Considering how important our homes and possessions are to us, it’s surprising that more people don’t put more consideration into their building and contents insurance. Could you afford to replace your home if it burned down? Insuring your home is so important that most mortgage providers won’t grant a mortgage without buildings insurance; however, it’s worth shopping around for policies, as your mortgage provider may not be the best insurance provider.

Buildings insurance will usually cover both the structure and the permanent fixtures such as plumbing, baths, toilets, doors and cupboards. You will need to check your policy to see if it also covers what are considered ‘outbuildings’ such as garages, garden sheds and the like. The policy may cover for damage from a number of causes, which may include fire, landslide, flood, falling trees, vehicles, earthquakes or lightning.

Equally important should be insuring your home’s contents, which are your possessions – your appliances, electronic goods, furniture and clothing. A surprising one in four households doesn’t carry contents insurance, though – many of them renters – leaving them liable for loss or damage due to burglary, smoke, fire or flood and water.

Some contents insurance policies may also cover you for legal liability – the loss you would suffer if someone injured themselves in your home due to your negligence or lack of upkeep of the property, and sued you for damages.

Building and contents insurance policies may be sold together, but it’s worth investigating the cost of separate policies to ensure you’re getting the best price for your coverage.

 

What does home insurance cost?

With both buildings and contents insurance you will have a choice between basing the cost of your premiums on the number of bedrooms in your house – a convenient, but potentially costly method – and working out the exact value of rebuilding your home and replacing its contents on the sum-insured method, which may be more accurate but is also more complicated and time-consuming.

Both methods carry the risk of over-insuring yourself and paying higher premiums; the sum-insured method also carries the risk of underestimating the value of your home and belongings, and therefore running the risk of being unable to replace everything should it be lost. If you underestimate the value of your belongings in order to save money on premiums you will lose out on any claim, so be as accurate as possible when estimating replacement values.

It’s important to work out the amount of buildings insurance you require based on what it will actually cost to rebuild your home, and not simply on the resale value, as these two figures may differ widely and you may be able to rebuild your home for much less than it would cost to buy in a strong real estate market. It is recommended that homeowners contact a chartered surveyor to assess the correct insurance replacement cost of a home.

Premiums on building insurance policies will vary widely from house to house, so don’t expect to get the same deal as your neighbour. Your postcode will be one of the first factors to determine your premiums, as some high-crime areas may be at greater risk of burglary. Buildings insurance may also be index-linked, which means premiums will rise in line with the Retail Price Index (RPI).

The style of your house will also be a consideration. Do you have a thatched roof, or similar uncommon construction? Insurance companies will often charge more for unusual features. Listed buildings will also be more costly. Lastly, as with all insurance policies, your previous claims history will also be taken into account.

Your postcode will also be a factor for your contents insurance, but the cost of premiums will vary even more widely due to your individual contents and how much they are worth. In addition, you will need to check whether you have indemnity cover or new-for-old cover. New-for-old insurance is likely to cost more, but it ensures that you are given the amount it costs to replace an item with a new one if it cannot be repaired. Indemnity cover takes into account the age of the item and wear and tear, and only gives a fraction of the new replacement cost.

You will also pay more for your insurance premiums if you wish to cover certain items which will not be kept in your home at all times, such as jewellery or a laptop computer.

Homeowners generally insure the contents of their homes with theft or disaster damage in mind. However, you’re probably more likely to damage or destroy an expensive item by accident, so accidental damage cover is a wise idea – it covers you for items that may be dropped and broken, scratched or otherwise damaged.

 

Exclusions

It is crucial to check the fine print of your building and contents insurance policies to see what is and is not covered, or you may suffer a nasty and expensive shock. The most common buildings insurance exclusions relate to damage from ordinary ageing and wear and tear; damage caused by your own neglect of the property, or by your pets; or damage you intentionally cause to the property.

Most insurance polices will also have limits on what you can claim for individual items, and for the total value of your contents, but you may be able to negotiate more coverage for higher premiums.

Homeowners who travel a great deal need to ensure that their home insurance policies cover them for extended periods away from the property. Many policies will not cover theft or damage if the property is left vacant for 30 days or more, but again, for higher premiums you may be able to arrange special cover.

 

Who offers home building and contents insurance?

There are a great many home insurance providers, so establish first what sort of coverage and policy you want before shopping around for quotes. Providers include esure, the Post Office, More Than, Lloyds TSB, Saga, Norwich Union, Zurich and the AA.

The re-mortgage market in the UK is big business for most lenders. Mortgage lenders have become increasingly aggressive with their marketing tactics over recent years as they try to hold onto or increase their market share at the expense of their competitors. In some ways this has worked to the advantage of the consumer but it also means that most lenders will now offer more attractive deals to new borrowers than they will offer to their existing customers.

Before the early 80’s most people arranged their mortgage with one lender and then stuck with that mortgage throughout its life. Mortgages were generally provided by Building Societies and the borrower was expected to go cap in hand to their Building Society who would lend if a savings account had been held for a sufficient period of time and if the lender had not used up their quota of funds for that period. In other words the lender had the ‘upper hand’ and the borrower was at their mercy. This all started to change in the mid eighties as the role of the Buildings Societies became less restricted and a new Building Societies Act took effect which allowed the Building Societies to compete head to head with Banks and Insurance Companies in all areas of financial services. As the Banks and Insurance Companies saw their territory being invaded by this new breed of Building Society so they too fought back and started encroaching on the Building Societies territory, most significantly, by entering the mortgage market. In addition Building Societies were released from the constraints that they had been under with regard to raising funds and were now allowed to raise money on the Wholesale Money Markets. All of these changes combined to make one very big difference to the market – there was now no shortage of mortgage money for the financial institutions to lend and a big fight was on to attract the customer. As with any product greater competition is generally good for the buyer resulting in lower prices.

So, let’s now look at the situation in today’s market. There are currently a little over 100 different mortgage lenders active in the UK market today. These range from the traditional Building Societies to Banks, Insurance Companies and the centralised lenders. As long as the applicant is credit worthy and the property to be mortgaged is good security there is no shortage of potential lenders. As I mentioned earlier, each of these lenders is anxious to maintain or increase their market share and this has resulted in an ever increasing array of new, innovative and competitive products being marketed. Unfortunately, in all of this most lenders seem to have forgotten their existing customer base and most of their marketing activities are directed towards attracting new borrowers rather than looking after their existing customers. The result of this has been to create a two-tier market. Most lenders will offer one set of products to new borrowers and another, less attractive, range of products to their existing customers (this is a generalisation and there are a few lenders who will offer existing customers access to the same products as new customers).
 

Where does this leave you the borrower?

What this means to you, the borrower, is that in order to obtain the most competitive mortgage rates you need to review your mortgage arrangements every few years and look at what the competition is offering in comparison with your existing lender. There are still a very large number of people who do not do this and in effect they are subsidising the low interest rates on offer to new borrowers. If you are one of the large number of people who are paying the standard variable mortgage rate then you should be asking yourself ‘why?’

 

Is a re-mortgage suitable for everyone?

There are some circumstances where a re-mortgage is not a viable option and before you go down this route you should consider the sums carefully and make sure that a change of lender is a financially sound proposition. To make this decision you will need to look at all the costs involved in arranging the re-mortgage and then calculate how much you are likely to save by taking this route. If there is a significant saving to be made then you should seriously consider changing mortgage lender. However, before you rush down this route talk again to your existing lender and tell them what you are proposing to do. You may find that they become more co-operative if they think you are serious about leaving them and offer you a deal which you will be happy to accept.

