Cath Hearnden, of My Mortgage Direct, says: If Vicky were to consider a 95 per cent mortgage, she would have to watch out for a higher lending charge (HLC). This is a fee charged to those who borrow more than a certain percentage of the property purchase price (normally 75 per cent). In recent years lenders have not charged this fee if borrowers have a 10 per cent deposit, and there are some lenders, such as Intelligent Finance and Nationwide, who do not charge the HLC at all. If Vicky wants a wide choice of lenders able to lend her the amount she wants at a fixed rate, she would be advised to put together the 10 per cent deposit.

Vicky wants to be able to budget accurately and guard against any price increases, so a fixed rate would be appropriate. Her mortgage requirements would not fit most income multipliers of 3.5 or 4 times. Many lenders have now switched to affordability-based lending, which considers income, number of borrowers, dependants, outstanding loans, etc. It also takes into consideration the type of rate being applied for, and the length of term on the mortgage. This makes a lot of sense, and in Vicky’s case means that she would qualify for a two-year fixed rate with Alliance and Leicester.

Vicky feels that an interest-only mortgage would allow her to keep her payments low in the first couple of years. After that she should change to a repayment mortgage. Paying interest-only can be very useful for a first-time buyer to get the household budget sorted out. However, the mortgage debt will not reduce. There are no certainties that property prices will increase and an interest-only mortgage can leave you in the same position as paying rent but without the flexibility, as you still have the responsibility of home ownership.

My Mortgage Direct, 0800 9530606

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