How To Choose The Right Mortgage

Posted by Allison on 5 April 2009, 10:56

Unless you have vast amounts of cash sitting around that you can use, you'll need to get a mortgage if you want to buy a house.  But it's not until you start looking that you realise it's not as simple as just going out and applying for one.

Whatever country you live in, they will have special rules and regulations that apply to buying a mortgage as well.  The amount of currency you have to pay towards it every month might vary depending on the mortgage you have picked, and there could also be a difference in the amount you have to put down as a down payment.

Firstly you need to decide who to get a mortgage with.  Who offers the best rates at the moment?  Are they fixed rates, or do you want a variable one that could change at any time?  How is their track record when it comes to giving their customers a good service and a good deal?

Next you need to think about the type of mortgage that will fit your situation.  There are three main types if you are buying a property to live in yourself (as opposed to renting one out).  The first one is a repayment mortgage.  These are very popular in Britain.  Basically they are very similar to any other type of loan; you make a payment every month which will gradually start to chip away at the amount you borrowed in the first place.  Your payments will only get rid of some of the interest initially, but after a while the capital will start to reduce too, until you eventually pay off the entire amount and own your house outright.

The second type of mortgage is not as popular, and in fact it caused a lot of problems and hit the headlines a few years ago when it was discovered that a lot of people reached the end of their mortgage term and weren't able to pay off the mortgage in full.  This was because they had an interest only mortgage. 

These require you to pay off only the interest every month, which sounds attractive since you don't pay as much as you would if you had a repayment mortgage.  The downside is that if you carried on throughout your twenty five year mortgage term on the £200,000 you borrowed, once you reached the end of the term you'd still have a hefty bill of £200,000 to pay back.

That's why you need to have a way of paying it back at the end.  Many people set up an endowment policy or similar savings vehicle to provide the amount at the end, but even then there is no guarantee that it will be able to produce the amount needed.

The third type of mortgage is a fairly new entity which has really caught on in recent years.  It is known by the name of an offset mortgage and if you go for one of these you could end up owning your house much earlier than you would with any other mortgage, not to mention paying a lot less in the process.

The key aspect of this type of mortgage is that it is also tied up with a savings and current account – sometimes both and sometimes just one.  The idea is that whatever you have as a credit balance in your other accounts is taken off the amount of your mortgage, so you only pay interest on the total amount you owe.  This is why you can pay your mortgage off much earlier than with any other type; not to mention paying lower monthly amounts towards it.

Many people are attracted by the flexibility of an offset mortgage, since it gives them more control over what will be the biggest purchase of their life.  It can also be worthwhile if you are looking to reduce your monthly payments and you have a decent amount of savings to offset against what you will be paying.

With all these choices it's no wonder it can be a little confusing.  This is why it's important not to jump into anything and take your time to explore the different options available to you. 

The best time to do this is before you actually start looking for a house.  If you start house hunting before you find out what type of mortgage will suit you best, you can guarantee that you'll find a property you love and will lose out on it because you are not prepared and need to do your research on mortgage options before you can go ahead and make an offer on it.

Of course, different countries do all work slightly differently and if you are thinking of buying a property in a different country altogether then there will be extra work to do before the hunting starts in earnest.

Be careful that you get proper advice from experts though, because different mortgages do suit different people and while one person may be happy with an interest only mortgage and advise you to get the same one, they may not have all the information themselves.  What's more your personal situations may be entirely different too, making a particular type of mortgage unsuitable for you but ideal for them.

The moral here is clear.  It's easy to just look at the bottom line when you are considering your mortgage options and only see the monthly amount you will be paying.  But while that is important it is by no means the only requirement that you need to be thinking about.

The best piece of advice is not to rush into anything.  Twenty five years is a long time to spend with a single debt, and if you make a wrong decision it isn't always very easy to rectify it.  You might well end up changing mortgages at some point during the next few years, but what you don't want is to choose one now and be regretting it as early as next month.