 

In general terms if you fall into the following categories you can almost certainly make significant savings by moving your mortgage;

1.

You are paying the standard variable rate to your existing lender.

2

. You are free to redeem your existing mortgage without penalty.

3.

You have more than 5 years left to run on your existing mortgage.

4.

You owe less than 90% of the property value.

5.

You have an outstanding debt in excess of £40,000.

6.

You are not considering moving and taking a larger mortgage within the next few years.

 

This is a general guideline and even if you do not fit all of the categories it may still be worth considering a move. For example if you only owe £30,000 you may find that the fees associated with arranging the re-mortgage out-weigh any saving to be made. However, there are some lenders who will offer to pay all the re-mortgaging costs and if a deal like that can be found then you could still make a substantial saving.

 

How can I calculate the figures so that I can see the net saving?

The first thing that you need to do is to write down your existing monthly mortgage payment. Remember that the monthly payment you make to the lender may include a buildings or contents insurance premium and you need to deduct that amount if this is the case.

 

The second step is to look for the mortgage product that best meets your needs. If you have decided that you would like a discounted rate then decide how long you would like the discount spread over. The next step is to obtain some quotations from various lenders and write down the new mortgage repayments. You now need to deduct the new payment from your existing monthly repayment to see how much you will save each month. The next step is to look at the period of the discount and this will tell you how many months the saving will apply for. Multiply the monthly saving by the number of months of the discount and this will give you your gross saving over the period.

 

You now know how much you can save by moving your mortgage but you also need to take into account the fees and charges associated with arranging the re-mortgage. Obviously, if these are greater than the saving to be made then you will need to think again. The following list will give you an idea of the fees to look for although not all of these will necessarily apply in your circumstances;

1.

Lenders Arrangement Fee

2.

Valuation Fee

3.

Mortgage Indemnity Premium

4.

Brokers Fees

5.

Redemption Penalty on existing mortgage

6.

Legal Fees

7.

Land Registry Fees

8.

Local Authority Search Fee

9.

Charge from existing lender to provide a reference to the new lender

 

If you talk to the lender you are interested in moving your mortgage to they should be able to help you calculate these fees and they will tell you which ones will apply in your case. Alternatively if you are using a broker to arrange the mortgage for you ask him to give you a full quotation outlining all these costs. In addition, if you are obtaining quotations for legal fees make sure that the quotes you are receiving include all the costs such as Land Registry Fees and Local Authority Search Fees and not just the solicitors own charges.

 

Once you have calculated these charges you are then in a position to take the costs away from the savings so that you can see what the net benefit is. There are, of course, other reasons over and above the simple cost saving why you might want to re-mortgage. You may wish to take advantage of a fixed rate or raise some extra capital in which case a cashback mortgage might suit you.

 

If you find that the costs associated with re-mortgaging are out-weighing the benefit, and this is likely to be the case if you have only a small mortgage, then you should look out for re-mortgage packages which cover some or all of the fees or offer a cashback on completion which can then be used to offset these costs. For example, there are several lenders who will refund the valuation and arrangement fees on completion and even pay the legal fees or offer a cashback. These products look particularly attractive with the smaller mortgages as the savings that can be made on the interest rate, in cash terms, are obviously smaller the lower the mortgage debt.

 

The following table will hopefully help you to calculate the saving the saving to be made;

 

 i)Existing Mortgage Payment  £                
 ii)LESS: New Monthly Mortgage Payment  £  
 Total Monthly Saving (i-ii)    £
 X Number of Months discounted/fixed rate  x..months  
 = Total saving over period of discount (A)   £
     
 LESS COSTS:    
 1) Lenders Arrangement Fee  £  
 2) Valuation Fee  £  
 3) Mortgage Indemnity Premium  £  
 4) Brokers Fee  £  
 5) Redemption penalty on existing mortgage  £  
 6) Legal Fees  £  
 7) Land Registry Fee  £  
 8) Local authority Search Fee  £  
 9) Reference charge from existing lender  £  
 TOTAL COSTS (B) (1+2+3+4+5+6+7+8+9)   £
     
 PLUS: CASHBACK/VALUATION FEES/LEGAL FEES REFUNDED (C)    £
 TOTAL SAVING OVER PERIOD (A-B+C)    £              

 

What are the catches to watch out for?

In broad terms, the more attractive the interest rate on offer, the more likely there are to be other conditions to watch for. These other conditions will usually fall into the following categories;

1. Early redemption penalties

– This is the way in which lenders will ensure that you stay with them for a pre-determined amount of time. The penalties are usually calculated at a level that will take away any benefit received if the mortgage is moved. It is becoming increasingly common for lenders to impose these penalties for several years after the initial benefit has been gained. This means that in most cases you will be required to pay the lenders normal variable rate for a period of time after the fixed or discounted period has ended. There are however, still some products that will allow you to repay the mortgage without penalty and these are worth looking at although you will usually find that they do not offer the most competitive interest rates.

2. Conditional Insurances

– Some lenders will require you to take out their own buildings, contents or accident sickness and redundancy insurance. You may find that one, or all, of these products are required by the lender and this is a cost that you will need to take into account when assessing the product. If buildings and contents insurance is compulsory you should ask the lender to tell you how much this will cost. Compare their quotation with others you can obtain elsewhere and if the lenders insurance is more expensive, treat the difference as an additional cost when reviewing your figures.

3. Arrangement Fees

– Lenders arrangement fees will vary from a few hundred pounds up to 1% of the mortgage so make sure you are aware at the outset how much you will be charged.

1. What different repayment methods are available?

Make sure you understand the whole range of mortgages available. You should be told about capital and interest mortgages and interest only mortgages as well as the different repayment vehicles such as endowment policies, ISA’s and pension mortgages.

 

2. What is the interest rate that I will be charged and for how long does this rate apply?

This sounds obvious but you should make sure that you understand how long the initial interest rate will apply.

 

3. What will happen at the end of the initial incentive rate period?

 

If the interest rate on offer is below the normal variable rate of the lender then you should make sure you know what will happen when this incentive rate runs out. Some fixed rate mortgages give you the option to fix for a further period at the end of the initial fixed rate period whilst others will be conditional on you reverting to the normal variable rate.

 

4. What is the lenders normal variable rate?

Find out what the lender charges as their normal variable rate and compare this with other lenders. There is no point in taking out a mortgage with a competitive rate initially if you then find that you are paying over the odds later on.

 

5. How much will my monthly repayments be at the incentive rate and at the normal variable rate?

This again sounds an obvious question to ask but you would be surprised how many people do not ask the question ‘how much will the mortgage cost at the standard variable rate?’ Remember, no matter how cheap the mortgage is initially at some point you will have to pay at the normal rate so make sure you will be able to afford the mortgage when this happens. Furthermore, remember that the standard rate may be higher in two or three years time so make sure you leave yourself with some flexibility.

 

6. Are there any penalties for repaying the mortgage early?

Ask about early redemption penalties and be particularly wary if these extend beyond the term of the initial fixed, capped or discounted period. If there are no penalties after the initial incentive period then you will be free to move your mortgage at the end of that time and will therefore me able to take advantage of other incentives available. If you are tied into the lender at the end of the initial period then you will probably have no choice and be forced to accept the normal variable rate.

 

7. Will I have to pay a mortgage indemnity premium and if so how much will this be?

Mortgage indemnity premiums have already been covered in this book but it is important that you establish the position at the outset. Mortgage indemnity premiums have in the past been charged whenever a mortgage went above 75% of the value of the property. However, many lenders have now raised the threshold to 90% of the value so there can be quite large discrepancies from one lender to another.

