Before contemplating the idea of getting a mortgage, it’s important to familiarise yourself with the potential risks involved so you can decide whether it actually is currently the right step for you.
Mortgages notoriously have high risks and penalties if you fail keep up on top of them.
1) Interest rates can and most likely will change
This will not affect your monthly payment if you’re with in the “fixed rate” period, which is typically 2 years. However, after the fixed period expires, you’ll be put onto your lender’s “standard variable rate” (SVR).
The SVR is typically a lot higher than the fixed rate, so be prepared for a jump in payments. Additionally, any change in interest rates will have impact on your monthly payments. If the UK base rate increases, then so will your mortgage payments.
2) Misunderstanding your mortgage policy
A lot of Mortgage borrowers don’t understand their policy properly. Be aware of ALL costs and foreseeable changes in your monthly payments. For example, after you escape the fixed rate period and start paying at a variable rate, your monthly will increase. Make sure you are aware of the change in price, and make sure you can afford the change.
3) Affordability & income changes
You will still be liable to pay your monthly mortgage on time if you fall ill or lose your job. You need to think about whether you can keep up with those payments. It’s always best to put money aside in case you get yourself into this situation- these things are unpredictable.
There are also insurance policies you can get in place which can help in this situation. It’s always worth looking into.
4) 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, you purchased a house last year on a 90% mortgage. The property was worth £100k, and you took out a £90k mortgage to purchase it. A year later, the property is worth £80k due to a crashing market.
Now, you still owe £90k on a property that’s currently worth £80k. That’s negative equity.
Negative equity usually affects those that took out stupid mortgages, and in practical terms, it causes problems when trying to remortgage. Because generally speaking, a lender wouldn’t touch you with a barge-pole.
5) Early repayment penalties
This only applies to “repayment” Mortgages. If you have a large amount of money saved up and you want to pay off your Mortgage, be aware because some Mortgage lenders may apply penalties.
You may be charged for paying your debt off early. Sounds silly, right? But you need to remember that Mortgage lenders will lose out on money if you clear your debt early. So make sure you find out if there are any early repayment charges. Of course, not all lenders apply this charge.
6) Failing to make mortgage payments
If you fail to make your mortgage payments for long enough, your lender will be entitled to repossess your property and sell it.
7) 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.
8) Getting the wrong type of mortgage
There are many types of mortgages available, and it can be overwhelming.
It’s crucial to get the right type of mortgage for you and your property. Getting the assistance from a reputable mortgage broker can be vital to help make the process easier.
For example, many landlords get “residential” mortgages for a BTL property, which is actually mortgage fraud, and could lead to severe consequences.
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.