure this goes smoothly and then your solicitor will request your deposit money, which is normally around 10-20% of the purchase price. This is transferred to your solicitor so that they can hold it for you between exchange of contracts and completion; this can either be a cash deposit or be earmarked from equity in your current home, with the solicitor arranging a representative paper transaction to that effect. The final stage in the process of buying a home is conducted behind the scenes by your solicitor. The mortgage monies will be requested and cleared in time for completion. They will then send the transfer deeds to the seller s solicitor and once these have been received back the sale is complete. Guide to Mortgages 3

Once the property is yours, you can pop open the champagne for yourselves and get the kettle on for the removal men. Be aware that the process works slightly differently in Scotland. 2.5 Protecting your investment Amongst the excitement of buying your dream home, it is easy to forget that the property is legally your responsibility to protect and look after and it will probably now be your most valuable asset. For that reason, it is advisable that you take out a comprehensive building and contents insurance to protect your home and belongings against loss or damage. It is also important to consider any life insurance needs once the property is yours as you will need to protect any dependents if the worst should happen. Life cover will pay out a lump sum on death to pay off your mortgage so your loved ones have one less thing to worry about. 2.6 Buying through a builder When it comes to buying a new build property, there are often a number of options available to you due to the fact that the property developers can be keen to sell quickly. For example, with some schemes the builder pays the deposit for you. This can be appealing, especially for someone who is struggling to get a deposit together, but it is important to note that not all lenders will accept builders deposits and that they will sometimes restrict a builder s deposit to 5% of the overall deposit. You need to also check that the lenders do not overvalue the property or value it at the price that you are paying i.e. asking price minus the deposit, which can leave you with a shortfall in the required loan amount after all. If you are purchasing a furnished new build you need to check whether the lender values the property with or without the furnishings. Also, be careful not to find yourself in a position whereby your mortgage deal expires before the completion of the building. Consider a mortgage whereby you are offered a longer period of time to complete. These extensions do not apply to all products so it is important to check. 2.7 Buying at auction For the private buyer, there are advantages of buying at auction. Some of the main advantages are: Equal opportunity The property is available for sale on a set day for all interested parties so everyone has an equal chance of buying. No gazumping There is no risk of being gazumped (being out-bid at the last minute) because the property is sold on the fall of the gavel and the contract is binding. Safe purchasing There is no danger of the vendor pulling out as the contract of sale is binding as soon as the gavel falls. More choice Auctions often offer a wider range of properties (including repossessions, properties in need of renovation etc). Time-saving All legal work and surveys should be completed prior to the sale so the completion of the sale should be a lot quicker. It is important to remember that when buying at auction it is essential to have funds in place before bidding and to set yourself a limit, which you will not exceed. You will need to pay a deposit on the day of sale (usually 10%) and the balance is usually due 28 days later. It is also recommended that you have a survey undertaken prior to the sale. If you are taking out a mortgage your lender will want to use their surveyor to assess the property prior to the auction as well. While you might lose a valuation or two, you could land yourself a real bargain buying this way. It may be best to speak to a mortgage adviser about lenders who are happy to lend on auction properties because with only 28 days to finalise everything you cannot afford to make a wrong choice of lender. Guide to Mortgages 4

