Banks and building societies grew during the 1990`s and 2000`s on lending to people without checking their income sufficiently and by relying on the surge in property values to cover any defaulting customers. All was fine when the economy was flying, but it came to a shuddering halt once many of the `sub prime` borrowers in the US started to default and property prices there began to tumble. Since much of this type of lending had been syndicated globally, the vast majority of lenders began to write down their security values and prepare for the worst. And the worst came.

Those that have survived now have a much stricter set of criteria for the customers they seek so as to ensure that both the risk and reward of their portfolio are in better balance. With property prices in the UK seeming to have stabilised and gained some ground in the last year on the substantial losses in values during 2008/9, lenders are becoming more proactive in growing their books and offering a wider range of fixed and variable rate mortgages.

In addition, the government has sought to stimulate demand by extending the stamp duty free property purchase to £250,000 for first time buyers. That can mean a saving of up to £2,500 which can be used to boost deposits or pay for fees.

Many experts are now encouraging borrowers to fix their mortgage interest rate for as long a period as possible. Others counter by saying that the outlook for inflation, which drives interest rate policy, is more favourable and that it is too early to fix. As ever, the advice is conflicting and it is best to look at a mortgage that suits your personal needs. Fixing gives certainty of expenditure for the period of the fix. A tracker or variable rate mortgage means that you will gain from any falls in interest rates but pay a higher price if they fall.

What has changed in recent years is the need for a substantial deposit. Finding 100% mortgages is virtually impossible and a starting point for any would be borrowers must be to have a 10% or 15% deposit before many lenders will even consider the application.

But deposit is not everything. A good credit history is essential too so if you have had any indiscretions during the past five years you may need to either wait until you build a good recent track record or be prepared to pay a significant interest rate premium on your loan. In the meantime, there are a good range of affordable 2 person tents to at least move out of the family home and in with your prospective partner or friends!

Given that it is the very customer base who most want to use interest only this is quite a big deal.

They have also gone further with loans below £500,000 in that applicants can no longer just say they will pay the loan off via the sale of the property, their buy-to-let portfolio or general bonus payments, but must have either a pension or some kind of savings plan. Is the return of the Endowment nigh?

On the face of it this seems to be unfair on those who have a legitimate reason for taking out a mortgage on an interest only basis, however when looked at a bit more carefully there are some sound reasons.

Unfortunately many people have used interest only as a way of making sure they can actually afford the mortgage in the first place and deferred worrying about how they are going to pay it back.

Is there really anything wrong with a lender insisting, as they always used to a decade or so ago, that they can see a structured plan in place to repay their debt?

Also, is it really right that someone can borrow 90% LTV and say they will pay the loan back by selling in a few years time? This does not happen with smaller personal loans so why with large ones?

For me, whilst I do see where Lloyds are coming from and they are perfectly within their rights to do so I would rather see underwriters employed to make a case-by-case, sensible,  judgment rather than a one-size fits all approach.

There are many wealthy individuals for whom interest-only is the correct method and gives them the flexibility they require. In fact for those of you who are in any doubt, I had an interesting presentation from a broker just the other week, Frank Jurga who I am sure will be delighted to share his thoughts on the issue.

It is a topic that is being discussed within every lending institution and it will be interesting to see if other lenders do follow suit.

For me, something does need to be done to limit the scale of interest only borrowing and borrowers need to be much more aware of how realistically they are going to pay the loan back.

Pensions and savings plans are underutilised, as for that matter is life insurance to protect the mortgage that is written into trust.

Too many applicants do tend to ignore brokers advice on these points as they are so focussed on buying the house of their dreams and choose to save money on the very things that can help keep them in the property.

The move by Lloyds shows that lenders are not going to allow the blasé attitude of the past decade to continue and, to be fair, there is a lot of merit in this. However, as with anything, sensible advice and a sensible underwriting policy could give us all the best of both worlds.

Your current account is the bank account you use the most. And yet it’s the one most of us spend the least time selecting. Odds are your parents took you into their local bank to open an account when you were a child and you haven’t given it a second thought since.

It is time you did. The banks know that most of us are entirely apathetic about our accounts and they use that knowledge to rip us off. If you are usually in credit the chances are you are getting an absolutely paltry rate of interest – think 0.1%. And if you are usually in the red, then in all likelihood you are paying an extortionate rate of interest on your debt of up to around 20%.

