How to review mortgages
A mortgage is the borrowing of money from a lender for the purpose of reinvesting the money into a property. This loan is secured by real estate collateral. Though this may not be the biggest expense one can experience, it is one of the most significant and crucial financial commitments. Like any other purchasing decision, different mortgages must be compared to obtain the best deal that suits one’s present day financial status.
Before agreeing to a specific contract, follow these steps to make a beneficial well-informed mortgage comparison:
Step 1: Compare mortgages according to their types
There are numerous different kinds of mortgages in the UK market. Knowing your options can help you decide on which type fits your current financial capability and unique needs.
A flexible mortgage is one of the most common and best solutions since a borrower can make alterations to it to suit his or her ability to repay the loan. An individual can make overpayments on his or her monthly repayments if desired. He or she can also underpay or stop paying for a given period of time. Other mortgage (and remortgage) types include: self-cert, offset, buy to let, adverse credit, and others. The parameters of these loans are mainly set by their loan to value (ltv) ratio (e.g. 75 ltv, 80 ltv, 85 ltv, etc.).
Basically, comparing mortgages involves a decision on the main utilized repayment method, there are two main options—a repayment mortgage and an interest-only mortgage. With a repayment mortgage, a borrower pays an agreed amount monthly for a predetermined period of time until both the interest and the capital are fully paid. With the other option, the home owner makes monthly repayments against only the interest associated with the loan if he or she opts for the interest-only mortgage variety.
The advantage of the former type of mortgage is that the borrower can be confident that the full loan will be paid off at the end of the contract term as the capital is decreased every time a payment is made. An interest-only mortgage has the risk of creating negative equity because there can be a reduction in home prices in the future. Moreover, since the capital stays the same throughout the life of the loan, a borrower must have a way of paying it off fully when the loan term ends.
Step 2: Interest rate must be evaluated
The mortgage rate is a number that plays an important role in a borrower’s decision-making process. It continually changes based on different factors, such as market activity and the condition of the economy. Though a borrower can lock in a rate to ensure that they will not increase their debt if rates increase in the future, it still may not be the best mortgage choice.
Step 3: Compute the true cost of the mortgages offered
A misconception of most first-time mortgage buyers is that lower interest rates always make the cheapest mortgage deals. This is not always the case as mortgages have associated fees and charges. Since they can potentially increase the entire expense of the offer, it is important to review them and compare mortgages fees from one lender (e.g. Nationwide, Halifax) to another. There are also certain fees that a person can negotiate on with a lender. Knowing the true cost of a mortgage determines the deal’s affordability and will help the borrower estimate a monthly budget.
Furthermore, consider the points that can result in a good comparison. Generally, the more points a borrower pays, the lower the mortgage interest will be. A trustworthy lender (e.g. HSBC, First Direct, Abbey) states the information regarding points so there will be no surprising fees at the closing of the deal.
Step 4: Compare mortgages in terms of their periods
When reviewing two deals, they must have the same lengths of repayment time. Why is the term of the mortgage loan so important? To begin with, it can alter the interest rate. Secondly, it can affect how quickly an individual can build up equity in his or her property. Lastly, it can define the affordability of the mortgage. For further insight into the affordability of a loan, it is best to play around with a mortgage calculator.
Moreover, there are lenders who offer deals with adjustable terms. Borrowers can extend the life of a mortgage loan to reduce repayment sums, especially when interest rates are increasing.