2.8 Types of property Certain types of property are more difficult to borrow against than others. For example, former local authority and high-rise flats in particular, where most lenders want at least 50% of the property to be in private hands, can pose problems for the unsuspecting freelancer. Former local authority properties can have restrictions which would adversely affect the lender too. High-rise flats were traditionally council flats, but more and more luxury flats are being found in high-rise buildings and lenders will now ask the location of the building before deciding whether or not to lend. 2.9 Land tenure ( leashold and freehold) Property bought on a freehold basis is owned outright and can be occupied indefinitely, whereas, leasehold property gives the owner the right to occupy the land for a specified period of time, usually in return for a nominal ground rent. The majority of flats are sold on a leasehold basis and, to comply with lenders regulations, they should have at least 30 years remaining on the lease at the end of the term but in recent years it has become easier for leaseholders to purchase the freehold. 2.10 Buying in Scotland If you are buying a property in Scotland, there are a few differences to be aware of: The seller will normally ask for offers over a certain set amount. There will be a pre-set closing date for all offers to be in by. You will need to make a sealed bid so that no one else knows what has been offered on the property. On the closing day the sealed bids are opened by the solicitor. You must have a valuation of the property carried out before an offer is made, the cost of which you must be prepared to lose if your bid is unsuccessful. As in England and Wales, it is a good idea to have the mortgage in place before making an offer. 2.11 Shared Equity Many local authorities and house builders offer shared ownership schemes. For those struggling to afford a home, shared equity could be an option. The advantage of this option is that you need only qualify for your percentage of the property and that you have the option to purchase the remainder of the property when you can afford to. Guide to Mortgages 5

Section 3 Mortgage Affordability Without a permanent contract and pay slips or P60s from an employer you may find it difficult to secure the same level of borrowing than would be available to an employee with a similar skill set. This is due to the fact that you will no doubt engage in legitimate planning measures to reduce your taxable income, such as claiming business expenses, but these will then have an adverse affect on your income for mortgage purposes. Even though funds are still available to the family budget, seemingly non-contentious measures, such as claiming expenses or selling the home PC to your company as a business asset, can all reduce your taxable income and restrict your ability to borrow. 3.0 How much can I borrow? The traditional way of calculating income for a freelancer working via a limited company is for the lender to use your average net profit from the last three years accounts. Self employed applicants must also rely on net profit figures, as shown on self assessment returns. However, your accounts may not necessarily be a true reflection of what you have earned and in the past, this has driven many freelancers down the more costly self-certification mortgage route. This option is no longer available after a Financial Services Authority (FSA) crackdown on what became known unflatteringly as liar loans. Freelancer Tip 2: Working on a contract basis A small band of contractor specialist mortgage brokers should be able to secure mortgages based on the current contract rate alone and you shouldn t have to pay a fee for their services. It is possible to secure a mortgage for contractors in particular, based on a multiple of annualised contract rate, which it has been argued gives a far truer figure of affordability. Typically the following calculation can be applied with only a 10% deposit: Contract rate x hours worked per week x 48 weeks in the year x 4 = total loan size allowable A specialist contractor mortgage broker will, therefore, be able to secure you borrowing of up to five times your annualised contract rate and all at exactly the same interest rates as employees would achieve. Freelancer Tip 3: Working on a freelance basis If you have multiple clients then it may pay to encourage the largest ones to retain your services on a contract basis so that the above can apply. Alternatively, shop around or speak to a mortgage adviser to find a lender who will allow dividends, salary and retained profit to all be included for mortgage purposes and ask your accountant to provide a favorable projection of your current year s income prospect. Some private banks have more discretion to look more creatively at your overall position and lend to you based on future prospects as well as the using historic accounts. Freelancer Tip 4: Working on a self employed basis Finding a larger deposit can have a significant impact on the multiple of net profit that can be used for mortgage purposes so use all of your skills to mobilise any available capital. Guide to Mortgages 6