Yet if you switch accounts you could easily end up with better interest rates – in some cases you could even pocket some cash just for switching accounts. So which account is the best for you?

If your current account is usually in credit, then your choice is between Halifax and Alliance & Leicester. If you’re always in the black by a large margin you’re probably best off with the Premier Direct Current Account from Alliance & Leicester. It pays 5% annual equivalent rate (AER) for the first year on balances up to £2,500.

However, if you pay at least £1,000 a month into your account but then the balance steadily drops as bills are paid, you might want to opt for the Halifax Reward Current Account. This account pays you £5 a month regardless of your balance throughout the month, as long as you pay in £1,000 a month. You also get the £5 indefinitely, so this might be a better option if you don’t want to have to switch accounts again in a year.

That said, if you use your overdraft, avoid the Halifax Reward Account like the plague. Even an arranged overdraft will be charged £1 a day – so borrow for five days and you’ve wiped out the £5 you got for your £1,000 in the first place.

A better bet would be Alliance & Leicester Premier Current Account – which is subtly different to the Premier Direct Current Account. This account only pays 0.5% in credit interest, but offers a 0% interest overdraft of up to £2,000 for the first year. And at the moment they’ll also give you £100 when you open the account and use their switching service.

But whoever you bank with, make sure never to go beyond your authorised overdraft. All the banks will punish you if you do. The worst offender is Alliance & Leicester, who will charge you £25 every time you go beyond your overdraft and £5 a day for as long as you stay over your limit. That could get very expensive.

Source: Moneyweek

Speaking at the CML’s annual funding affordable housing conference in London today Rob Thomas, senior policy adviser at the CML, highlighted the severity of the sums to be paid back by lenders to the government and the Bank of England in exchange for access to funding over the last two years.

Thomas explains that £178bn worth of funding accessed through the Special Liquidity Scheme falls due 2011/2012, and a further £134bn from the Credit Guarantee Scheme which becomes due in 2012/2013.

He says: “How realistic is it to believe that retail deposits can be the source of funding to pay back the £300bn the government wants back?

“The answer is that retail deposits grew by about £60bn last year which suggests the simple arithmetic that retail deposits would take something like five years to repay those government funds and of course lenders don’t have five years.”

Thomas went on to say that the wholesale markets also offer little opportunity to repay the debts as even the boom securitisations accounted for £35bn of additional funding.

This would mean that it would take about nine years to harness the wholesale markets by enough to pay down their debt.

As lenders will be forced to pay back this sum over the next three years it inevitably means there is less money to lend.

Thomas adds: “All of this is going to mean that lenders are going to be restrained for possibly the next five years. The next few years are going to be quite difficult.”

Almost as though to add insult to injury, if you pay off your credit card balance in a lump sum (and you do not usually do so) or if you close a credit card, your credit score also takes a significant hit. Why? Because you’ve limited the amount of credit you have available and that is what your credit score is based on – well, that and your payment history. This essentially tells the bank the likelihood that you will default based on your payment history and the amount of credit you can tap into if an emergency happened.

Credit scores account for approximately 10 percent of a bank or other financial institution’s decision – what is known as the risk assessment – to award a loan or financing and the determination of the interest rate you will receive and the fees associated with the transaction.

What about the other 90 percent? The other ninety percent comes from your level of income, the value of your assets, the reason for the loan/financing, your spending patterns, etc. These factors each contribute significantly to getting approved and getting a good deal in any financing transaction.

It is also the main reason that someone with a high credit score may still be turned down for a loan. Issues such as unemployment, the value of the collateral going down below the amount financed, clearing out retirement accounts early, increased spending over the last year without an increase in income, etc., all form part of the applicant’s risk assessment and all can be indicators as to whether a person will be able to repay a loan.

Of course, it is precisely when you are seeking a loan or financing that a need exists. While these aspects cannot really be changed once begun, there are things you can do to improve your overall credit risk assessment and make it more likely you will be able to get the credit you need and with low interest/fees.

Establish habits.

Patterns are safe. Establish buying patterns that look good, such as using credit for large purchases (e.g. a new lawnmower, yearly parking space, new oven) and debit for groceries and sundries. You may even want to consider trying to pay cash for large purchases that are more luxury items or “treats” (e.g. expensive hand bags, gadgetry) so that if your buying patterns are pulled, you are able to show consistency and a pattern of responsible purchases.

Get a job./Have a job.

