For the vast majority of people, it’s impossible to buy a home without a mortgage.
Getting hundreds of thousands of dollars together to put down as one lump sum is a privilege reserved for very few.
As it stands, it’s as much as most homebuyers can do to scrape together a deposit. The rest has to be borrowed from a bank or building society. Fortunately, there are hundreds of lenders offering a whole range of different types of mortgages. Whether you are buying your first home, remortgaging or moving up the property ladder, there should be a home loan suitable for you.
Most mortgages are now only offered on a repayment basis which means you repay part of the capital and the interest every month. At the end of the term, which is usually between 25 and 30 years, your mortgage debt will have been totally repaid.
Some lenders allow you to take out an interest-only mortgage which means that your monthly payments only cover the interest. You therefore need to have a plan in place so that you can afford to repay the amount you initially borrowed in full, at the end of the term.
Many major lenders have withdrawn from the interest-only market, while others have tightened their criteria making them harder to get because of concerns that thousands of people have interest-only mortgages with no means of repaying them.
Opting for interest-only might seem attractive because your monthly repayments will be lower than with a repayment mortgage, but unless you have a solid plan to pay back the capital it’s best to go for a repayment loan.
Advantages of a mortgage
A mortgage makes home ownership affordable:
Buying a home is likely to be the biggest purchase you’ll ever make and a mortgage will be your largest debt. Because you can spread the repayments on your home loan over so many years, the amount you’ll pay back every month is more manageable, and affordable!
Traditionally, when people take out their first mortgage, they’ve tended to opt for a 25 year term. However, there are no rules about this and as we are living longer and the retirement age is going up, 30-year mortgages are becoming more common. This can help bring your monthly payments down, but on the flip side you’ll be saddled with the debt for longer.
It’s worth going for the shortest term you can afford – not only will you be mortgage-free sooner but you’ll also save yourself thousands of dollars in interest. And don’t forget, when you remortgage and switch to a new product, you shouldn’t opt for another 25 or 30 year term.
For example, say you take a five-year fixed rate deal as your first mortgage and borrow the money over a 25-year term. When you come to remortgage five-years later, you should aim to take that mortgage out over 20 years.
A mortgage is a cost-effective way of borrowing:
Interest rates on mortgages tend to be lower than any other form of borrowing because the loan is secured against your property. This means the bank or building society has the security that if it all goes wrong and you can’t repay it there is still something valuable – your property – to sell to pay back some, if not all, of the mortgage.
Interest rates on mortgages are constantly changing – over the years they’ve been higher than 15% and lower than 2%. Fixed rate and tracker mortgages tend to be the most popular, but there are also discount and offset mortgages, plus products aimed at first time buyers and landlords. Our guide on different types of mortgages explains these in more depth.
There are a number of government schemes available to help people buy their first home such as Help to Buy, Funding for Lending and New Buy. Some shared-ownership schemes where you only buy part of the property and rent on the proportion you don’t own yet are run by the local council or housing trusts.
Disadvantages of a mortgage
You’ll pay back A LOT MORE than you originally borrowed:
The most obvious disadvantage is that you are carrying an enormous debt over a long time. The other major drawback is that since the mortgage is secured on your property, you have to be able to keep up with your mortgage repayments or you could lose your home.
During the credit crunch, lenders worked hard at keeping even those struggling with the mortgage in their home. But if homeowners really can’t make the repayments, their home will be repossessed. The bank or building society will then sell it to recover their money.
Although the monthly amount you’re paying may seem reasonable, the total amount you pay back over the years is huge. For example, someone who borrowed $160,000 over a 25-year term would repay $280,600 in total once interest is added on! (This assumes the rate of interest averages 5% over the term.)
Watch out for fees:
It’s not only the cost of interest that mounts up when you have a mortgage. Fees can also be hefty. There will be set up costs each time you take out a new mortgage and these vary significantly but some are as high as $2,000. You’ll also incur conveyancing costs (conveyancing is the legal work required when you take out a mortgage); and there are penalty fees to watch out for if you need to get out of your mortgage deal early.
Our guide on mortgage charges looks explains these fees in more detail.