 

8. Is there an arrangement fee to pay and if so will I get this back if my application does not proceed?

If there is an arrangement fee to pay find out how this is collected. Some lenders will ask you to pay the fee up front with the mortgage application whilst others will either add the fee to the mortgage debt or deduct it from the advance cheque when the mortgage completes. If the fee is payable up front ask if it will be refunded if the application does not proceed. Some lenders will retain the fee even if they decline your application so make sure that you understand the situation at the outset.

 

9. Is the mortgage portable to another property if I decide to move?

Find out what will happen if you decide to move to another property. This is particularly important if you are taking out a long term fixed, capped or discounted mortgage or if the redemption penalties last for a long period of time. Many lenders now make their mortgages portable which means that you can transfer the mortgage on the same terms and conditions to a different property if you decide to move.

 

10. Am I allowed to make partial repayments of capital or increase my monthly repayments if I wish to repay the mortgage early?

Ask what conditions will apply if you wish to pay off part of the mortgage or accelerate your repayments.

 

11. Are there any other conditions attached to the mortgage? Will I have to buy your insurance?

Many of the very attractive rates available are made less attractive by the imposition of compulsory insurance. It is always the case that the lender will insist that you take out buildings insurance to cover the property but many lenders will also insist that you take this policy through them. This means that you are denied the opportunity to shop around for the best quote. If this is the case with the mortgage you are being offered then get a quote from the lender and see how competitive they are. If the premiums are in excess of those you can obtain elsewhere then take this into account when assessing the attractiveness of the deal. This becomes even more important if the lender is insisting on buildings and contents insurance and sometimes they will even make it a condition of the mortgage that you take out their accident, sickness and redundancy cover.

 

12. Do you provide advice on mortgage products from the whole market or just a selection of lenders?

If you are talking to the lender directly then they will obviously only be providing advice on their own range of products. However, if you are talking to a broker you might assume that they are providing a complete overview of the entire market. This is not necessarily the case and the adviser may take on the status of an appointed agent of one lender or arrange mortgages from a selection of preferred lenders. Whatever, his or her status the Financial Services Act now imposes a requirement that you are told the status and if the adviser is using a selection of preferred lenders you should be given the details.

However, this is not always as straightforward as it might appear. The new rules state that in order for a broker to call himself ‘independent’ he must offer the customer the opportunity to pay a fee rather than receive commission. This means that he can call himself ‘independent’ even if he only sources his products from a selection of lenders providing that the selection is deemed to be a representative sample of the market. What this means is that he may not always have access to the very best products available in the market.

 

On the other hand a broker who sources his products from the market as a whole but who only works on a commission basis and does not offer the alternative of a fee paying service cannot describe himself as independent. It is important that you understand this distinction and ask the question ‘do you source your products from a panel of lenders or deal with every lender in the market?’

A.S.U. – Accident, sickness and unemployment insurance (sometimes referred to as A.S.R. – accident, sickness and redundancy insurance). This is an insurance policy which is taken out by the borrower and protects against the borrower being unable to work for the stated reasons. The policy will usually pay a percentage of the normal monthly mortgage repayment (plus insurance) if the borrower is unable to work due to accident/sickness or unemployment/redundancy. These payments will normally only be made for a limited period of time – typically 6/12 months or until the borrower returns to work. The terms of these policies and the cost vary considerably from company to company.

Administration Fee – This is a fee charged by some lenders which is not refundable if the mortgage application does not proceed. The Administration fee will often form part of the valuation fee but will be retained by the lender even if the valuation has not been carried out.

Annual Percentage Rate – This is meant to show the true cost of borrowing and adjusts the notional interest rate to take account of all the initial fees and ongoing costs to reflect the real cost of borrowing throughout the entire mortgage term. Unfortunately there is currently some disagreement over how this rate should be calculated and some distortions occur. Whilst this could be a good way to compare relative deals care should be taken to ensure that the rates being compared have been calculated on the same basis.

Annuity Mortgage – (See Repayment Mortgage)

Arrangement Fee – This is a fee charged by some lenders in order to access particular mortgage deals. Arrangement fees particularly apply if you are looking for a fixed rate or discounted rate mortgage and these may either be payable up front, added to the loan on completion, or deducted from the loan on completion (check with the chosen lender which situation applies).

Arrears – Contracted mortgage payment not made by the due date. Applicants who have arrears on a current mortgage may experience problems if attempting to arrange a new mortgage through the mainstream lenders. A number of lenders do, however, specialise in this area of the market and their details can be found in the arrears section of the Moneynet site (www.moneynet.co.uk).

Buy to Let – A term used to describe the purchase of a residential property for the sole purpose of letting the property to a tenant. Whilst the majority of lenders will not provide mortgage finance for this purpose a number do specialise in this niche area of the market. The details of these lenders and the terms on which they will grant a mortgage can be found in the Buy to Let section of the Moneynet site (www.moneynet.co.uk).

Capital and Interest Mortgage – (see Repayment Mortgage)

Capital Raising – Normally refers to a re-mortgage when additional funds are taken over and above the amount required to repay the existing mortgage debt which is then used for personal finance purposes.

Capped Rate – A capped rate is a mixture between a fixed rate and a variable rate. The interest rate is guaranteed not to rise above a set level within the capped rate period but if the normal variable mortgage rate is below the capped rate then the variable rate is charged. This gives the ‘best of both worlds’ as the interest rate can fall but will not rise above the capped rate. However, the level at which the cap is fixed is usually higher than for a fixed rate mortgage for a comparable period of time. Sometimes ‘Cap and Collar’ mortgages are offered and these impose a minimum payment rate (the collar) in addition to the maximum rate (the cap). The lender will normally impose early redemption penalties if the mortgage is redeemed within the first few years (see Redemption Penalties).

Cashback – This is the arrangement whereby a cash sum of money is repaid to the borrower at the start of the mortgage. The amount of the cashback will vary considerably from lender to lender with the highest amounts being paid where the borrower is willing to forego any fixed or discounted rate offers and pay the normal variable mortgage rate. Cashback deals are also available in conjunction with some fixed or discounted rates but the amount of the cashback will normally be reduced in these circumstances. If a large cashback is being considered then it could, in some circumstances, be liable to Capital Gains Tax (refer to the lender, your accountant or local tax office for clarification). The lender will normal impose early redemption penalties if the mortgage is redeemed within the first few years (see Redemption Penalties).

Centralised Lender – This refers to the group of lenders, other than high street banks and building societies, who operate without a branch network, normally from one location.

Conditional Insurance – This refers to insurance products which some lenders will impose as a condition of their mortgage offer. This could mean that the lender insists that accident, sickness and unemployment cover is taken out or that combined buildings and contents insurance is taken. If looking for a fixed or discounted product then these conditions should especially be watched for.

County Court Judgement (CCJ) – A judgement for debt recorded at a County Court. These judgements will be shown when the lender carries out a credit search. If the debt has been repaid, subsequent to the judgement being recorded, then the entry will be marked ‘satisfied’. The appearance of CCJ’s on the credit register will greatly reduce mortgage options and nearly all lenders will insist thatJudgements. However, there are some lenders who specialise in this market details of which can be found under the Arrears/CCJ section of the Moneynet site (www.moneynet.co.uk).

Discounted Rate – The lender agrees to give a fixed discount off the normal variable rate for a guaranteed period of time. The discounted rate will move up and down with the normal variable rate but the payment rate will retain the agreed differential below the variable rate for the agreed period of time. If a discounted rate is taken the lender will normally impose early redemption penalties if the mortgage is repaid within the first few years (see Redemption Penalties).

