Mortgages: Is the detail important?

Mortgages: Is the detail important?

I’ve had the pleasure of helping Islanders with their mortgage requirements for nearly 25 years. When I first arrived in 1994, I was working for Midland Bank, and we were proud and delighted to be offering fixed interest rates of just under 10% – and they were flying off the shelf!

The mortgage market has come a long way since those days and of course with lower interest rates and rising property values the dream of owning a property has become a reality for many and remains the primary goal of many of our clients.

As a mortgage broker, it is my responsibility to help steer that enthusiasm, sometimes even to curb it! Asking tough questions and knowing about those small details that can have such a big impact over the term of a typical mortgage. So, this month we’ll take a look at some of the key points for anyone wanting to finance their new home.

Are you borrowing enough?

Sounds crazy, doesn’t it, but it’s amazing how many people find that within a short period of time after buying a new home, they are turning to their bank, a finance company or even the dreaded credit card to borrow a little more for something they overlooked? Of course, none of us want a big mortgage hanging around for years to come, so it makes sense to borrow well within our means.

However, overlooking or underestimating the extra things, like the cost of new furniture, decorating the lounge or repairing the boiler, could leave you having to turn to short-term expensive finance and put pressure on your budget just when you should be thinking about settling in and enjoying your new property.

After all, adding £10,000 to a 25-year mortgage, at an interest rate of 3%, will only add about £48.00 to your monthly mortgage repayment, while borrowing the same amount as a personal loan is likely to cost you around £180 per month over five years. Yes, in the long run, borrowing over 25 years will cost you more, but the priority in the early years is usually to keep the monthly costs as low as possible.

The benefits of overpayments

So, you’ve found the house, got your mortgage sorted, enjoyed your trip to the Royal Court, moved in and unpacked the boxes, it’s one or two years down the line and the payments are finally feeling manageable. This is not the time to sit on your laurels!

Even if you have bought your dream home and no intention of ever moving again, please don’t ignore your mortgage when you are planning your financial year. Eventually even the scariest mortgage payment will start to feel affordable: perhaps you’ve had a pay rise, finished paying for the car or the kids have finally moved out – so just picture the day when that final mortgage statement arrives on your doormat and you really own your own home… Now think about how much more amazing that might be if you can achieve that goal before you’re 50 or 55.

As you might expect, when you are applying for your mortgage, the priority is to prove to yourself (and the bank) that you can afford the payments. In order to keep things as cheap as possible in the early years many new mortgages are therefore taken over 30 years, so introducing an over-payment as early as possible can make a significant difference.

Let’s see what that might look like for a mortgage of £250,000 at an interest rate of 3%:

lOver 30 years, monthly payment £1,054 (total amount payable £379,443).

lOver 25 years, monthly payment £1,185 (total amount payable £355,658).

lOver 20 years, monthly payment £1,385 (total amount payable £332,758).

So, if you could afford the extra £331 per month from the outset, you could potentially save £46,685 and pay off your mortgage ten, yes ten, years early!

Some lenders still seem strangely reluctant to allow borrowers to overpay on some of their products. However, if the option is there it’s very well worth making use of it, as even a small extra amount can make a real difference over the term of your mortgage.

How to choose the right interest rate

Almost without fail potential borrowers are looking to pay the smallest amount possible each month – and why not. Most of us are now familiar with the choices which are generally available from the Island’s lenders of fixed or variable rates, and I find that fixed rates remain very popular. Choosing a mortgage with a fixed monthly repayment will certainly help you to manage your budget and is a logical choice, especially as the traditional flexibility of variable rates has been slowly eroded.

It’s important to understand what happens when the existing rate is up for review or when you want to move house. What flexibility is there during the lock-in and what would the penalties be if you needed to break the deal early? These seemingly small factors can prove very costly and might help you as you compare the deals on offer. This is especially true in Jersey, as switching to a new lender is still not that simple here and can often be surprisingly expensive, so you do need to think about the track record of the lender, as you may well be with that same bank for 20 or more years.

Improve or move?

If you are keen to move home, think about why you are looking to move. Clearly, the couple expecting twins and living in a one-bedroom apartment would be well advised to move to something bigger, but if you already like the location and you have good neighbours, perhaps you don’t really need to go to the expense of moving. It’s amazing what a lick of fresh paint or a new sofa can do to freshen up a property or, if your budget can stretch a bit further, then perhaps a new kitchen or bathroom would do the trick. When you consider the cost and time needed to move house, extending or otherwise improving a property might be a cheaper option, helping you to learn to love your home again.

Timing is everything

Don’t underestimate how early you need to start planning, especially if you have a property to sell. If you are selling, get advice early on, and follow it. However brutal that advice might be, remember that your home is an asset and one which might need to be ‘dressed’ in order to get best value. Organise your belongings – having made the decision to move, why not start packing straight away? Be honest about the amount of ‘stuff’ you have gathered and make some trips to the charity shop!

Then, think about your finances and the mortgage. Ideally, start the investigation process at least six months before you even start looking at properties. This gives you plenty of time to get your budget organised and your savings pulled into shape. You will also have time to ensure that all your paperwork is in order, especially important for the self-employed, which will give you that extra bit of confidence when you start to think about your mortgage and hopefully help you make a successful application.

And of course you need to think about the time you need to prepare for the move itself, and then to get moved. Can you take time off, or do you already have a three-week cruise booked, meaning you have no time off left to take? Trying to get everything done in the evening and at weekends just adds more stress to the process.

So timing is indeed key! However, the factors which make the time right, or not, will vary from person to person and be dictated by your personal requirements. The consequences of buying too soon or making a failed attempt to buy can be expensive both financially and emotionally. Of course, on the flip side, home ownership is the absolute dream of many people and is very rarely something which is viewed upon with regret.

A good dose of luck

Of course, finding the right home or choosing the best mortgage will always involve a good dose of luck. Getting specialist advice will hopefully increase your chances of surviving the process unscathed and even with some enjoyment – let the specialists take the strain, walk you through the small print and guide you towards the right deal for you. They can give you that all-important, impartial overview of the process and make sure that your ‘to do’ lists include everything they need to. They will ask the difficult questions when reviewing your budget and may even recommend that you wait a while before you buy.

lIf you want to chat about any of these issues you can reach Helen and the team at de Carteret Wealth on info@decarteretwealth.com or 860660.

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