Buying a home is probably the biggest investment you can make, and choosing the right mortgage that suits you is essential if you want to enjoy your new home without the fear of spiralling debts. Following some simple guidelines will make sure you avoid difficulties later on – it pays to make sure you completely understand the Agreement you are making, and the benefits, and possible costs involved.
Never forget that you are in charge. Competition among financial institutions to lend money to homebuyers is stronger every year, so don’t be afraid to shop around for the best deal, and never accept an offer without checking it very carefully. Regulations make certain that lenders cannot knowingly confuse a customer, but that doesn’t mean that you don’t have to take care reading and understanding, and asking questions every step of the way.
So what are the different types of mortgage, and how can you tell which one will suit you?
What Type of Mortgage is Right For me?
Mortgages fall into four basic categories, and simple definitions are –
Repayment– your monthly payments cover the sum you have borrowed, and the interest charged, so when it’s paid off, there is nothing more to worry about. Most lenders will insist on you taking out a Life Insurance Policy that will pay off the remaining sum in the event of your death before completion. Interest Only– as the name suggests, you pay the interest raised each month, but the payment amount goes into an ISA, pension, or endowment plan which makes enough interest to insure that there is a lump sum at the end of the loan term which pays off the mortgage. In an ideal situation, there is a cash lump sum left over as well, which is yours, tax-free. Fixed Rate– you agree to pay a pre-arranged rate of interest for a fixed term of years. This means that if the bank interest rates rise, your payments remain the same, but if the rate falls, you still pay your agreed rate. Discount Rate– this is an attractive option for first-time buyers because the rate is set lower than normal for the early years of the mortgage, which is ideal for people who need to furnish and equip their home, as well as buy it.
Other variations of these basic types of mortgages are available, and can be discussed in detail with your lender.
Once you have decided on the type of mortgage you want to take out, which depends on your circumstances and future plans, it’s time to start shopping around for the best deal.
You should allow yourself plenty of time to make appointments with a variety of High Street Lenders – banks and building societies. Make sure you have the appropriate information with you – the amount you can comfortably afford to repay, your salary details, the approximate cost of the property you are hoping to buy. Always start with the bank or building society that deals with your salary or wages, they know you as a customer, and will be keen to keep you as a mortgage customer as well.
Problems and Pitfalls
Borrowing money costs money – that’s how banks and building societies make their profits, and you need to be aware of some of the potential difficulties that you could encounter in the future.
Interest Rate Changes – If you are a Repayment Mortgage buyer, then you can enjoy the advantages of any drops in interest rates, but remember, the trend in interest rates is almost always to rise, rather than fall. You must make sure that you have sufficient funds to make your repayments, even if they rise above their starting point – and they probably will.
Investments Risks – If you have an Interest Only Mortgage, then the bulk of your repayment money is going to be used to fund an ISA or similar investment, which follows stock market trends. These systems are attractive because they enjoy considerable tax benefits, but caution is advised – the investments may not make the necessary lump sum to pay of the mortgage at the end of the term, and you may have to ‘top up’ the fund before the term is completed.
Discuss everything fully with the adviser provided by your lender. Never be afraid to ask questions, these people deal with mortgages every day, and are used to people finding out information for the first time. The golden rule is – never sign any documentation without fully understanding what is involved. It’s your dream home, so make sure you have prepared for the future, and you can enjoy it.