Endowment Mortgage – An interest only mortgage supported by an endowment policy. During the term of the mortgage only interest on the mortgage is paid to the lender. At the same time premiums are paid into an endowment policy which is designed to mature at the end of the mortgage term. The proceeds of the endowment policy are designed to repay the mortgage debt, although with a low cost endowment policy it is not guaranteed that the proceeds will be sufficient to repay the debt. In addition to providing the investment to repay the mortgage debt the endowment policy will also include life assurance which will repay the mortgage debt in the event of the death of the policyholder within the policy term.

Exchange of Contracts (NOT SCOTLAND) – This is the stage in the property transaction at which legally binding contracts are exchanged between the buyer and the seller. Once contracts are exchanged the vendor becomes legally obliged to sell and the purchaser to buy on the terms agreed.

Existing Liabilities – This term is used by lenders to define all other finance commitments apart from the existing mortgage. This will take into account such items as bank loans, HP, credit cards, maintenance payments (to ex-spouse) etc. Most lenders will take these items into account when assessing how much they are prepared to lend and will usually deduct 12 months payments from gross annual income before applying their normal income multipliers.

First Time Buyers (FTB or FTP) – lenders differ in their definition of a First Time Buyer. Some lenders will include in this someone who has owned a property before but has no property to sell (i.e. may be renting temporarily after selling) and other lenders will include joint borrowers where just one party is a FTB. Other lenders will take a more literal definition and only include someone who has never owned a property before.

Fixed Rate – The lender will fix the interest rate that they charge at a set level for a fixed period of time. There are normally a whole range of fixed rate products available from different lenders and these vary in terms from very short periods (3 – 6 months) up to the whole 25 year mortgage term. The lender will normally charge early redemption penalties if the mortgage is redeemed within the fixed rate period and often beyond the initial period (See Redemption Penalties).

Flexible Schemes – This is a term that describes a number of new mortgage schemes and is based on the fact that some of these lenders calculate the interest on the mortgage on a daily – rather than annual basis. This offers the lenders the opportunity to be more flexible with the management of the account than would otherwise be the case. That said, there is a wide range of lenders advertising that they are flexible in outlook. These will range from lenders who will offer you one account from which to base all your savings and borrowings. From this one account you will operate your mortgage, savings accounts, current account and any other borrowings. However, not all ‘Flexible Schemes’ are as flexible and this and some will simply offer payment holidays or an ability to overpay each month to either build up a fund to draw on at a later stage or to help redeem the mortgage early.

Freehold (NOT SCOTLAND) – This describes the tenure of a property where ownership of the property and land is held indefinitely. This compares with leasehold property where the property is held for a limited period of time.

Further Advance – This is an additional loan made by the existing mortgage lender and secured by the first charge on the property. The Further Advance can be used for a variety of purposes (subject to the lenders approval) such as home improvement, purchase of freehold or personal purposes, such as debt consolidation.

Guarantor – A guarantor is a person other than the borrower who guarantees the mortgage repayments. A Guarantor can sometimes be used to support a borrower who has insufficient income to qualify for a mortgage in their own right. The Guarantor will normally need to have sufficient income to support the new mortgage in its entirety after taking into account any existing mortgage and other commitments they have personally. The Guarantor becomes responsible for the whole mortgage repayment if the borrower defaults.

Home Buyers Report – A type of survey report which is more detailed than a Mortgage Valuation but not as in depth as a Full Structural Survey. A Home Buyers Report is often carried out by the proposed lenders surveyor and the report can then be used for the lender to replace the Mortgage Valuation in addition to acting as a detailed report for the borrower. A Home Buyers report may not be suitable for certain types of property where a Structural Survey may be more relevant. If in doubt talk to the surveyor you propose to use.

Income Multiplier – Income Multipliers are used by lenders as one calculation in determining how much they are prepared to lend on mortgage. The most common multiplier used is 3 times a single income or 2.5 times joint incomes, whichever gives the higher figure. More generous multipliers are available from some lenders and lenders will be more flexible if the Loan to Value is relatively low.

Insurance Guarantee premium – ( See Mortgage Indemnity Guarantee)

Initial Interest – This figure is usually shown on the mortgage completion statement and refers to the amount of interest charged from the date that the funds are drawn down to the first repayment date. This has the effect of increasing the first mortgage payment and the amount of the initial interest payable will depend on the time in the month when the mortgage is completed. For example, if the mortgage payment is due on the 1st of the month and the mortgage is completed on 18th June then the first monthly mortgage payment will become due on 1st August. That monthly payment will, however, include one months interest from 1st July – 1st August and also 13 days interest from 18th June – 30th June which represents the initial interest.

Interest Only Mortgage – Interest only mortgages have become increasingly popular in recent years. Interest only mortgages can be supported by an endowment policy, pension plan or Pep in which case they are normally referred to as an endowment, pension or Pep mortgage. An interest only mortgage may, however, be arranged without the support of any particular repayment vehicle. Many lenders will now accept payment of interest only on the basis that the borrower makes their own arrangements to repay the capital at or before the end of the mortgage term. This could be done in a number of ways such as inheritance, sale of the property or from the realisation of other assets.

Land Registry Fee – This is a fee charged by the Land Registry to record a change in the registered title of Registered Land. The change will normally be notified to the Land Registry by the solicitor acting in the house purchase (or re-mortgage) and as such the Land Registry fee will normally be payable to the solicitor and accounted for in his final account.

Leasehold (NOT SCOTLAND) – This is the tenure that applies to most flats and maisonettes in the UK (excluding Scotland). As opposed to freehold property the rights to the property are owned only for a fixed period of time, with the freehold being held by a third party. The lease outlines the responsibilities of the various lessees in a block and determines the arrangements to be adopted for such things as upkeep of the common areas and insurance of the property. Because these cross covenants are required to avoid disagreements and confusion between the lessees only leasehold flats and maisonettes are accepted as mortgage security. This should not be confused with the situation where the freehold is owned by all the lessees in a block and this will commonly be advertised as ‘share of freehold’. Providing individual leases exist for each lessee then this would normally be acceptable to mortgage lenders. If in any doubt always talk legal advice before proceeding.

Legal Completion – This refers to the time at which the legal ownership of the property changes hands. This date will usually be agreed upon at exchange of contracts. This will also be the date at which the mortgage becomes effective (sometimes the mortgage completion date may be a couple of days before this to ensure that the solicitor has funds on the due day).

LIBOR Linked Rate – LIBOR is the London Inter Bank Offered Rate and is the rate at which banks lend money to each other. LIBOR changes daily and a LIBOR linked mortgage will normally be adjusted every three months. LIBOR linked rates are usually quoted as X% above LIBOR.

Loan to Value (LTV) – The loan to value is expressed as a percentage and represents the relationship between the size of the mortgage and the value of the property. For example a mortgage of £30,000 on a property valued at £40,000 would be shown as 75% LTV. This is an important figure to look at when considering the various mortgage options as the higher the LTV required the fewer the options. The Moneynet mortgage search facility will exclude schemes where the LTV requested is too high.

Loan Consolidation – Sometimes referred to as debt consolidation, this simply represents the policy of borrowing on mortgage in order to repay other loans or debts. This can be achieved as part of a re-mortgage or by arranging a further advance from the existing lender.