If you have the scope to secure a contract then you could consider working on this basis as the contract based underwriting described, overleaf, can be applied in the very first day of your first contract in some circumstances. If not, then take steps to minimise your costs in the year of purchase. It may be wise to suspend pension contributions etc, as this will inflate the income for mortgage purposes. Again certain private banks are not just looking to help the super rich but are keen to lend instead to more mainstream applicants, who look like good future prospects. Offering to move your banking facilities can help win brownie points with these lenders, as can finding a larger deposit. 3.1 Interest on your mortgage Interest is ordinarily charged for as long as the debt is outstanding. The interest rate paid on a mortgage is dependent on several factors, including the type of mortgage, the amount that you borrow compared to the property value (known as the loan to value or LTV), and finally, the specific lender and scheme you opt for. Interest on conventional mortgages can be calculated on a daily, monthly, quarterly or annual basis dependent on the lender and scheme. Daily interest is the most beneficial for the Freelancer who will get immediate benefit for each repayment of capital, be that monthly or when extra cash becomes available, but certain lenders still stick to the outdated annual calculation, which leads to the borrower over-paying on debt that is no longer outstanding. Various global and national issues will affect the cost of borrowing and interest rates are part of the UK monetary policy. Because The Bank of England Monetary Policy Committee (MPC) pledges to keep inflation at 2%, they look at inflationary pressures when setting interest rates as well as other objectives like economic growth, unemployment and the housing market. The MPC meet on a monthly basis. 3.2 Deposit payable The amount of deposit that you have available to put towards a property may affect the interest rate that you pay. Many lenders offer more competitive rates if you have a larger deposit to put down. Another point to bear in mind about a mortgage deposit is that it is payable to your solicitor at exchange of contracts and legally binds the buyer and seller to complete the sale. If you try to back out of the sale after the exchange of contracts, you could lose your mortgage deposit and still have to pay your solicitors costs. Guide to Mortgages 7

Section 4 Understanding your repayment options There are a range of mortgage and remortgage products to accommodate the diverse needs of freelancers, which can appear confusing at times. The most important point to take into consideration when deciding on which type of mortgage to take out is how you are going to pay back the capital you borrow and how you pay the interest on it. 4.0 Repayment mortgages With a repayment mortgage, each payment made to the lender consists of both capital and interest. The payments are structured so that the amount of capital repaid gradually increases and the loan is fully repaid by the end of the term. It may be possible to keep payments level throughout the term, even if interest rates do rise or fall by increasing or decreasing the mortgage term. Freelancer Tip 5: Affording a repayment mortgage If you are forced down the repayment route by lender criteria but are concerned by the higher monthly costs you may be able to take the mortgage over a longer term to reduce fixed outgoings and then simply overpay to keep your lending on track. With most lenders the term that you take can range from 5 to 30 years. 4.1 Interest only mortgages With an interest only mortgage your payment to the lender will consist solely of interest. The outstanding loan would remain constant throughout the mortgage term unless you make ad hoc payments and become payable in full at the end of the term. Your lender can stipulate that you need to set up a repayment vehicle to use to pay the loan off at the end of the term. This can be done through existing Personal Equity Plans (PEPs), ongoing Individual Savings Accounts (ISAs), unit trusts, investment trusts and pension plans. Interest only mortgages are inherently more risky than repayment mortgages for two reasons: Firstly, when interest rates go up or down, the amount you pay changes by a greater amount than a repayment mortgage. This is because you are always paying interest on the full amount, whereas with repayment mortgages your balance decreases steadily over time, which means your interest is calculated on a lower average amount. Secondly, you are not guaranteed to pay back the original amount you borrowed because the money you may have invested is reliant on variables associated with the investment markets. It is, therefore, your responsibility to ensure that these investments are kept on track throughout the mortgage term to ensure that your mortgage is paid in full. It is also a good idea to make occasional lump sum repayments to reduce the capital amount, if possible. Freelancer Tip 6: Interest only Increasingly, interest only mortgages have become the subject of Financial Services Authority (FSA) concerns that borrowers are overstretching themselves. In response, lenders are tightening their criteria, which is a shame because for many freelancers these loans represent a very Guide to Mortgages 8

flexible method of borrowing because your fixed costs are relatively low each month and you have greater flexibility to repay capital as and when you choose rather than be constrained by a rigid repayment schedule. It may even pay freelancers to accept a slightly higher deposit requirement or less competitive interest rate to achieve this flexibility and as long as you are disciplined with regard to the fact that the debt will eventually need to be repaid, these mortgages can prove a real help given the changeable level of your freelance income. 4.2 Split-repayment/interest only mortgages It is possible to split the mortgage payment so that, for example, half of the loan is on interest only and the other half is on repayment. This repayment method can reduce monthly costs and is ideal if you have an opportunity to make a lump sum overpayment or have savings that would eventually cover the interest only half of the loan. Guide to Mortgages 9