Likewise, pattern of employment is important. If you are applying for a loan or financing, do so while employed, even if it is not in your field. Your determination to have a job rather than being idle while waiting for one in your field will not be overlooked. As an added bonus, you may even learn a new skill, like how to make a perfect latte.

Increase your spending limit.

This can be deceptively easy. Try going on-line to your credit card account. There is typically a button or link for increasing your credit limit. Typically, these links only take into account your history with that company, rather than requiring an entire credit report be run. This small act could give you enough extra credit to lower your debt-to-credit ratio enough to get a good deal.

Predicting what interest rates are going to do is a popular sport. A quick dig around turns up a wide range of forecasts. For example, Reuters says the base rate will be 2% by the end of 2011, Barclays Capital reckons it will be 3.5% and Capital Economics predicts the rate will stay at 0.5% as we head into 2012.

While it’s impossible to say for sure who’s right, it seems unlikely that interest rates are going to rise in the near future. While we may technically be out of recession, economic growth of 0.2% in the first quarter of this year does not signal a return to the kind of growth that would trigger rate rises. And, leaving aside the current pick up in inflation, the Bank of England is still more concerned about deflation. So expect to see a base rate that sticks at 0.5% for many months yet.

That means that for most borrowers it’s probably not time to fix your mortgage. If interest rates stay low, you’re better off sticking with a cheap tracker deal. Cheltenham & Gloucester, Nationwide and First Direct all offer tracker mortgages with a rate of 2.5%. If you are currently sitting on your mortgage provider’s standard variable rate (SVR), then switch to a tracker: tracker mortgages follow the base rate, but a provider can raise its standard variable rate regardless of what the base rate is doing. That’s why over the past 13 months many SVRs have been creeping up, despite a flat base rate.

However, a tracker mortgage may not always be the best choice. The low base rate is good news for your mortgage payments, but it means any savings you have are unlikely to be earning you any money. Just now, it’s unlikely your savings rate even matches inflation. So if you have a large amount of savings, an offset mortgage is a better bet.

These mortgages allow you to offset your savings against your mortgage to reduce the amount of debt you are paying interest on. For example, if you have a £150,000 mortgage, but put £50,000 of savings into the connected savings account, you’ll only pay interest on £100,000 of your mortgage. And you can still access your savings whenever you like. First Direct has a tracker offset mortgage with a rate of 2.59%. However, the minimum deposit is 35%.

Although interest rates probably won’t rise in the near future, if only a small rise would leave you unable to meet your mortgage payments then go for the peace of mind a fixed rate offers. And if you do decide to fix, go for a five-year deal. While there is disagreement over when interest rates will start to rise, most economists agree that rates will be significantly higher in two to three years’ time. So you don’t want to be coming off a fixed rate just as that happens. The Co-operative Bank has the best five-year fixed deal with a rate of 4.49%, although you will need to come up with a 25% deposit.

Mortgages are a big financial investment, and with so many different mortgages on offer, it is vital that you do some groundwork in order to maximise your chance of finding the best deal.

These simple tips are a great way to get on the right track.

1. Know your financial situation

Be aware of your financial standing and credit rating before making any applications. Lenders will review your credit report before making a decision on what kind of deal they offer you. You should check your credit report is accurate and up-to-date before meeting with any mortgage lenders.

2. Improve your credit report

If you’ve got a bad credit history, all is not lost if you take steps to improve it. Paying your monthly bills on time, for example, and taking steps to improve your credit rating will help you come across as a more favourable candidate.

If you are getting a mortgage with someone else, they should also check their credit report.

3. Understand the mortgage process

Taking out a mortgage can be a complicated and long process. Start by researching the mortgage market and getting a good understanding of how it works. Read up on key mortgage terms, and get to know the difference between fixed rate, flexible and other mortgage types.

4. Always read the small print

Mortgages can look identical at first glance, but special mortgage conditions and various costs involved over the years of the mortgage can have a big financial impact. Ask questions, and read all the documentation. Yes, this can be quite a bore, but you’ll be better off for it.

5. Avoid large purchases

Before going to see a mortgage lender, clear your credit card and loan debts as much as possible. Your total amount of debt is a key factor in getting a mortgage, so avoid taking out additional debt or making large credit purchases until after you have purchased your home.

6. Don’t leave footprints

Ensure that lenders understand that you are only seeking a quote for a mortgage, otherwise your credit report will show that you are making multiple credit applications. These could be viewed as lending rejections and harm your chances of getting a mortgage.

