With the global recession having hit hard, many individuals are finding it increasingly difficult to get a foot onto the property ladder, due to lenders tightening their lending criteria. For those who are successful in obtaining a mortgage, however, the elation at obtaining funding needs to be tempered by a realization of the importance of avoiding some of the costly mortgage pitfalls that can derail a household’s finances.
Biting off more than you can chew:
The temptation is always to reach for that dream house in the perfect location. If you can comfortably afford that property, then that’s great. However, all too often couples end up with hefty monthly mortgage payments that they then struggle to meet. The associated risk can increase if you’ve taken a variable rate mortgage and then experience a period of interest rate hikes, or if you start a family and suddenly find that your regular expenditure has increased. It’s vital, therefore, that you only take out a mortgage when you can comfortably meet the ongoing payments and could cope with an increase in those payments or a rise in your cost of living.
Plumping for an uncompetitive mortgage:
The chances are that purchasing your home will be the biggest financial transaction you will ever embark on, so you would think that no-one would enter into a mortgage agreement without thoroughly shopping around for the best deal. However, many individuals, either through ignorance or lethargy, don’t research more than one or two lenders and may therefore be left paying above the odds for their home. Remember that even a half percentage point difference in rates can add up to a lot of money when you’re dealing with a loan costing hundreds of thousands of dollars.
Sticking with an uncompetitive mortgage:
To compound the mistake of taking out a mortgage with a poor interest rate, many people don’t bother to switch to a better deal. An example of this is that many lenders offer initial discount rates to attract borrowers to their mortgages. Maybe that discounted rate is for the first three years and thereafter, the mortgage defaults to their Standard Variable Rate (STR). The STR will invariably be much higher and those individuals who fail to act will end up paying a lot more than those people who are proactive and switch their mortgage to a lender offering a better rate.
Failure to pay off the mortgage early:
Lenders will typically suggest that you take out a mortgage over a long time-frame, such as 25 years, and many borrowers agree to this mortgage term. However, the fundamental rule with mortgages is that the sooner you pay them off, the less they will cost you. The reason for this is that early repayment will minimize the interest that you pay on top of the capital amount.
Mortgage holders should therefore always look to pay off the mortgage as soon as is possible, with the caveat that you don’t want to overstretch yourself financially. One way to achieve this goal is to make lump sum payments into the mortgage. Note that for fixed rate mortgages, there is often a yearly limit on the amount of overpayment that you are allowed to make, but committing to making such payments will save you a lot of money over the duration of the mortgage. Another way to pay off the mortgage earlier is to step up your monthly payments.
Taking out a mortgage can seem quite daunting, especially in a time of recession. However, the risks associated with having a mortgage are usually outweighed by the prospect of owning your own home and it is always a wonderful feeling when you take possession of the keys to your new home. Just remember that the hard work of managing a mortgage doesn’t end when the house purchase is completed. Continuing to monitor your mortgage rate and identifying opportunities to pay off the mortgage early will ensure that you get good value from your purchase.