Saving Money On Your Mortgage
Getting a mortgage is a pretty simple idea, it’s just a loan really; you borrow some money and you pay it back in monthly payments. But mortgages are perhaps one of the most complicated types of credit available – there are different types, different rates and various fees and conditions.
On top of that, your rates can vary, you will probably re finance your mortgage every few years and all in all you will probably pay back about twice as much as you originally borrowed. So even though the idea is simple, mortgages are certainly not.
This section of the site will attempt to make your life a little easier though, we will discuss the various different types of mortgage available, whether you are a first time buyer, landlord or just looking to re mortgage and get the best rate.
A mortgage is actually very good value, it is the cheapest form of credit you are ever likely to get. But since you are borrowing such a large amount of money you will still find that the repayments are large and the interest you incur is dizzying.
In the first couple of years your monthly repayment amount will be 90%+ interest. That means if you are paying £500 a month, less than £50 of that will go towards paying off your loan amount. This is why over paying on your mortgage can save you so much money in the long run.
Loan To Value
Another nuance of mortgages is the critical LTV or loan to value ratio. In other words how much of the value of your house are you borrowing? A few years ago you could get 110% LTV mortgages, which basically meant that you would borrow £110,000 to buy a £100,000 house – leaving another £10,000 to spend on fees, repairs, holidays etc…
Needless to say, since the credit crunch this doesn’t happen any more, and now the biggest loan you are likely to get is 90% or 95% if you have very good credit (more on that in a minute).
The lower the LTV ratio is the lower the risk to the bank: If you default they will want to take your house and sell it to recoup the debt, so the higher the value of the home compared to the debt, the easier it is for them to recoup their losses. All of which means that the bigger your deposit the better the rate you’ll get.
Now back on the topic of credit, it is important to note that when the credit crunch happened, a lot of people with those risky 110% LTV mortgages defaulted and the banks found that they had to write off a whole load of debt that they couldn’t recoup.
As a result the banks are pretty risk averse right now because they don’t want to make the same mistakes again. Many would argue that they have gone back the other way and they are being too risk averse… But either way the fact remains that getting a mortgage is pretty tricky right now.
Unfortunately first time buyers are the ones who are having the hardest time because they generally have a smaller deposit, a smaller income and less of a track record. Let’s face it, if you have never had a mortgage your biggest loan ever might only have been for £5,000 and now you want to borrow 20 times that amount!
How To Get The Best Mortgage Deal
Well we’ll be covering the specifics in the individual articles within this section, but the moral of the story so far is that you need to prepare in advance. You need to start thinking about your mortgage at least 6 months before you apply for it and ideally a year in advance.
The more you have going for you the better the deal you are likely to get. That means that you need to get saving to increase your deposit and decrease your LTV ratio, you need to maximise your income (or just wait until you have had that income for long enough), you need to make sure your credit score is as good as it can be and that you don’t have any bad credit affecting your applications.
Other than that, shopping around and just being aware of what you owe and how your mortgage works will put you in a better position to be able to save money and maybe get mortgage free a little bit sooner.