Home loan or mortgage plan selection

Continuing further from the previous article How Mortgage Work, in this article we will explore how should one approach to select a mortgage plan or a home loan scheme, depending upon one’s financial circumstances and repayment ability.

First things first: You are responsible for paying back your mortgage – think carefully about which repayment option will suit you.

You can choose to pay your mortgage back in the following ways:
• repayment – your monthly payment is split between paying off the loan (principal amount) and paying off the interest you owe on the loan;
• interest-only – your monthly payment pays only the interest charges on your loan, and you must arrange some other way to repay the principle loan; or
• A combination of the above two.

The standard mortgage term is 25 years, but you can choose a different term if it suits you and the lender agrees that you can afford it.

With a shorter term, you’ll have higher monthly payments but pay less in total. With a longer term, you’ll pay less each month but more in total.

Beware of having a mortgage term that continues past the age you retire unless you’re sure you’ll be able to afford the payments then.

How to get help on selecting mortgage or selecting home loan?
You can find mortgage advisers on the high street or online. Make sure they’re regulated by the FSA or are agents of regulated firms. This means they must meet certain standards set by FSA so you can get the advice or information you need to help you make an informed choice

One Important thing to note is that FSA does not regulate buy-to-let mortgages. More on buy-to-let mortgages in a later article.

Important things to think about before finalizing a deal:

How much can you borrow or afford to borrow?
To a larger extent, it is the responsibility of the lending firm to check about how much the borrower can afford. Only after a proper assessment of the repayment capability, a lender should quote a maximum amount it can lend to the borrower, after assessing the financial situation of the borrower.

Also, the borrower should be very careful while making a commitment for the mortgage or home loan he is taking. Some schemes may end up in a disaster for the borrower, if he does not understand the scheme properly. For e.g. some lenders offer a discounted rate to start with, but one should see if he will be able to afford the repayments when the discount ends?

Mortgage lenders have in the past offered to lend up to 3½ times your salary (before tax). So if you earn £50,000 a year, you could borrow £175,000.
If you’re buying as a couple, i.e. jointly with your partner, lenders would normally multiply your joint total salary by 2½. So say you earn £25,000 a year and your partner earns £15,000, you could borrow £100,000; or multiply the highest annual income by 3½ and add the second person’s annual income. So using the amounts above, you could borrow £102,500.

If you have other sources of money, such as bonuses, overtime or commission, lenders may include only half of this because it isn’t guaranteed income.

Recently it has become more common for lenders to make an affordability assessment when calculating how much they will lend you. Each lender has its own method, but generally they all try to calculate your disposable income, taking account of:
• your total income;
• any money you owe, such as existing loans and on credit cards; and
• household bills and living expenses

Important point to note:
Don’t get into the habit of overstating your income to get a very large loan because you could end up with a mortgage you can’t afford and could lose your home; you’ll also be committing fraud and could get a criminal record. Remember, Ultimately, it’s you who has the responsibility of the loan. So if anything goes wrong and found to be incorrect, you will be in trouble. Hence, act responsibly