Section 5 Understanding your mortgage scheme options 5.0 Traditional mortgages Traditionally any over-payments or under payments are subject to a charge or penalty and payment holidays are not allowed but greater flexibility has become a feature of the UK mortgage market. 5.1 Flexible mortgages Flexible mortgages allow you to vary your payments, which can be very useful for freelancers whose income may fluctuate from month to month and year to year as the market for their skills changes. Instead of being tied down to the same mortgage payment for the whole term, these schemes can allow you, subject to status and lending criteria, to overpay when you have a bit more cash and underpay when times are tougher, and also take payment holidays without penalty. These usually have the interest calculated on a daily basis. Therefore, each time you reduce the capital, whether in line with capital and interest schedule or by lump sum, there is an instant saving in interest. Subject to sufficient equity in the property, further drawdown of the equity in the house may be permitted with some schemes. 5.2 Offset/cheque book mortgages Offset or cheque book mortgages are flexible mortgages that enable you to use money held in linked savings and current accounts to help reduce mortgage interest. They essentially work by taking advantage of the fact that we tend to get less interest on our savings than we pay for our debts. A savings or cheque account is linked to your mortgage account, and instead of earning interest in the traditional way this is offset against the balance of your mortgage. For example, if you had a 100,000 mortgage with 10,000 in a savings account, you would only pay interest on 90,000 of the mortgage. There are tax advantages as well, particularly if you are in the higher tax bracket, as you do not pay tax on savings interest but reduce the interest you pay. So for instance, rather than receiving 1.5% on your savings after tax, you can save interest of say 5% on your mortgage, which is equivalent to a higher rate tax payer earning over 8% interest. Offset mortgages are clearly a good option for people with savings. As a rule, to make a difference you need around 10,000 in savings for every 100,000 mortgage debt. However, smaller amounts can make a real difference as well. They are particularly good for freelancers, the self-employed, or people who receive annual bonuses. By putting money that has been set aside for tax purposes for instance, into an offset savings account, self-employed homeowners can benefit from their cash working against their mortgage, with instant access. There are wide variations on functionality with offset mortgages and it would be advisable to consult a specialist mortgage adviser who would be able to advise you on the best deals available. Guide to Mortgages 10

Freelancer Tip 7: Making the most of your Flexi-Mortgage Flexible mortgages are sometimes slightly more expensive in terms of headline interest rates but this masks the fact that you are gaining far more freedom to have your mortgage more suited to the realities of being a freelancer. With a flexi loan you can make the mortgage a central plank of how you structure your entire finances. Overpaying when times are good and then perhaps underpaying when you need to are both benefits of an Offset/flexi mortgage. Likewise, if you have savings that you don t want to formally pay off your mortgage then this type of loan is ideal because you still retain instant access to your money making these schemes the ideal choice for many freelancers. 5.3 Fixed rates With fixed rate mortgages, the interest rate remains unchanged for a set period of time. At the end of the fixed period the mortgage will revert to a variable rate. You should be able to remortgage at this time, should you choose, though early redemption penalties will probably apply if you chose to reduce your mortgage within the scheme period. Some fixed rates allow an overpayment of up to 10% of the original mortgage amount. The advantage of fixed rate mortgages is that, if the bank s base interest rate increase, your payments will not and you will also know exactly what your mortgages payments will be for as long as you are within the fixed-rate period. However, if general interest rates remain below the figure which your mortgage is fixed at, you will not get the benefit of these savings. Freelancer Tip 8: Predicting base rates When considering a fixed rate it is important to try and gauge interest rate expectations over the term of the mortgage scheme. In this way, an initially higher fixed rate could pay dividends if bank base rates increase. As an example, a 200k mortgage on a 3 year fixed rate of 5% may be a whole 1% higher at outset than the comparable variable rate of 4%. However after 6 months of stability base rates move up by 0.25% a month over the next 6 months as meetings of the Monetary Policy Committee agree to increase the cost of borrowing to try stabilise a spike in inflation. So by month 12 the variable rate you would have paid stands at 5.5% but the fixed rate remains at 5% for a further 2 years. Using this example an initially dearer fixed rate mortgage saves the borrower money over the three year term. 5.4 Standard variable rates (SVR) With a variable rate mortgage, your monthly costs are dictated by the lender rate and will move up and down with it. This means that if the general movement in interest rates rises by 0.5% or lowers by 0.5%, the interest rate on your mortgage (and therefore your monthly payments) will rise or fall by that amount. However, SVR mortgages can often be significantly higher than base rate as the lender will have commercial considerations irrespective of what could be dramatic moves in Bank of England base rates. Another disadvantage is that you will not always know what your mortgage payments are going to be from one month to the next. Standard variable rates can be a useful place to park your debt if you are waiting to see what happens to rates in general before fixing for instance. They also rarely have redemption penalties for repayment so are ideal for short term borrowing, bridging finance or as a holding scheme whilst a remortgage onto a competitive rate with another lender goes through. 5.5 Discounted rates If you need to save money in the first few years of your mortgage then a discounted rate could be the way to go. A discounted rate mortgage is a reduction off of the lender s SVR. For example, a lender may offer a 2% discount on its SVR mortgage for two years. With an SVR of 6%, this would mean that your mortgage on a discounted rate would be 4%. Discounted rates are variable and move in line with general market rates. The advantage of this is that if rates go down, so should your mortgage repayments, with the added benefit of the discount thrown in. Unfortunately should rates go up, so will your repayments and, therefore, as with the variable mortgage, you do not know what your payments are going to be from one month to the next. Guide to Mortgages 11

