All of us have heard of the term “mortgage”. Some of us look upon this phrase with fear while others are eager to take advantage of the benefits that such a scheme has to offer. Still, the best way to ensure that you are in the most advantageous position is to appreciate the fundamental aspects behind any mortgage. Let's take a look at this concept in greater detail before concluding with a handful of suggestions to keep in mind during the process itself.
How Does a Mortgage Work?
A mortgage is essentially an agreement between you and a financial institution (such as a bank or a building society) that is put into place if you wish to purchase a home. You will agree to pay a percentage of the total price of the property (known as the deposit) and once these funds are received, the institution will provide you with the liquidity so that you can pay for the remainder of the value over a set period of time into the future. While mortgage “windows” will vary a bit in the UK, they will generally last anywhere between 20 a to 30 years.
Getting a Good Value on Your Mortgage
The terms and conditions associated with different lenders will naturally vary a bit. Still, there are two main concepts to keep in mind:
- The size of the initial deposit
- The use of fixed or variable interest rates
The first concept is rather straightforward. If you are able to make a larger down payment, your monthly obligations will be lowered. However, never make the mistake of making a large deposit only to be placed into a financially crippling situation down the line. Carefully calculate how much you can afford to spend and always stick to this number.
The second category is a bit more complicated. Mortgages can be attached to either a fixed or a variable interest rate. A fixed interest rate is beneficial due to the fact that you will know its value for the lifespan of the mortgage. However, the issue is that if the Bank of England happens to lower its predominant rates, you will still be kept at a higher bracket.
Variable rates will obviously be able to address this issue. Still, the one “unknown” is what these rates will equate to in the future. Those who are lucky will pay lower rates is the BoE happens to lower this benchmark figure. There can also be times when higher rates will dictate that you are paying more back than you had initially anticipated.
What to Do?
The first step is to speak with your financial institution in order to determine what they are offering as well as to understand the terms and conditions. It is also prudent to perform an online search to determine which mortgages are currently the most popular. Obtaining a mortgage is a very important decision which should not be taken lightly. So, be sure to prepare in advance!
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