Did you know; picking the wrong mortgage deal can end up costing you twice what you borrowed?
Also, you need high-level qualifications to understand mortgage contracts.
Although getting a mortgage looks simple, typical mortgage contracts are more complex than most people think. The truth is; most mortgage lenders love complicating matters which leaves many borrowers confused about how mortgage loans actually work.
A recent study done by online broker Habito and the University of Nottingham reveals that you need to be a 2nd year A-level or Year 13 student to understand the language used in typical mortgage contracts. This statistic is shocking considering 50% of UK adults don’t have that level of education.
Mortgages vs. payday loans
Mortgage contracts are guilty of having complex terminologies although this is just part of the problem. There are also problems in the way mortgage deals are presented, i.e., they focus on interest rate as opposed to the total cost of the loan over the entire term.
Payday loans also have a bad reputation not only because of the amount borrowers pay in the end but also because of the interest rates (APRs) which go beyond 1,000%.
However, when you compare the total amount of money you are charged as opposed to the APR, mortgage loans cost more than what payday loans are allowed to charge. What’s more; the wrong mortgage can make you pay twice what you borrowed.
When does your mortgage cost double?
If you make a mistake of signing up for a high-rate mortgage over a lengthy term, the overall cost can easily double the loan amount.
Let’s take an example: You want a mortgage loan worth £200,000, and you are in a position to raise a £20,000 deposit. As a result, you need a mortgage product that offers 90% loan-to-value. Since interest rates usually rise, you choose a 5-year fixed rate to give you interest-rate protection and choose a 35-year term to ensure you pay the least amount of money as monthly repayment. According to Money Facts, the overall cost of the loan will be at least, double although you are borrowing £180,000 if you choose a 4.49% + rate from lenders like Lloyds Bank, Virgin Money, Kensington, Teachers Building Society or Furness Building Society. Such a cost would be illegal for payday loan providers who aren’t allowed to charge you (interest among other charges) amounting to more than the original cost of the loan. Solution
Nobody wants to be overcharged for anything let alone a mortgage loan even if you are taking a longer term. So, what action can you take to reduce the total cost of a mortgage loan?
First and foremost, focus on the total cost of the loan as opposed to the monthly repayments. Most mortgage borrowers go for lengthy terms. According to mortgage broker L&C, 22% of first-time home buyers choose terms ranging from 31 to 35 years. This is according to 2017 statistics indicating a 100% increase from 11% in 2007.
Choosing a shorter mortgage repayment term, i.e., 25 years is clearly better. You may be required to pay more every month; however, you will clear your loan faster spending less money in the process. Anyone who can afford overpaying is also advised to do so although you need to do so by approximately 10% every year to avoid incurring any charges. It’s advisable to confirm the over-payment terms beforehand to ensure it makes financial sense.
Mortgages aren’t fixed, so switch
Most mortgages have an initial fixed period or a tracker period which spans for 2 to 5 years. After this period is over, borrowers are moved to an SVR (standard variable rate) which allows lenders to set rates as they please, anytime even when the base rate isn’t fluctuating. The current SVR for Lloyds is 3.99%. Virgin Money and Teachers Building Society are currently charging an SVR of 4.54% and 4.99% respectively. To avoid overpaying on your mortgage, avoid spending time on an SVR rate.
It is smarter to remortgage every time you reach the end of a tracker or fixed rate. It may come at a fee, i.e., £1,000, however, such a fee is worth it if you lock a low rate for many years.
According to an FCA report published in June 2018 highlighting how mortgages work, 30% of mortgage borrowers don’t find the best deals. Searching for mortgage deals is more complicated than searching for credit card deals or payday loan deals. Using comparison sites isn’t enough. You need to do more such as enlisting the services of a mortgage broker. Mortgage brokers are the best professionals for offering advice on all matters relating to mortgages from; the kind of loans that match your needs perfectly to choosing suitable lenders. In fact, a mortgage broker can help you access mortgage deals you wouldn’t be able to access if you went directly.
Is the Company Director of Swift Money Limited.
He oversees all day to day operations of the company and actively participates in providing information regarding the payday/short term loan industry.