Mortgage Indemnity Guarantee (MIG) – This is known under many different names which include the following; Higher Lending Charge, Indemnity Premium, Insurance Guarantee Premium, Additional Security Fee, Mortgage Guarantee premium, Mortgage Indemnity Premium amongst others. This is a fee that is payable if a ‘high percentage loan to value’ is required. The MIG fee is used by the lender to purchase insurance to cover them in the event that you default on the mortgage and they make a loss on possession and resale of the property. The policy has no benefit to the borrower and offers no protection – indeed if your property is repossessed and the lender claims on the Mortgage Indemnity Insurance then the insurance company that has paid out the claim to the mortgage lender can still pursue you, the borrower, for repayment of that amount. The actual terms of the MIG will vary considerably from lender to lender and if you are told that this will apply you should check the details. Many lenders will impose this additional fee if you wish to borrow more than 75% of the value of the property and the premium payable will be calculated as a percentage of the amount you wish to borrow over that figure. There are a handful of lenders that do not charge MIG premiums or who charge in a different way.

Mortgage Term – This is the number of years over which the mortgage is arranged. If a capital and interest mortgage is being considered then it is worth looking at shorter terms than the traditional 25 year mortgage as considerable interest savings can be made by reducing the mortgage term by even a couple of years.

Mortgage Valuation – This is the most basic form of survey and is the minimum required by lenders in order to ascertain the suitability of the property as security for their loan. Although the borrower will normally receive a copy of this report it should not be relied upon as a comprehensive report on the condition of the property. A more detailed report (either a Home Buyers Report or Structural Survey) should be commissioned when considering the purchase of a property.

Negative Equity – Appeared in the late 80’s as a result of the slump in property prices. This describes the situation where the value of the property has fallen below the outstanding mortgage debt. Some lenders have particular products and policies to assist people who are trapped by Negative Equity.

Net Monthly Payment – This figure will be shown on both the mortgage offer and mortgage completion statement and shows the actual amount of the mortgage payment after MIRAS tax relief has been taken into account.

Non-Status – Some lenders will offer non-status facilities which allow them to lend without proof of income and sometimes without proof of existing mortgage repayment record. The maximum Loan to Value on these schemes is normally 70% or below and a credit search will usually be carried out.

Part Endowment – This describes a mortgage where only part of it is covered by an endowment policy. The balance could be arranged on an interest only basis or more commonly on a capital and interest basis.

Permanent Health Insurance (PHI) – This is a type of insurance which will pay a proportion of normal income in the event that the policyholder is unable to work due to accident, sickness or disability. These policies are normally used to replace a percentage of full income rather than just the mortgage repayment but the level of cover can be selected up to certain maximum levels. This type of cover should not be confused with ASU/ASR policies which will normally only cover the mortgage payment for a limited period of time. PHI policies can be arranged to pay income until a return to work or normal retirement age.

Portable – This describes the ability to move a particular mortgage product from one property to another in the event of a property move. This is particularly important if a fixed, capped, cash back or discounted product is taken where early redemption penalties are charged. If the product is not ‘portable’ then a house move would involve the payment of early redemption penalties even if another mortgage was taken with the same lender. A portable mortgage means that the same scheme is transferred to the new mortgage for the remainder of the original term e.g. a 5 year fixed rate is taken which has redemption penalties within the first five years. If the borrower decides to move after two years then the same five year rate will apply to the new mortgage for the balance of the remaining three years. If the original product was not portable, however, then redemption penalties would be paid on redemption of the existing mortgage and a new product would have to be taken for the new mortgage.

Redemption Penalty – An additional charge made by the lender if the mortgage is repaid within a pre-agreed period of time. These have become increasingly common with the growth in fixed rate and heavily discounted products. They are generally imposed to stop borrowers hopping from one lender to another simply to take advantage of the latest heavy discount or cheap fixed rate. Normally expressed as a number of months interest within a set period of years i.e. 6 months interest if redeemed within the first seven years but may also be expressed as a percentage of the mortgage debt i.e. 5% of the mortgage if redeemed within the first seven years. Careful attention should be paid to these penalties as they vary considerably from lender to lender and the lower and shorter the penalty the more attractive the deal.

Regional Lenders – This refers mainly to the smaller local Building Societies who restrict their lending to within certain regional locations. This could also be applied to a larger number of lenders who will not lend in Scotland or Northern Ireland and if you are looking for a mortgage in either of these areas you should check at an early stage that the lender will lend in these areas.

Re-mortgage – This is the process by which a mortgage on a property is moved from one lender to another. The new mortgage is used to repay the existing lender and at the same time additional funds may be raised for other purposes. Re-mortgaging has become an increasingly popular way to take advantage of the competitive deals offered by lenders to attract new business. If a re-mortgage is being considered then careful attention should be paid to the costs associated with arranging the re-mortgage as well as the savings to be made on the monthly repayment (the costs can sometimes erode any savings to be made). A check should also be made with the existing lender to ensure that there are no early redemption charges.

Repayment Mortgage – Also called an Annuity mortgage or Capital and Interest mortgage. With this type of mortgage the monthly repayment includes an element of the capital sum borrowed in addition to the interest charged. In the early years of the mortgage the majority of the monthly repayment consists of interest with only a small part repaying the capital. However, as the debt gradually reduces the element of capital increases and the interest element reduces, so although the monthly repayment stays the same (assuming interest rate remain unaltered) the debt starts to reduce more quickly as the term of the mortgage progresses. On a 25 year term mortgage it would not be unusual to still owe over 50% of the original debt after the first 15 years. Providing the correct monthly repayments are made on their due dates this mortgage will guarantee to repay the total mortgage debt at the end of the mortgage term.

Retention – This relates to monies withheld by lenders until certain mortgage conditions are met. This will normally relate to repairs or improvements to the property that the lender is insisting on.

Self-Certification – Several lenders will allow borrowers to self certify their income and no further checks on income are made. This type of scheme is useful to the self-employed who may not have accounts available or any other person who has difficulty in proving their earned income. The lender will normally make checks on previous credit history and will require a clear credit search in addition to a good previous lender’s reference.

Self-employed – This will usually cover anyone who is not paid under PAYE. In addition, for mortgage purposes, most lenders will class controlling directors as self- employed or directors with more than a 20% shareholding. If this applies then the lender is likely to ask to see company accounts and to write to the companies external accountant for proof of income.

Stamp duty – This is a tax which is levied on the purchase of property. The tax is paid by purchasers and is currently levied at the following rates:

1% of property value £60000 – £250000
3% of property value £250001 – £500000
4% of property value £500001 and above.

The appropriate rate is paid on the whole purchase price and not just the excess applying to that band i.e. a purchase price of £300000 will attract £9000 stamp duty, being 3% 0f £300000.

Structural Survey – This is the most detailed type of survey report normally undertaken in connection with a House Purchase. If a Structural survey is opted for then the lender will also need to have a mortgage valuation carried out for their own purposes and the borrower will be responsible for both fees. An alternative may be a Home Buyers Report which will cover both the borrower and the lender but advice should be taken from a qualified surveyor who will be able to advise on individual properties and circumstances.

Term Assurance – This is life assurance that pays out the insured sum on the death of the policyholder providing it occurs within the policy term. This is a common method to protect the mortgage in the event of death and to ensure that the mortgage debt is repaid. The most common types of this insurance are Mortgage Protection or Level Term Assurance. Mortgage protection is normally used in connection with a capital and interest mortgage and the level of the insured cover reduces in line with the reduction in the mortgage debt. Level Term assurance is more likely to be used in connection with an interest only mortgage as the level of cover remains constant as does the mortgage debt. With Term Assurance cover there is no pay out if the policy holder survives the policy term and the policy simply lapses with no value. This factor makes this type of cover relatively inexpensive.

