A mortgage represents the most expensive form of credit most people will ever apply for. With house prices well above £200,000 in many locations, taking out a mortgage means taking on a sizeable debt that will take decades to pay off. As such, borrowers have to be very careful about what they do.
The good news about mortgages is that there are plenty of them readily available. The bad news is that it is easy to make costly mistakes. Recognising such mistakes is the first step in avoiding them. The second step is to employ the right strategies that guarantee things work in your favour.
Are you planning to buy a house soon? If so, do not make these five mistakes:
1. Going Directly to a Bank
Banks are the first institutions’ many people think of when it comes time to apply for a mortgage. However, going directly to a bank virtually guarantees not getting the best deal possible. Here’s why: financial institutions only offer a limited number of mortgage deals that are designed purposely with their needs first.
You might go to a bank or building society and discover you only have access to two different mortgage products. What if neither product is right for you? Even worse, how do you know that either of those two deals is really the best you can get? You have no way of knowing because the bank or building society has no incentive to look out for your best interests.
What’s the solution? Avoid banks and use a dependable mortgage brokerage instead. Independent mortgage brokers represent multiple public and private banking institutions as well as third-party lenders. If there is anyone capable of finding you the best mortgage for your circumstances, it is an independent broker.
2. Accepting an Interest-Only Mortgage
Interest-only mortgages may represent a way to get into your dream house without taking on monthly payments you cannot afford, but there’s a catch: paying only interest with your monthly payments means you are not paying down the principal. That is not a problem until you come to the end of the loan at which time a balloon payment is necessary.
If you are taking out a £100,000 mortgage with interest-only payments, are you going to have enough money to pay what you owe on the loan’s maturity date? If not, you are either going to have to take out a new mortgage or sell your house.
3. Obsessing Over Interest Rates
Do not make the mistake of obsessing over interest rates, either. Yes, interest rates are important in determining how much you will pay to borrow. But they are not the only thing to consider. Remember that lenders advertise annual percentage rates (APRs) as opposed to straight interest.
An APR represents the total cost of borrowing over the life of a mortgage. It includes interest, closing costs, application fees, and so forth. It is more important that you concentrate on APR than interest rates alone. Your goal is to get the lowest possible APR on a loan with terms that suit your circumstances.
4. Mortgaging More Than 75%
It has long been understood that home buyers will put down a certain percentage of the purchase price on a home as a deposit. The size of a deposit can vary, but the general rule is to put down 25%. Whatever you do, don’t make the mistake of putting down any less.
A deposit of less than 25% means you are mortgaging more than 75% of the value of the home. Why is this bad? There are several reasons, beginning with the fact that you will end up paying more interest for every pound you borrow. Coming in with a 10% deposit as opposed to 25% means you will be paying a lot more interest.
Mortgaging more than 75% also makes you a higher risk to lenders. That means you will get less favourable rates and terms. Also, note that higher mortgage amounts reduce the number of lenders willing to loan to you. This means you’ll have fewer deals to choose from.
5. Exceeding Your Established Budget
Finally, do yourself a favour and commit to not exceeding your established budget – not even in the slightest. Be prepared that your estate agent might show you houses that are above your budget with the hope of getting you to spend more. Don’t do it.
Exceeding your budget, even by a little bit, could cause serious financial problems down the road. You could stretch yourself so thin that the slightest financial emergency prevents you from making your mortgage payments. Miss a few mortgage payments and you could be in line for repossession.
Also, keep in mind that committing to your budget might mean that you cannot find a house you really like. That’s fine. You are better off waiting until the market improves or you have more money saved. You can never go wrong by not spending money. On the other hand, you can go terribly wrong by spending more than you have.
Now you know what to avoid when it comes time to apply for a mortgage. Good luck in your house search. Hopefully, your estate agent and mortgage broker can work together to get you into the home of your dreams.