This type of mortgage is not for those on a tight budget as your mortgage repayments could potentially vary quite a lot. However, if you do have a little money to spare and rates are low or predicted to drop then snapping up a good discount deal can save you a lot of money. 5.6 Tracker rate Tracker mortgages are directly linked to the Bank of England s base rate, and avoid the ability of lenders to influence their commercial lending rates because they directly shadow the central bank s lending rate. The advantage being that if the base rate is cut, you benefit immediately as you do not have to wait for your mortgage lender to decrease his SVR. Like discounted rate mortgages, trackers are not a good choice if you are on a tight budget. 5.7 Capped rates Here the interest rate will rise and fall in the same way as a variable rate mortgage, but cannot rise above a fixed maximum interest rate. However, the interest rate charged on capped rate mortgages are usually higher than both fixed and discounted mortgages at the outset. If you need to know what your maximum outgoings are going to be and would still like to benefit should interest rates fall, then a capped rate can be a good option. 5.8 Adverse credit For people with adverse credit history, obtaining a sub-prime mortgage used to be an option but FSA pressure has meant that this borrowing is very difficult to achieve now. There were many lenders and brokers who specialised in this field and offered an array of schemes, many of which were charged at exorbitant rates with high arrangement fees and extended tie-ins. There is often the misconception that contractors in particular are unable to access the mainstream mortgage market if they have had any credit problems in the past. This is not the case as there are a small number of high street lenders who offer contractor friendly underwriting to clients who may have had adverse credit in the past. A specialised contractor mortgage adviser will be able to secure you the most appropriate scheme for the level of adverse credit that you have had as they understand the lender s underwriting criteria with relevance to you as a freelancer. 5.9 Cashback There are also deals such as cash-back mortgages that will provide you with a lump sum when you complete on a mortgage. While this extra cash may be useful, just remember that nothing comes free in life and that any money advanced will be added to your mortgage in the long run by way of higher interest rates or possibly with hefty penalty charges should you later want to switch to a more standard scheme. Guide to Mortgages 12