Variable Rate – This is the traditional way that mortgages were arranged before the concept of fixed rates. A variable rate will fluctuate up and down to reflect the true cost of borrowing. Some variable rates may be discounted for a period of time (see Discounted Rates).

 

Applying for a credit card is no different to applying for any sort of borrowing. The lender will take your personal information, income, outgoings and any existing debt into account, including personal loans and balances on other credit cards. They will also run a check on your credit history to see if you have had any credit problems in the past.

You can check your own credit history through credit references companies such as Experian (www.uk.experian.com) or Equifax (www.equifax.co.uk), for a fee. Depending on the service, you may also be able to query or correct errors on your file that may be preventing you from obtaining credit.

If you have no credit history
If you have never had a credit card or personal loan, you may find yourself in a position where you have no credit history, so you may have limited options as to which credit cards you will be accepted for. In this instance, the bank where you hold your current account may be the best starting point.

Banks often offer introductory ‘student’ credit cards with low spending limits and slightly lower interest. However, these do not often come with the best interest rates.

To help you build a credit history, you may want to acquire one of these cards but use it sparingly or not at all. After a few months, your credit history may have improved sufficiently for you to apply for a standard card offering lower interest rates.

If you have poor credit
Bad credit will unquestionably restrict your options for choosing a credit card. However, many issuers will consider giving credit cards to people with poor credit under certain conditions. They may offer a higher interest rate and lower spending limit, for example, depending on your specific credit history.
 
Credit card agreements
Credit card agreements are governed by the Consumer Credit Act 1974. The Act licenses lenders and compels them to show buyers the true cost of credit; it also protects consumers against "extortionate" rates of credit.

However, even credit charged at standard rates can add up quickly, so if you are having trouble making repayments on an outstanding balance, contact your credit card issuer immediately.

The earlier you contact the lender, the more likely they are to try to help you meet your repayments. They may suggest a different payment schedule, or an alternative card with a lower interest rate.

But don’t ignore the problem simply hoping it will go away, because unfortunately it won’t.

 
Once you tarnish your credit record, it is a long and difficult process to improve your standing, and you may find any future credit agreements you wish to enter may be refused, until you return your account to order.

 

 

Lenders want to make sure that you are a good risk and do not have a history of bad debts and unpaid loans behind you. To do this they will do two things. First they will check your entry on credit registers. Credit reference agencies such as Experian, Equifax and CallCredit PLC hold factual information about you and this allows a lender to check your name & address and your past credit history, including any County Court Judgments or defaults recorded against you. This will provide your ‘credit refererence’.

The second thing that the lender will do will be to credit score your application. They do this by allocating points to a variety of questions they have asked you. They then add up the total points score and you either pass or fail depending on the result. For example, they are likely to award you more points the longer you have been resident at your current address or with working for your current employer. They will also take into account things such as your occupation, your age, whether you have a home telephone and how long you have been with your bank etc. Lenders will never divulge how their credit scoring works for fear of fraud and each lender will have their own system. The fact that you have been turned down by one lender will not necessarily mean that you will be declined by others.

A poor credit record won’t necessarily prevent you from getting a credit card, but you will probably have to pay a higher interest rate. The self employed, or those – increasingly common these days – on short-term contracts may not be such an attractive risk to lenders.

 
People are refused credit for a number of different reasons and there is no automatic ‘right’ to credit, although it is illegal to refuse credit for reasons such as race, gender, religion, sexual orientation or address.

A common reason however for being turned down for credit may be because information held about you by a credit reference agency, or information provided in your application form, suggests that you will have problems repaying. Another very common reason for being turned down is that you may not appear on the Electoral Roll with the credit agencies at your quoted address. If you are having difficulties in obtaining credit then it is always worth checking that you actually appear on the voters roll at your current address.



If you don’t, you’ll be lucky to get credit anywhere. You can check this by reference to Experian (www.uk.experian.com) or Equifax (www.equifax.co.uk).
If a lender turns you down for credit they must explain to you the reason.
 
However, they do not have to go into detail and simply have to tell you whether it is due to their credit scoring or information from the credit reference agencies.



How do I check my credit file?
Most lenders go through three main credit reference agencies for information on your financial past – Equifax (www.equifax.co.uk), Experian (www.experian.co.uk) and CallCredit PLC (www.callcredit.plc.uk). These three agencies, although business rivals, work pretty much along the same principles.

Each compiles credit histories from a number of different sources, including the electoral roll, county court judgments and how effectively past debts have been managed. Every time you open a new form of credit it will leave an electronic foot print on your record, which the agencies use to compile a credit ‘scoring’ system. When you apply for a personal loan, the lender – be it a bank, building society or internet based provider- will firstly run a credit check on you to see what kind of ‘score’ you have.

If you are turned down for credit, this is not a decision made by Experian, Equifax or CallCredit PLC, but by the lenders, based on their own criteria.

If you want to get hold of an up to date copy of your own credit report, please refer to section 7 of this guide for full contact details of Experian, Equifax and Callcredit.


If a lender refuses you credit, it must say why. Under the Data Protection Act, if you are refused credit, and scoring was used to help the lender decide, you can ask for a review of your application.

 

 

It’s now harder to obtain credit than ever, so it’s vitally important to check that your credit record is accurate and up to date. If there is inaccurate information recorded against you, it could seriously hamper your chance of obtaining credit. Check out your own credit report with a free 30 day trial below. Credit Expert

Knowledge is power when it comes to getting the credit deals you want. Start by understanding the impact your credit history has on the type of credit you are offered – or whether you get an offer at all.

Your credit history is reflected on your credit report which lists credit cards, store cards, loans, mortgages and other credit accounts, repayment track record and other information such as bad debts, IVAs and bankruptcies. Lenders use this, along with details from your application, to decide whether there’s a good chance that you’ll repay what you owe, so it’s crucial to understand what items will and won’t influence them.

With the credit crunch biting hard, it’s more important than ever to ensure that your credit report is accurate as incorrect information recorded against your name could lead to you being turned down for credit, whether it be for a mortgage, a personal loan, a credit card or even a new mobile phone contract.

Here are the top ten credit myths – and the truth behind them.

1. Previous occupants of my address affect my credit rating

These days it makes no difference to your credit rating if the previous occupant of your home was a millionaire or a bankrupt as long as you never shared a financial connection – lenders are only interested in your ability to repay them on time and in full. They do like to see stability, though, and if you’ve recently moved they will want to know your previous address, so they can check back.

2. Credit reference agencies help make lending decisions

Credit reference agencies compile and hold your credit report securely; they don’t use the information to make lending decisions. Lenders use the credit report data to help make decisions and perhaps score your application, each using a unique set of criteria to make a decision. With CreditExpert you can see your Experian Credit Score, based on your credit report, which will give you a good indication of how lenders will see you. See your credit report free today. Credit Expert

3. Past debts don’t count

Unfortunately, they do. Court judgments for non-payment of debts, IVAs and bankruptcies stay on your credit report for at least six years. Even a missed repayment is recorded for at least 36 months. Lenders see these and it could count against you because they may see it as an indicator that you will miss payments with them too.

4. If you’ve never borrowed, you’ll get the best deals

You’d think that someone with no history of debt would be attractive to lenders but the reverse is often true. Lenders want you to have a history of making repayments on time and in full – if you’ve never borrowed, they have no way of knowing how you’ll make payments in the future and may even reject you. They’d often rather see a credit report showing a few well managed loans or cards and regular, reliable repayments.