7. Take your time to compare

It may seem tempting to take the first mortgage offered to you, but like most things, it’s always a good idea to shop around and compare mortgage deals. Approach a number of different lenders, and look at a range of mortgage options.

Martin Smith, head of mortgages at Legal & General, said: “Credit scoring has its place but complex prime cases are not always catered for by this approach. There are many reasons why an otherwise creditworthy borrower might generate a low credit score. Ditching credit scoring is an innovative, back to basics way of looking at lending and the rate on this product is extremely competitive too.”

The product, which is provided by Hanley Economic Building Society, comes with a £100 booking fee and a £1,399 administration fee and is available to a maximum loan-to-value of 75pc.

Melanie Bien, director of mortgage broker Savills Private Finance, said: “A product that uses old-fashioned underwriting rather than a formulaic credit score is welcome as this is very rare in the mainstream market, and the rate is also quite competitive.”

However, Ms Bien pointed out that borrowers should be wary, as the lender is likely to be more cautious if it is considering applications on a case-by-case basis than it would with generic credit scoring.

She said: “For example, it may take a harder line with regard to existing debt, loan multiples, and other properties in the background.”

Borrowers who are interested in checking their credit history before they apply, can get a copy of their credit file for as little as £2 from one of Britain’s three credit reference agencies, Equifax ( www.equifax.co.uk ), Experian ( www.experian.co.uk ) and Callcredit ( www.callcredit.co.uk )

Yet for Britons at least, inflation just isn’t going away.

In March, the consumer prices index (CPI) and every other measure of inflation rose once again. CPI hit an annual growth rate of 3.4% from 3% in February – economists had been forecasting 3.2%. The retail prices index – which includes housing costs – hit 4.4%, and RPIX (which excludes mortgage interest bills and used to be the Bank of England’s target measure) jumped by 4.8% year-on-year, from 4.2% in February.

However you look at it, those are big numbers. The CPI target is 2%. Bank Governor Mervyn King is well into letter-writing territory. And even if you look at ‘core’ inflation, which excludes fuel and food prices, it still grew by more than expected, rising by 3% year-on-year.

The one consolation for the central bank is that the last time inflation was this high was back in autumn 2008, when CPI hit 5.2% in September (it hit 3.5% in January 2010, but the other measures were far tamer than they are now). But that was the peak. As the economy plunged into recession, inflation tumbled, and CPI was down to 1.1% by September 2009.

But of course, that’s something of a double-edged sword. Because a nose-dive back into recession would be a pretty painful way to get the inflation figures down. Yet if the recovery is genuine, and inflation shows no sign of falling back, then the Bank is taking a big risk in keeping rates this low. If workers start to worry about the rising cost of living, it’ll get tougher to keep pay deals down, particularly if companies are genuinely seeing better times.

And savers are being wiped out. Real interest rates (the inflation rate minus the base rate) now stand at a miserable negative 2.9%, and that’s assuming you take CPI, the most forgiving inflation measure. No wonder people are piling into more speculative investments – they’d rather take an uncertain risk than the guaranteed loss you’ll get with most savings accounts.

So what happens next? It’s a tough call, but one of the most important when it comes to your investments.

Source: Moneyweek

The home reversion provider has analysed completed applications over the last three years to find out why customers opt for home reversion plans and what they use the released equity for.

Repaying the mortgage emerged as the top reason for choosing home reversion plans, with almost 30% of customers last year planning to repay their mortgage with the released cash.

More home owners are using home reversion to carry out home improvements, with just over 17% choosing to use released equity in this way last year.

A further 15% use home reversion plans to consolidate debts other than their mortgage.

Some 6.5% use the released funds to boost their retirement income.

Bridgewater has also seen a drop in the number of those using the money to travel and as a gift to others.

No customers in 2009 used their equity as an emergency fund or to fund long-term care, but Bridgewater believes this may change in future as the government reviews its social care policy.

Peter Welch, head of sales and distribution at Bridgewater, says: “Using the equity in the home to clear the mortgage and other debts will remain strong drivers for the equity release client base however products such as home reversions can provide solutions for many individuals reviewing their current options.

“Advisers should be on the look-out for those who fit the bill and there is always the potential to work with mortgage advisers who do not cover equity release to ensure the introduction of this growing band of potential clients.”