When I naively applied for my first mortgage, I eagerly obeyed every word my mortgage broker was uttering, and I really didn’t know enough about what I was getting myself into. I lapped up every word, and ignorantly signed every dotted line he threw under my nose.
In hindsight, even though my broker did a fine job (I think he did anyways, it was so long ago, and I’m still alive?), I really shouldn’t have further educated myself on what I was getting myself into. However, of course, the excitement of becoming a homeowner was overshadowing the reality of signing up for a lifetime of debt.
While I think
many most first-time buyers go into the abyss of mortgages and homeownership relatively blind, it really isn’t the best way. In fact, it can end up being a terribly expensive mistake. Choosing a poor mortgage and/or putting faith in the wrong advisor can ultimately cost thousands of pounds.
I don’t think it’s realistic for most people to learn everything they need to about mortgages [before signing their life away], but I think it is to learn the basics, or at least, learn the key points I believe every borrower should know before making any commitments.
1) The deposit matters! A LOT!
First and foremost, I can’t overestimate the impact a deposit can have on your mortgage payments (and ultimately, how much much money you do or don’t piss down the drain on interest payments).
But simply, the bigger the deposit you have available, the wide range of mortgage products you’ll have available to you. So what does that mean? It means you’ll be able to access loans with lower interest rates, and you’ll pay less on interest payments.
If, for example, you only have a 10% deposit, you’re unlikely to qualify for the most competitive mortgage products on the market, making your monthly payments on interest higher. Generally speaking, 25% and higher deposit amounts will start to open up better mortgages with better rates.
2) Pay attention to the “Product fee”
When browsing mortgages, you may notice a horrifying figure known as the “product fee” (or “Total upfront fees”), do not just pay attention to the interest rate!
The product fee is a one-off amount you’ll have to pay for the mortgage. Often, what happens is, some people will look at a product with a very low interest rate (i.e. 0.6%), but will have an insanely high product fee. While the interest rate may make the product look attractive, in reality, it really isn’t because of the product fee. To compare, you may see a different product with a higher interest rate (1%), with a much lower product fee, in which case, that will work out cheaper over the duration of the mortgage term.
So instead of focusing on the “Initial rate” (i.e. the interest rate), pay attention to the “APRC” (Annual Percentage Rate of Charge), because that’s the true representative of what your rate will be- it takes into account the interest rate which your loan will cost you overall each year and all charges such as administration fees, valuation fees and booking fees at the start of the mortgage.
3) Accessing the best mortgage products
As I’ve already said (and I’m sure I’ll say it again in this blog post), getting the wrong mortgage could end up costing you a small fortune, so it’s critical to choose wisely. One of the best ways to ensure you get a competitive product (i.e. one with the lowest rates) is by accessing the broadest range of mortgage products available on the market and then comparing.
Purely through experience, I’ve realised that most independent mortgage advisers do NOT have access to the broadest range of products on the market, so that’s why I generally don’t use them anymore. Although, they do usually provide a very personal service, which is a quality many find comfort in.
Similarly, going directly to your bank or building society will most likely be extremely limiting, because they’ll only offer you their products (which will be a small fraction of the market).
The quickest and best way to compare the largest range of mortgage products is by using online comparison websites like Habito (a free online specialist mortgage broker, who search the whole market).
Essentially, my recommendation would be not limit yourself to one path, but explore many options.
4) The interest rate of your loan can and will change
Your interest rate will not change during the initial “fixed rate” period, which is typically between 2-5 years. However, after the fixed period expires, you’ll be put onto your lender’s “standard variable rate” (SVR).
The SVR is typically a significantly higher than the introductory fixed rate, so your monthly payments will skyrocket unless you remortgage (i.e. switch to a new mortgage with the same or different lender), otherwise be prepared for a jump in payments.
5) Lenders expect you to pay every month!
From my experience, lenders don’t provide leniency very easily – they don’t buckle to sob stories or excuses. They expect their payment every month on time.
For example, you will still be liable to pay your monthly mortgage on time if you fall ill or lose your job. That’s why it’s always sensible to have an emergency fund.
If you fail to make your mortgage payments for long enough, your lender will be entitled to repossess your property and auction it off.
6) Crashing market & negative equity
During an economic downturn, “negative equity” is a buzz phrase that often crops up. Essentially, it refers to the point where your mortgage debt is greater than the current value of the property.
For example, let’s presume you purchased a property last year for £100k with a 90% mortgage. But then, the market takes a turn for the worse and suddenly your house drops in value by 20%. You’re then left with a property worth £80k, but with a debt of £90k (i.e. the debt exceeds the value of the actual property).
The real impact of negative equity is usually felt when trying to remortgage! You’ll struggle to find lenders queuing up to lend you more money than the property is worth, so you’ll end up with a poor mortgage product with insanely high interest rates!
7) Early repayment penalties
If you have a significant amount of money saved and you want to toss some of it towards your mortgage debt, be aware because some lenders may apply penalties. It will typically depend on whether you’re still within your fixed rate period.
You may be charged for paying your debt off early. Sounds silly, I know.
But you need to remember that mortgage lenders will lose out on money if you clear your debt early. So if you take out a mortgage with the intention of making overpayments, it might be worth enquiring about any potential early repayment penalties.
8) Lenders generally have full control
This is where reading the terms and conditions of your policy carefully is vital.
To protect themselves, lenders generally have a lot of control once they lend money to an applicant. They can penalise, change or even revoke your loan and ask for immediate redemption of the mortgage if for example, you default on your payments.
9) Getting the wrong type of mortgage
There are many types of mortgages available, and it can be very overwhelming.
It’s crucial to get the right type of mortgage for you and your property, because it can literally end up saving (or costing) you thousands of pounds. Getting the assistance from a reputable mortgage broker can be vital to help make the process easier, but obviously the purpose of this blog post is to arm you with information so you’re not entirely at the mercy of someone else’s advice.
If there’s one aspect of mortgages I think every potential borrower should be aware of, it’s being familiar with the differences between repayment and interest-only mortgages. Yes, it’s only the tip of the iceberg, but it will be critical when choosing the best mortgage for you.
Disclaimer: I'm just a landlord blogger; I'm 100% not qualified to give legal or financial advice. I'm a doofus. Any information I share is my unqualified opinion, and should never be construed as professional legal or financial advice. You should definitely get advice from a qualified professional for any legal or financial matters. For more information, please read my full disclaimer.