5. I could be on a credit blacklist

No, you couldn’t – they don’t exist. Your credit rating doesn’t take account of the area where you live, your race, ethnic origin, religion or gender. Factors lenders do consider include your repayment history and how much you already owe. Essentially, they want to be sure that you aren’t taking on more credit than you can comfortably manage.

6. Friends and family living at my home affect my credit rating

Unless you share a joint financial connection with any of them – for example, a mortgage – friends and family will have no impact on your credit rating. If you do have a joint account or have made joint credit applications, their name will be listed in your credit report under financial associations. When you apply for new credit, lenders may see your financial associate’s credit report as well, as their circumstances could affect your ability to make repayments.

7. Repaying your credit cards in full depresses your credit score

This urban myth is also nonsense. Making repayments in full every month is likely to result in a better credit score, because it shows you can afford your borrowings. You’re more likely to get a lower score if you make late payments and let interest – and your total debt – rack up.

8. It doesn’t matter how many credit accounts you have
Lenders want to be sure that you can afford the credit they grant, so they prefer it if you don’t already owe large amounts on multiple accounts. They can even take into account the amount you could borrow against your credit limits, so it’s sometimes best to close down unused accounts and limit the number of new applications you make. Finally, don’t fire off random credit applications, as these will be registered on your credit report – ask for quotations before you apply and these will only be seen by you on your credit report. If it looks as if you’re trying to borrow a lot in a short period of time, lenders may think you’re desperate for money or even suspect fraud.
9. You only have one credit score

Each lender uses its own method to calculate credit scores and some even use a different formula for different products, such as loans and cards. So you could get three different credit scores if you made three applications in a single day. Your credit history also changes over time, as your circumstances change. For example, missing a few repayments could lower how you are scored, while paying off a debt could give it a boost.

10. Items in your credit history stay on file forever

Your credit report is designed to give lenders a good picture of your recent and current position – they’re not interested in seeing that a 40-year-old missed a few credit card repayments when he was 21, because it has no relevance to his likely behaviour today. Most information about your credit history is therefore held for between three and six years.

 

Introduction

What will happen to your loved ones after you die? Will they be able to support themselves? Can your spouse manage the mortgage payments and ensure your children are able to attend university?

Arranging life assurance cover is the best way to ensure your family is taken care of in the event of your death, giving both you and them peace of mind.

Many of us are superstitious about planning for after our death, believing it to be a morbid topic and one that might even hasten the inevitable. But knowing you have a comprehensive life assurance programme in place will provide peace of mind for both you and your loved ones.

Life assurance, put simply, is a policy provided by an insurance company that pays your family either a lump sum or a series of smaller sums in the event of your death. Policies vary widely; some may guarantee a payout, others expire after a certain period of time. Some have premiums and payouts set in stone, while others offer more flexibility.

There are many factors to consider when choosing a life assurance policy. What sort of cover do you need? How much cover should you arrange? Do you need basic life assurance or more extensive critical illness cover, and what about tax?

As a financial data comparison site, Moneynet.co.uk can direct you to the best life assurance deals to meet your needs. The internet makes it easy to shop around to find the best deals, but you need to ensure that a deal really suits you and your family.

How much cover do I need?

The first step is to establish how much cover you will need, and for what purpose. Will your family need full financial support after you die? Do you wish to arrange for your mortgage to be paid off, or your children’s university education be paid for? Perhaps you wish to ensure your business partner can survive the upheaval caused by your death.

Reasons for arranging cover could include:

  1. Mortgage repayments – level term policies, recommended for interest-only mortgages, offer fixed premiums over a fixed period of time and payment upon claim. Lower premiums are available with a decreasing term policy, where the amount of cover reduces over the term of the policy in line with the amount owing on a repayment mortgage.
  2. Replacing the primary earner’s salary – ensuring the family does not fall upon hard times in the event of the primary breadwinner’s death – is often the main reason for arranging life assurance. The amount of the payout should be calculated according to the earner’s net salary, the number of years it will be needed to maintain the family, as well as additional expenses incurred due to the breadwinner’s death, such as childcare. The amount can be paid in a lump sum and invested in order to pay out the income needed, or paid in monthly instalments as a Family Income Benefit.
  3. Replacing childcare – the death of the primary childcare provider may create expenses in the form of full-time childcare. The level of care needed and for what term depends on the age of the children.
  4. Education expenses – cover can be arranged for school fees and/or university tuition and expenses for children in the event of the death of the primary earner.

In some cases, policyholders may be concerned about leaving debts behind; in others, they may simply wish their family to be able to keep up a certain standard of living after their death.

It is recommended that you use your current annual salary as a base guide from which to establish how much total cover you wish your policy to provide. A general rule is to choose a policy providing at least ten times your salary; in certain circumstances, up to 25 times salary may be appropriate. Again, the amount will vary depending on how you intend it to be used.

People unsure about the type of coverage they need, or the amount they should insure for, should consult an Independent Financial Advisor for expert advice.

Once you have determined which financial goals you wish to satisfy, the next step is to choose the type of cover you want.

Life assurance: policy types

Term life assurance is the simplest form of policy, offering basic cover for a set number of years, usually at low cost. A term policy requires a regular premium payment and pays out a lump sum on the policyholder’s death. If the policy expires and the holder is still alive, no payment is made; the policy pays out only if you expire before it does.

The cost of the assurance premiums will vary from person to person depending on factors such as age, health and occupation, but for all policies it is crucial to ensure you keep up the monthly premium payments to keep cover in place.

Term assurance policies may also offer the option to pay an extra premium and receive a payout in the event the policyholder is diagnosed with a critical or terminal illness.

Critical illness cover can include debilitating but not necessarily fatal conditions such as heart attack or stroke, cancer, multiple sclerosis, loss of limbs, etc., and the cover pays a lump sum on diagnosis – not for treatment of the condition, as you would expect with a health insurance policy.

As with any coverage, it is important to be sure exactly which conditions the policy covers, and which it doesn’t. A policy will be very specific as to the illnesses it will pay out for; critical illness policies can also range from basic coverage, which will include just the main critical illnesses such as cancer, to comprehensive policies that cover a more extensive range of conditions.

Full disclosure of any and all existing medical conditions and history is vital when arranging critical illness cover. Failure to disclose could result in denial of payment when an illness is diagnosed – just when that payment is needed most.

Policyholders wishing to provide for their families in the event of their death can choose Level Term assurance, which pays a lump sum if the holder dies during the term of the policy. The payout amount is guaranteed and remains the same throughout the policy; you only need to choose how much you wish the amount to be, and the length of the policy term. There is no payout, however, should the policyholder outlive the term of the policy.

Decreasing Term assurance sees the amount to be paid out decreasing over the term of the policy. Most often used to cover mortgages, this type of term life assurance has the payout sum reducing over time just as the amount owing on the mortgage reduces.

Some mortgage providers will not release mortgage funds without the debtor securing some form of life assurance, guaranteeing repayment should the worst happen.

Whole-of-life assurance removes some of the guesswork from life assurance by guaranteeing a payout of a lump sum when the policyholder dies, at whatever time that may be. As long as the premiums are maintained, the cover is assured. However, because a payout is virtually guaranteed, this assurance is generally more expensive than basic term assurance and is generally more likely to be used in Estate Planning as a tool to meet Inheritance Tax liabilities.

Endowment life assurance policies are essentially savings schemes that have life assurance attached; they are most often carried with mortgages and pay out any accumulated returns at the end of the policy term, or if the policyholder dies before the end of term, a payout sum plus any returns so far.

Generally endowments are taken out with decreasing term assurance, where the payout sum decreases throughout the term of the policy to cover the remaining mortgage debt, but the endowment investment is hoped to make up the difference and even perhaps surpass it. However, this happy outcome requires the cooperation of the investment markets – the performance of which is not, of course, guaranteed.