Section 6 Additional Information In the previous sections we have covered the information needed to take out a mortgage. In this and the following sections we have put together a further glossary of terms to enable you to approach your mortgage needs with confidence. 6.1 Mortgage Term Mortgage term is the period of time that you take the mortgage over. The term that you take will be dependent on several factors and can range from 5 to 30 years with most lenders. Making regular or lump sum overpayments will also impact on the mortgage term by reducing the capital and therefore the interest owed. Your mortgage adviser can ensure that the mortgage scheme you opt for allows the required flexibility in this respect. Freelancers often put cheque book style mortgages to good effect to reduce their mortgage term. Most people would like the end of the mortgage to at least coincide with retirement, but as contractors are not bound by standard retirement ages this may not necessarily coincide with reaching 65 years of age and so mortgages can be arranged through to your 70s if required, subject to certain criteria. 6.2 Home equity release schemes Often the biggest asset you own is your home. Equity release schemes allow you to release the value trapped in your property. This released equity can be used as an additional source of tax free income in retirement. The amount that is released is based on the property value (the property needs to be worth at least 40,000 in most cases) and your age (usually no earlier than age 55). The loan is paid out either in a lump sum or paid to you on a monthly basis. For further details on these schemes using a specialist mortgage broker is advisable. 6.3 Annual percentage rates The FSA encourages consumers to use annual percentage rates (APRs) to compare mortgage schemes. This crude comparison is arguably more relevant when looking at short term borrowing, such as personal loans however, rather than a mortgage over 25 to 30 years because APRs assume that the borrower will remain on a standard variable rate after any initial fixed or discounted scheme expires. In reality, any astute borrower will shop around or approach their mortgage adviser who will look to help clients exploit the system and move onto the next attractive rate, either with the current lender or with a new lender as soon as the current scheme expires. Using APRs also has the effect of spreading the impact of any high initial charges over the term of the mortgage, which again ignores the fact that in two years time the borrower may be on a different scheme with a competitor. 6.4 Joint mortgages If you are buying a property with a friend or partner there are a number of issues to consider and steps to be taken to protect your investment before signing on the dotted line: Draw up a deed of trust with a power of sale. This means that the sale of the property cannot be blocked by one party. Decide whether you will be: Joint tenants: This means that the property is owned 50:50 and passes automatically to one if the other person dies. Tenants in common: This means that each owns a different share i.e. the person bringing in the larger salary can take a bigger share of any gains (or losses). Guide to Mortgages 13

Make wills - because if one of the co-owners dies without making a will ( intestate ) the remaining person will have no rights over the deceased person s share of the property. Put both names on the deeds. It is important to realise that there is no such thing as a common law spouse (except in extremely obscure exceptions) so if you and your partner are not married and decide to buy a house together, if there is no legal documentation the law will see you as two distinct individuals with no call on each other s money. 6.5 Scottish home reports Scotland introduced Home Reports into their property market in a bid to help prospective buyers. These information packs have been compulsory for all properties marketed after 1st December 2008. The Scottish Executive recognised the need for upfront communication between buyers and sellers through a comprehensive information pack supplied during a viewing. The way that the Scottish property market is structured means that an offer made by buyers is legally binding so it is important to have access to as much information as possible before deciding on the offer to make. Home Reports are designed to save buyers time and money, cutting out the need to arrange several valuations and surveys on each property that a freelancer would like. The reports should also encourage sellers to fix any problems before they market the property. For sellers, the Home Reports are essential as it will be illegal to market a property without one following the schemes introduction on the 1st December 2008 with fines of up to 500 for failing to provide a pack. Whilst this may seem like an unnecessary cost, the Home Reports will save you the hassle of having several valuations by prospective buyers, as you arrange one surveyor to visit at a time to suit you and then simply copy the report to give to each buyer. 6.5.1 What is included in a home report? The Home Report differs slightly from the HIPs that were used in England and Wales until they were scrapped in May 2010, in order to reflect the differences in the Scottish legal system. As well as general information explaining the Scottish buying and selling process, there are three main components that a standard Home Report should include, these are: The Single Survey An energy efficiency report A property questionnaire The single survey is the key difference between the Home Report and the HIP. It is designed to give both Sellers and Buyers information about the condition and value of a home so that offers made will meet both parties expectations. For the first time, buyers will be able to see an accessibility report aimed at the elderly, disabled and parents of young children. The energy efficiency report is the same format as those in a HIP and is designed to encourage buyers and sellers to be more aware of the carbon emissions and energy efficiency of a house. It also details ways to improve the house to help lower energy bills. The property questionnaire is completed by the seller to inform prospective buyers of details such as planning consents relating to the property, parking arrangements, the council tax band, any local authority notices that affect it and any alterations that have been made to the house. 6.5.2 Who needs a home report? Any property marketed for sale in Scotland on or after 1st December 2008 although there are a few exceptions to the rule, including: New housing that is purchased off-plan Guide to Mortgages 14

