Money: Money back, freedom and maybe a windfall

What's the best mortgage and could your home loan be bettered? This week we start a new reader service offering free advice from a specialist broker

The borrower

Clara Joyce is 30, single, earning pounds 38,000, working for a publisher in London and is a first-time buyer. Her personal circumstances are not dissimilar to many first-time buyers in London who have had enough of renting and flat-sharing, although by most people's standards she is well off.

On top of her basic salary she expects to earn between pounds 12,000 and pounds 15,000 in freelance earnings this year. She also has around pounds 40,000 to put into a property and another pounds 30,000 of longer- term investments that she wants to use over time to pay off her mortgage.

She expects freelance earnings to continue at the same level next year, although in the past they have been much lower. One way or another, she is confident that her total income will continue to increase.

As far as Clara knows she has a decent credit record but, at present, is not on the electoral roll.

Her prime consideration with a mortgage is to be able to borrow the maximum amount at the best possible overall value, avoiding where possible any extra insurances and lock-ins. She wants to avoid paying through the nose because of the multiple of her income she wants to borrow, or because of the loan's size compared with the property value. She wants an interest- only loan with the flexibility to pay off lump sums periodically and the ability to remortgage in future if better deals come up. She is fairly optimistic on interest rate prospects: she expects base rates to go higher but to come down again within a couple of years.

Clara has yet to select a property, but she wants to sort out the mortgage in advance with a view to buying in the coming months.

The advice

Simon Tyler, the managing director of Chase de Vere Mortgage Management, notes that Clara is relatively sanguine about interest rates and, therefore, is not as enthusiastic about the present generation of cheap fixed-rate loans as might be expected. However, as she may not end up buying for some months, her opinion may change as the economic outlook and sentiment develop over the next few months. Most of Chase's clients are currently opting for three-year or five-year fixed-rate loans as these continue to be at historically low rates.

Present fixed-rates combine their traditional advantage of cash-flow certainty with low costs, and loan rates would have to drop a lot for most borrowers who locked in today to end up worse off.

That aside, the flexibility Clara is looking for suggests a loan like the Stroud & Swindon building society's Flexible Mortgage. It is a variable- rate loan with a current rate of 8.3 per cent, set a little below standard market rates of 8.5 per cent or so. It also offers a "bonus" "cashback" type of arrangement, in effect worth 3 per cent.

She can overpay at will and the interest is recalculated on a monthly rather than annual basis (as with many lenders). This loan is also available on an interest-only basis.

The society would offer a loan up to 3.5 times income, or pounds 133,000, without considering the freelance income, and this, along with a pounds 40,000 deposit, would result in a loan marginally above 75 per cent. As it stands, that would require a small mortgage indemnity (Mig) insurance premium of pounds 165. Alternatively, if Clara could put in another pounds 5,000 or reduce the amount borrowed to pounds 120,000 she could avoid the Mig.

The mortgage gives borrowers three separate cashbacks, each worth 1 per cent of the loan value, on completion and after year one and two. The only "lock-in" on the mortgage is that if Clara remortgages elsewhere within three years of taking out the loan, she forfeits the cashbacks already paid; after this time there is no penalty.

The mortgage also carries membership of the society, putting Clara in line for any potential windfall, and there is no fee on completion.

Clara could get an immediate approval in principle from the Stroud & Swindon, an approval that would last three months before references would need to be renewed. By the time she finds the property she wants, it might also be worth considering a fixed-rate loan again: by that time fixed- rates may look even cheaper and the variable-rate outlook may have worsened. Mortgage Trust, the telephone lender, offers a three-year fixed-rate loan that also offers the overpayment opportunities of other flexible mortgages: this might also be worth looking at.

q Clara Joyce was talking to Chase de Vere Mortgage Management (0171- 930 7242).

If you want to be considered for a mortgage makeover, or a wider financial makeover, for publication - including a photograph - write to Steve Lodge, personal finance editor, Independent on Sunday, 1 Canada Square, Canary Wharf, London E14 5DL, or fax: 0171-293 2096 or 2098; or e-mail: S.Lodge@independent.co.uk. Include details of your financial position, a daytime telephone number, and say why you think you need a makeover.