With Convertible Term assurance, you may convert a term policy to whole-of-life or endowment assurance at the end of the term of the policy, without necessarily having to provide new medical details.

Family income benefit provides a slightly different payout; the benefit upon your death is provided to your family in regular payments rather than in a lump sum, giving them a regular income over a selected period of time. The term is chosen at the outset of the policy, and this type of policy would usually be taken to replace a lost salary or to provide an income for a particular purpose, such as children’s education expenses.

With Family Income Benefit, you decide the term ahead of time, perhaps to match your expected income-earning years. So if you die with five years to go on the term of the policy, it pays out the benefit to your dependent for the next five years. If you die with only six months to go to the end of the term, your family will only receive six months’ worth of benefit.

What do I need to look out for?

It is extremely important to know the terms and conditions of your life assurance policy. In many cases, a policyholder’s personal circumstances may change during the term of the policy, and so the current premiums or the eventual amount of the payment may no longer be appropriate.

While a policyholder’s personal circumstances may be likely to change, the economy itself is guaranteed to do so, and a policy taken out 20 years previously may simply no longer cover all contingencies. Some companies offer the option of index-linked policies, in which the guaranteed payout and the premium payable are linked to the Retail Price Index and rise alongside it each year.

Holders of index-linked policies need to establish whether their policies are linked automatically, or whether they need to opt-in to linkage each year; failure to do so could result in being locked out of future linking.

Furthermore, policyholders must be aware of all the rules and regulations pertaining to payouts. Some policies may not, for example, pay out if death is caused by participation in certain dangerous sports or activities.

People who receive life assurance as part of an occupational pension scheme need to ensure that cover is maintained if they leave that place of employment. If the same policy is not maintained, a new one should be started in its place as soon as possible.

It is also important to remember that the longer you put off getting life assurance, the more expensive it will get.

Who should be covered?

Life assurance is not merely the sole province of the ‘breadwinner’, or the person who earns the largest salary. For a family with young children, the spouse providing the bulk of the childcare – often but not always the woman – performs a function that, in the event of their death, costs the family a great deal to replace with outside help.

A family that loses its stay-at-home mother may, for example, have to hire a full-time live-in nanny to provide the same sort of care, and will have to provide relief cover as well for evenings, weekends and holidays.

Spouses can arrange separate life assurance policies, but a more economical route could be to arrange joint life assurance cover, where the policy pays out if either spouse or partner dies during the term of the policy. Depending on the particular policy, the benefit may be paid out at the death of the first policyholder, or to a separate beneficiary upon the death of the second policyholder.

What about the beneficiary?

Most commonly, policyholders will name their spouse and/or their children as beneficiaries of their life insurance, with other family members an option for the unmarried and childless. Beneficiaries are not limited to family – a business partner is also a popular option.

A joint-life policy is a popular and often less expensive option for couples which covers the two of them simultaneously. This type of policy may be in a first-death form – where the benefit is paid out on the death of the first of the two to die to the surviving partner – or a last-survivor form, where the benefit is paid to the beneficiary, usually the children, after both partners die.

Spouses may also take out life-of-another policies on each other; a husband may take out insurance on the life of his wife, and vice versa. Life-of-another policies require that you prove an insurable interest in the person whose life you are insuring; however, spouses are assumed automatically to have an insurable interest in each other’s lives.

Will my life assurance payout be taxed?

The payout from a life assurance policy is generally free of deductions for personal income tax – by itself, it is tax-free. However, the payout is considered overall as part of the deceased’s estate.

If the payout, when added to the estate, pushes the entire estate over the threshold for paying no inheritance tax, then any amount over the threshold would be liable for tax. In order to spare beneficiaries the burden of paying tax on a life insurance payout, policyholders can opt to write the policy in Trust. Placing the policy in trust ensures that the proceeds will not create or worsen a tax burden. They will also be available to the trustees to pay out to the beneficiaries almost immediately upon death, whereas if they form part of an estate they may be tied up in probate for several months.

A whole-of-life insurance policy can also be written under trust to be used for expected inheritance tax costs on the deceased’s estate to cover the tax burden. The policy in trust can be released to the beneficiaries almost immediately upon death, and they can then use it to pay the inheritance tax bill to release the estate.

Placing a life assurance policy in Trust is a complex issue, and people considering this option should always seek advice from their solicitor and independent financial advisor before proceeding.

How much does it cost?

The cost of each different policy offered by a life assurance company varies widely, and depends on a number of factors: the type of policy, the length of the policy term, the size of the death benefit, the flexibility of the policy, number of people covered by the policy and so on.

The cost of premiums will also depend to a large extent on your answers to more personal questions: the company will wish to know your age, your state of health, whether or not you smoke, what you do for a living and similar questions. They will likely also wish to know whether certain diseases and conditions run in your family, such as cancer, heart disease or other potentially fatal conditions.

How do I apply?

Applying for life assurance may for some people be as simple as filling out a few forms. Many of us, however, will not be so lucky, and more assessments will be involved before an assurance company decides to offer a policy, and at what cost.

Insurance companies use what they call mortality tables to determine the premium for a particular individual. These tables assess the chances of a person dying within the term of a policy, based on factors such as their age, sex, occupation, smoker/non-smoker status and so on. Mortality tables will be used to assess the premium for a person in normal health. To these premiums the insurance company may then add a ‘loading’, after taking into account other factors relating to medical history and lifestyle.

In order to determine whether a loading will apply and if so, how much, it is not uncommon for a life assurance company to request additional reports from your GP or even a medical examination. The likelihood of this happening will depend on various factors such as how much cover you are seeking, your age, medical history and general health and lifestyle.

It is important to ensure you disclose the truth about your health and any conditions you may suffer from to the insurer; failure to disclose such information could result in your life assurance policy being null and void upon your death.

The underwriting process

Once you have completed an application for life assurance, your proposal is assessed for risk and appropriate premium rates are calculated during the underwriting process. Rates are normally expressed per £1,000 worth of cover guaranteed by the policy, and will vary according to the factors described above. Insurance companies will also employ the services of qualified doctors to interpret reports and medicals from GPs and to help determine the amount of any premium loading.

Once the underwriters have assessed the application, you will be offered terms and the cost will be confirmed. In most cases this should be the price that you have been quoted, as most people will be accepted at normal rates. However, in some cases a loading will be applied which will increase the costs and in some more serious cases the underwriter may refuse to offer cover at any price. In these cases the insurance company will usually send details to your GP so that he can advise on the reasons.

 

How is payment made?

On the death of a policyholder, the beneficiary of a life insurance policy will normally be asked, on submitting a claim, to provide various proofs: the death certificate of the policyholder, proof of policy and other documents the insurer may require to process the claim. If the policy has been written in trust, then the payout can normally be made very quickly. However, in the event that the policy is not written in trust, the payout will only be made on production of the Grant of Probate, which may take some weeks.

Having read our guide to life assurance, you will now be in a far better position to determine what type of policy is best for your needs.

Remember, while many people automatically opt for the lowest monthly premium or the highest payout sum they can find, this may not be the best choice for all circumstances.

If you wish to provide a steady income for your family over the longer term, or expect your financial circumstances to change over the term of the policy, flexibility may be higher on your list of needs.

Within reason, people of any age or health status can usually arrange some form of life assurance cover, though of course the cost of premiums will vary depending on your own personal situation.

But for the very best – and lowest cost – deals around, request your own personalised quotation from one of our life insurance experts today