Taking on a mortgage is probably the biggest financial commitment you’ll make in your lifetime so it’s essential to get it right. Here’s some key things to think about before you commit.
Have you got a good deal on your mortgage loan?
Make sure you’ve obtained the most competitive rate available to you. Admittedly, you can’t always control the rate you get because some factors beyond your control will determine what’s possible. For instance, if you’re a first-time buyer with a smaller deposit, you’ll pay a higher interest rate than someone who has a larger deposit.
If you’re an older person taking out a mortgage over a shorter term, the monthly payments will be higher as you’ll have less time to pay off the mortgage.
If you’ve had credit problems in the past, you may have to use a specialist lender, and they may charge you a higher interest rate.
While some factors are beyond your control, you’ll want to be sure you’ve got the best possible deal. It’s well worth speaking to a reputable mortgage broker who can shop around and find the best mortgage loan to suit you.
Can you afford the monthly payments?
When applying for a mortgage, many of us tend to focus on what we can borrow. We don’t always give enough thought to the monthly payments. It’s true that some monthly mortgage payments can be cheaper than paying rent. However, this is not always the case and you’ll want to be sure you’re not putting yourself under too much financial pressure.
While a lender will look at your current income versus your outgoings before making a decision, you must do your homework and take control of your finances. Know what you’re going to be paying each month and check it’s affordable for you. Will the monthly payments be a bit of a stretch financially, or can you comfortably afford them? What would happen if you were to lose your income or if you had unexpected extra expenses? Do you have a contingency fund for emergencies?
Are you willing to give up some of your financial freedom?
If you’re buying your first property or a property that will mean taking out a bigger mortgage, are you happy with the commitment you’re making? While current restrictions are in place, we’re not going out and spending money, but how will you feel about not being able to afford many nights out when restrictions are lifted? Will you be content to spend more time at home living on a budget with fewer luxuries?
Are you happy with the term of your mortgage loan?
Have you considered whether the term of the mortgage is right for you? For example, if you’re a 50-year-old taking out a 25-year mortgage, it won’t be paid off until you’re 75. Will you still be working at 75, or do you plan to retire at 65? If you’re retiring before your mortgage is paid off, how will you meet the payments, or do you plan to sell up and downsize before the term comes to an end?
Are you happy with the type of mortgage loan?
There are several types of mortgages. A fixed-rate mortgage means you pay the same interest rate for a fixed term, usually two to five years. A fixed-rate deal can offer peace of mind, but if interest rates go down, you won’t benefit from any possible saving.
A variable rate mortgage changes its interest rate in line with rate changes. A tracker mortgage also has a variable rate that follows the Bank of England base rate and is subject to fluctuating interest rates.
A variable or tracker rate will mean you’ll benefit if rates go down, but they are unpredictable as they are clearly subject to change. Would you prefer the peace of mind of knowing what you’ll pay? If so, a fixed-rate mortgage would be the best option.
Should you buy with someone else?
When you take out a joint mortgage with someone else, you will both be responsible for the monthly mortgage payments. If your partner cannot pay their half of the mortgage or decides to move out, you would be responsible for the entire amount of the monthly mortgage payments. The same would apply to them if you were to lose your job or move out. Be clear on the responsibility and make sure you have complete trust in the person you’re buying with.
How are you going to buy with someone else?
There are two types of home ownership, and it’s vital to decide which one best suits your situation before you commit. Joint Tenants means you both have equal rights to the property – i.e. you both have a 100 per cent share – and are both entitled to half of the sale of the property. Tenants in Common means that you each own a separate share of the property and is generally more suitable if you are each putting in different amounts. Seek advice from your solicitor on what would be best for your situation.
What’s your backup plan?
How would you cope financially if you or your partner became ill or injured and couldn’t work for a long time? Financial protection can offer peace of mind, and we strongly recommend taking out life cover, critical illness or income protection. We can help with financial protection and advise you on what would be best for you. You can download our free guide to financial protection.
What’s your long-term mortgage strategy?
If you’re a young first-time buyer, the longer-term future of your mortgage may be less of an issue. However, you may want to think about your strategy if you take out a mortgage in later life. Would you sell and downsize to a cheaper property, or do you intend to keep changing your mortgage every two to five years? Talk it through with a reputable broker and have a plan in place that will alleviate any worry and work for you. We’re here to help with advice.
Are you a first-time buyer? Download our free guide to buying your first property