Newly converted premises Right to buy homes Seasonal and Holiday properties A portfolio of several residential properties sold as one Mixed sales, e.g. when a property is sold with farm buildings included Unsafe properties or those that will be demolished If a buyer requests part or all of the Home Report it must be given to them within nine days. Under the legislation, the house must be put on the market before the report is twelve weeks old otherwise a new report must be compiled, however once the property is on the market the report doesn t need to be updated again as no shelf-life has been imposed. Guide to Mortgages 15

Section 7 What is a remortgage? A remortgage is the term used to describe when a borrower seeks to transfer their mortgage debt from one lender to another. The reasons for doing so include the expiry of an initially attractive interest rate scheme from the original lender or if the borrower needs to increase the level of borrowing to release funds but is not allowed to at competitive rates with the current lender. 7.1 How it works The remortgage market is a game of cat and mouse between borrowers and lenders and, played skillfully; it can save the borrower tens of thousands of pounds on the average size mortgage over a normal term of 25 years. By ensuring that you always pay as competitive a rate as possible a freelancer can dramatically reduce the servicing costs on their debt and remortgaging represents big business for lenders as they poach clients from each other with initial inducements to switch (i.e. a lower interest rate and the new lender pays some or all of the costs to help you transfer your debt). The remortgage usually involves an updated valuation of the property. This will take into account any changes in value due to home improvements, or due to fluctuations in the local property market. 7.2 Capital-raising Some schemes could not only allow you to switch to a lower interest rate but if you are keen to do so, you can release some of the equity in your home at the same time. In this way a larger loan may even cost you less than a smaller existing one. Funds released on a remortgage can be used for any-purpose, for example debt consolidation, home improvements, to pay a tax bill, help fund a business venture or to provide a deposit on a buy-to-let property. It may allow the home owner to release the funds for improvements, such as a conservatory or loft conversion, which could in turn increase the value of the property. Remortgaging is often a far better way of borrowing money than taking out loans or using credit cards, as interest rates are typically much lower. Freelancing Tip 9: Avoid debt consolidation pitfalls Many people take advantage of remortgaging to consolidate debts, such as personal loans or credit cards, and, thereby, substantially reduce their monthly outgoings. This means that the original short-term borrowing will be spread over a longer term however, (in line with the mortgage) and over time could accrue a higher overall cost in terms of interest paid. It is, therefore, advisable for freelancers to overpay on this portion of the mortgage to reduce the term, perhaps using some of the extra money available in the budget now that outgoings have been reduced. Freelancing Tip 10: Remortgage Dos and Don ts You should be extremely cautious about running up credit debts in the belief that you will always be able to pay them off by remortgaging. You should try to avoid paying a lender s standard variable rate just because your initial interest rate has come to an end. Also, avoid just staying with your current lender as the easy option. Too many people allow inertia to set in once an initially competitive interest rate expires. A good mortgage broker should contact you at least two months before the expiry of any special rate you may be on, so that they can explore the options available to you. You should spend some time looking at what is on offer from the current lender and compare this with what is available elsewhere in the market. In this way, you should be able to keep an eye on future market conditions and ensure that you secure competitive interest rates throughout the life of your mortgage. Guide to Mortgages 16

