News Tristan on 17 Jul 2008 11:05 am
How to buy the right mortgage
The mortgage marketplace is a tricky place. There are so many different lenders, and each lender has so many different products to choose from, it can be daunting trying to pick the right deal.
Not to mention, that each month it seems that the lenders change their product range. One month a certain lender may have the best deals in town, but the next month they don’t have any good deals.
So how do you pick the right mortgage for you? Simply put, you need to work out who you are. I’m going to generalise a little bit here, and say that there are four types of potential mortgage buyer:
- Risk averse, low income
- Risk averse, high income
- Risk taker, low income
- Risk taker, high income
I will at this point define what I mean by low and high income. Someone who is low income is defined as someone who’s mortgage (and other debts) equates to more than 25% of their household disposable income, and high income is defined as someone who’s mortgage (and other debts) is less than 25% of their household disposable income. I use percentage of disposable income because I have met many people who earn very little money but are high income and many who earn lots of money but spend a large proportion of it on their debt repayments.
Risk averse and low income
These kind of buyers should buy a long term fixed rate deal, anywhere between 3-5 year fixed rate deals will give them certainty of payments for the medium to long term. This means they know what they will be paying each month on their mortgage, and they don’t have to worry about what the base rate is doing.
Risk averse and high income
Should go for a long term capped rate deal, so that they know that their mortgage will never get more expensive than the level of the cap. Also, because they have more disposable income, they are in a position to take a small chance on the base rate, which occasionally will move in their favour, thus resulting in a small decrease in their mortgage payments. The difference could of course be used to overpay the capital or saved for times when the base rate rises above the initial rate.
High risk and low income
A low income buyer should not be completely reckless with their finances, even if they are risk takers, so I suggest they go for a short to medium term capped rate, this will limit their exposure to rising interest rates and allow them to take advantage of any reductions in interest rates.
High risk and high income
These buyers should go for a long term tracker rate. The reason for this is that as the mortgage does not represent a huge proportion of the disposable income, you should be able to deal with any rises in interest rates without too much trouble, with the upside being that you get to take advantage of any reductions in interest rates.
Of course, this is only a guide, and any decision will of course need to take account of the various fees associated with a mortgage, not just the rate of interest. The main thing to look at in any decision on a tracker or capped rate will be the margin over or under the base rate. There are usually some really cheap tracker rates that come with 2-2.5% arrangement fees, which usually swallow up any potential savings made on the cheaper rate.
The last thing that any potential buyer should look carefully for is the penalties for extricating yourself from the mortgage contract. I would always look at products that had either no penalties or only had penalties for the duration of the discount period.
on 17 Jul 2008 at 3:18 pm 1.Personal Finance Buzz said …
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on 18 Jul 2008 at 1:54 pm 2.Mark Jackson said …
Good post.
People need to realise that the banks and building societies have created the credit crunch by their own actions i.e. being greedy and lending to people who they should have never lent to. As a consequence of this the Bank of England base rate seems pretty meaningless. Most lenders have to fund a certain proportion of their lender from the Interbank market that has its own Interest rates that are not linked to the Bank of England rate. Therefore I believe lending rates will continue to rise over the short to medium term and I for one am all for locking in a fixed rate over a medium term i.e. at least 5 years to ensure peace of mind and affordablity. The days of short term rate chasing are over. What is the point of taking a 2 year fixed rate at say 5.99% (if your lucky) and paying a £1499 fee which they then add to the loan. Any monthly saving is eaten up by the increase in the debt, then 2 years later you have to do it again. so if you take a 25 year mortgage and did this every two years that 12.5 x £1499 = £18737.50 added to your mortgage over the term ( and remeber they would also be cahrging you interest on this)this is exactly what the banks want you to do as it increase their profits dramatically.