I remember my first mortgage like it was yesterday.
I’d fallen in love with a second-floor flat in London, just over the road from where we were renting. Our offer, with a bit of haggling, was accepted; now I just had to sort out the mortgage.
I’d never applied for one before, so didn’t really know what was involved or even what size mortgage you could get on my earnings. I had a five percent deposit saved up and a decently paid job as a magazine journalist, which I topped it up by freelance writing on the weekends.
But would it be enough?
The wait to find out if we’d been approved was excruciating. I’d stare up at the flat every day as I walked to the tube station, praying so hard that it would all work out.
Then, potential disaster struck – the magazine I worked for announced it was closing. I knew I could find more work (this was before the 2008 crash, and the journalism industry was booming), but I also knew the timing of the redundancy could totally derail our application at its most critical point.
Thankfully, timing was (just) on our side; the mortgage came through literally in the last week before I finished at the publishing company, and I found better paid work right away.
Since then, we’ve had two more mortgages approved – when we moved house, and when we renovated – and we’ll be doing it all again next year because there are better deals and lower interest rates available now.
The whole ‘world-getting-turned-upside-down’ theme of 2020 made us take a good look at all our life admin, and we realised there was lots we could do to save money and help life run more smoothly.
Interest rates have dropped since we took out our fixed rate mortgage, so it makes perfect sense to shop around for a better deal when it expires next year. Added to that, we’ve made the decision to start overpaying as much as we can each month. This way we’ll have a financial buffer, should the world be unexpectedly brought to a standstill again and we’ll pay off our mortgage much sooner.
Mortgages are complicated, which is why so many people choose to stick their heads in the sand. I know with that very first one I was just so grateful to have it granted I had no idea if we were being ripped off with a terrible interest rate (which we probably were!).
Covid-19 has wreaked havoc on the real estate market – first grinding it to a halt and then sending it into overdrive as soon as lockdown ended (helped by the stamp duty cuts) – and I feel for families trying to claw their way onto the property ladder during this crazy time.
Experts are divided on whether the market will stay buoyant, or sink the moment the coronavirus financial support schemes end, but many of the low deposit mortgage offers have disappeared while lenders wait it out to see how the market will be affected in the long term.
It can be tempting to rush in now, before the stamp duty cuts end in April 2021, but experts also recommend caution; you could end up buying at a pandemic premium only to find the value of your house drops once the market levels out again – essentially cancelling out the gains of your stamp duty reduction.
One of the easiest ways to see at a glance what you can realistically afford, is with an online mortgage calculator. You simply enter the amount you want to borrow (the sale price, minus the amount of your deposit), the interest rate your lender is offering, and the length of time of the mortgage.
A click of a button reveals what size mortgage you could get by telling you how much it will cost you each month for both a repayment and an interest-only mortgage (a repayment mortgage means you owe nothing at the end of your set term; and interest-only mortgage means at the end of the term you’ll owe the entire amount of the original loan).
The rationale behind this is that, by the time the lump sum is due, you can pay it with matured investments or inheritance money, or sell the home and benefit from the increase in value.
You can use the calculator to adjust the length of your mortgage and the amount you borrow, until it settles on the amount you can comfortably afford.
While it might be tempting to keep your repayments high in order to pay it off more quickly, the better idea might be to keep your repayments at a comfortable level but ensure your mortgage deal allows you to make overpayments (some won’t allow it at all, or will only allow you to overpay by a certain amount each month).
This way, you have the option to pay off as much as you can for as long as you can, but you’re not locked into high payments if your income drops unexpectedly.
Do your research first, figure out what size mortgage you could get, then – the fun part – go out and find the (affordable) home of your dreams.
• this post is based on my personal experience, please consult a mortgage advisor for professional advice
Photo courtesy of Micheal Langmire, Unsplash