Section 8 Buy to Let Buying a property to let has proven extremely lucrative for many contractors. It can be a source of income and can offer a potential for long-term capital growth. It is a useful hedge against fluctuating contract rates and is often looked on as a future pension or as an early exit strategy from the rigours of freelancing. If you are looking to buy-to-let you need to be aware of how you get an appropriate mortgage, the pitfalls that may occur and the knowledge you need to avoid them. There are three main differences in buy-to-let mortgages as opposed to other mortgages: Rent Potential the decision as to whether or not a mortgage will be offered is usually based largely on the rental income that the property can command. Most lenders look for coverage of between 100% and 125%. In some case your income may also be considered. Interest Rate buy-to-let mortgages usually have slightly higher interest rates. Larger Deposit typically a minimum of 25% of the property s value is required as a deposit. 8.1 Tax breaks Interest payable on a buy-to-let mortgage can often be written off for income tax purposes against rents received. As a result a larger loan size may, paradoxically, be desirable on a buy-to-let mortgage whereas no such tax break exists on residential mortgages. You are also often able to offset your furnishing, maintenance costs and letting agent fees. 8.2 Buy-to-Let Pros and Cons Most of the scheme options that are available for residential mortgages are available for buy-to-let mortgages as well, including offset style mortgages. Online sourcing systems from comparison websites can be a help but a mortgage adviser will also be able to assist you with the best buy-to-let scheme available to suit your needs and you shouldn t have to pay a fee for their services. You need to be aware that becoming a private landlord is not always a way of making easy money. It can be risky and complicated. It can also be time consuming (more than other forms of investment) and there is no guarantee that house prices will rise. However, having a second property to let to tenants can reap considerable financial rewards over time. Freelancer Tip 11: Think before you leap Before buying a property to let, you need to decide what your primary objective is. Is it to generate income or is it for capital growth or both? In other words, are you looking to make a smaller profit every month or are you looking to make a profit through increased equity from the property as it increases in value over time? This decision may affect the type of property you purchase and the location. Also, you need to be aware of the fact that there are other costs involved, in addition to the monthly mortgage repayments. As a guide, you should be aiming to achieve a gross rent of about 125% of the rental property s mortgage repayments in order to cover your costs should anything go wrong. This would allow you to build a buffer-fund to cover maintenance and other additional costs. Guide to Mortgages 17

Additional costs include: Property upkeep maintenance costs for the property. Letting agent s fees letting agents charge around 10% of the monthly rent for finding and vetting tenants and an additional cost of around 5% if you require a full management service. Ground rent/service charges applicable to leasehold properties. Legal insurance to cover costs if problems with tenants occur e.g. eviction of tenants in the event of non-payment of rent. Although these situations can usually be resolved in Court, it does involve fees which could set you back anything upwards of 1,000. Most legal insurance policies cost well under 100 so are well worth considering. Insurance building insurance and contents insurance (for items provided as part of the rental agreement). Furnishings the purchase of any furniture if the property is to be let furnished. Make sure you are covered for this by your home insurance. Gas/electrical appliances cost of maintaining appliances and ensuring that they comply with any regulations, such as safety tests. Decorating costs the property may require work ranging from painting to a new bathroom suite before it is suitable for letting to tenants. When choosing a property to let, it would be wise to determine what types of properties are in need and where that need is. For example, there may be a University in the town with students who are looking for somewhere to live. The property needs to be in the right area, close to transport and other facilities and in good condition. Ensure that you choose a reliable letting agent to act on your behalf. 8.3 Let to Buy If you want to retain your current property or are unable to sell it in time for your new mortgage to complete, speak to your mortgage adviser. If you can afford both mortgages on your income this may be possible, depending on specific lenders criteria. Some lenders will be happy to discount your current property from their affordability equations if you have the sale particulars. Certain lenders are happy for you to keep the property with the current lender and rent it out. For many freelancers this has been an initial springboard into the buy-to-let market without formally going down the investment property portfolio route and there are benefits in dipping a toe in the landlord business with a property which you know well as opposed to one that you are buying blind. This scenario is known in mortgage circles as let to buy. Guide to Mortgages 18