For most people, the mortgage is the single biggest financial expenditure they'll make in their lives. And most people will need a mortgage to buy a home - not many of us have the luxury of paying for a house in cash!
Given the fact that you're likely to take out a mortgage at some point during your life, it's important to understand how they work, their advantages and disadvantages, and how to decide what type of mortgage is right for you.
The basis for a mortgage is simple: you borrow money from a bank or other lender, and use that money to buy a house. The house then becomes collateral for the mortgage, meaning that if you default on loan payments, you risk losing the home to your lender. The loan you pay off has a fixed or variable interest rate (depending on the type of mortgage you choose). As you pay off the mortgage you'll be building up equity in your home, and once you have paid the mortgage in full, the property is 100% yours.
Mortgages: The Pros and Cons
The most obvious advantage of a mortgage is that having one will allow you to buy a home much sooner than you otherwise could. If you had to save up £100,000 (or even more) before buying your first home, you might have to wait until your forties rather than buying it in your late twenties or thirties. The beauty of a mortgage is that since you only need a deposit of 10% to 20% of a home's value, you could own and live in your own home in your mid-twenties. Some lenders will even accept a lower deposit, but you'll pay higher interest rates.
The most obvious disadvantage? You pay dearly for borrowing that money. If your mortgage is for £100,000 over twenty years, the loan will cost close to £200,000, depending on the interest rate you pay and the amount of mortgage fees you are charged.
On the other hand, instead of throwing money away on rent, you're using that money to buy equity in your home. When your mortgage is paid off, you'll be the owner of a valuable asset.
Should you get a mortgage? That depends on a couple of things. First and most important is the question of whether or not you can afford it, and that question is not always easy to answer. The second point is whether or not you want to own a home. Home ownership does have its disadvantages - you suddenly become responsible for things like council tax, and maintenance and repairs on the property, and these expenses can present a real problem if you're not ready for them.
Getting the Right Mortgage
There are several different types of mortgage - including fixed and variable interest rates, bad credit mortgages, interest-only, and mortgages with varying amounts of financing - and it's not easy to know which is right for you when you're first starting to investigate the subject.
If you're planning to get a mortgage in the future, it's important that you don't rush head-first into the project without taking some time to research your options. Don't sign with the first mortgage lender you talk to, even if they promise you that you're already getting the best deal. This is a huge financial undertaking, and it definitely pays to talk to several lenders, to make sure you are getting the best mortgage for your money.