Buying your own home is probably one of the largest financial decisions that you are likely to make in your life, so it is vital that you choose the right mortgage to help you pay for your dream home.
There are many aspects to taking out such a large loan secured against your property and it would definitely help you to choose the right product if you could gain a good understanding of how mortgages work.
Long term commitment
The origin of the word mortgage is old French mort gage, which literally translates into dead pledge.
When you take out a loan for the standard 25 years you are pledging to pay instalments over what is normally a 25 year period, or until you die and your life insurance takes up the slack.
That cheery thought at least demonstrates how big a deal taking a mortgage really is and why you need to consider all aspects of what is a long term commitment and a large financial outlay over the life of the loan.
The meaning of security when it comes to mortgage is a double-edged sword, as you are enjoying the security of having a roof over your head but the lender also has the security of the property, which they can repossess and reclaim should you default on your payments.
Now that you have had all the relevant warnings of what you are signing up to, it’s time to take a look at what the current mortgage market has to offer.
Mortgages used to be a combination of cheap and easy in the not so distant past but despite the fact that interest rates are still historically low and lending is therefore cheap in comparison to previous periods in time, getting a mortgage is no longer as easy as it once was.
Affordability rules were introduced in early 2014 as a way of regulating lending so that people could only take out a mortgage for an amount they can comfortably afford to repay back on a monthly basis.
Lenders now ask for proof of what you earn and what you spend and they will require details of all your household bills and personal expenses so that they can arrive at a monthly figure you can afford. They will then either offer you a mortgage for an amount they think you can afford or actually refuse your application based on the information you have supplied.
Getting the right mortgage
Getting over the affordability hurdle is just one part of the equation and as there is still a dazzling array of different choices and mortgage products available despite a tightening of lending policy.
You need to decide whether you should go for a fixed rate deal so that you know exactly how much you will have to pay for a defined period of time or should you consider a variable rate deal and hope that interest rates remain low for longer than anticipated.
A fixed rate mortgage offers is advantageous in some respects but not in others.
If you took out a five year fixed rate deal, your repayments would be exactly the same each month regardless of whether there was an interest rate rise during that time. The downside is that if mortgage rates fall during that time, you remain locked into the higher rate until the deal expires, which could be costly.
You might want to consider a tracker mortgage, which is linked to the Bank of England base rate. This means that if the interest rate rises, your mortgage payment will rise in unison, so a half percent rise in the base rate would add a the same to your mortgage cost.
Tracker mortgages can often be cheaper than fixed rate mortgage rates and it is easy to understand what rate you are required to pay because it is directly linked in with the bank base rate.
Deciding which mortgage the right one
If you are just getting on the property ladder and finances will understandably be a little tighter than they might be a few years down the line, you might want the comfort of fixing a rate so you can budget with an element of certainty.
If you think that you may move on again to another property in a few years, you should perhaps avoid tying in to a deal that may cost you financial penalties to get out of if you have to switch mortgages before the end of the agreed period.
Navigating the mortgage maze is about finding the right deal that suits your circumstances and risk preferences, especially when it comes to deciding whether to fix your rate or not.
Jamie Wells is a personal finance consultant. He has a background in banking where he used to authorise and issue mortgages. Since then he has been investing in property himself. His articles appear on property investment blogs.
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