Making the leap from renter to homeowner is a big step and for many of us, it represents the biggest financial commitment that we’ll make in our lifetime. Taking out your first mortgage can be daunting, so these are some of the things you’ll need to think about before committing.
Why get a mortgage?
Unless you are lucky enough to have vast wealth at your disposal or have come into a considerable amount of money, perhaps through an inheritance, financing a property is likely to be the most realistic route towards home ownership.
Depending on where in the country you live and the type of property you’re wanting, you could find that taking on a mortgage may actually reduce your monthly outgoings with your mortgage repayments being substantially lower than your current rent.
Of course arguably the greatest benefit of being a homeowner, aside from the stability it can bring, once your mortgage is paid, it’s a high-value asset that you will then own outright, and depending on the term of your mortgage, you could find in 25 years or so that you’re mortgage-free, a life goal that many of us look forward to reaching!
Mortgage affordability
Of course, the biggest factor to consider is affordability, but it’s not simply a matter of working out how much you can afford to pay out each month. You’ll also need to factor in things like how long you’re likely to remain in your current property, whether you might want to release capital and remortgage your property at some point and importantly, what you’ll do if interest rates rise and cause an increase in monthly repayments.
You’ll also need to think about what might happen if your circumstances change, for example through illness or job loss and you’ll also want to consider your age and how long you might want your mortgage term to be spread over.
As well as thinking about the affordability of mortgage repayments, as a homeowner there are plenty of other expenses to think about which as a renter, you may not have needed to consider.
Some additional homeowner expenses to consider
- Home and buildings insurance
- Upkeep of your garden
- Ground rent or maintenance fees if the property is leasehold
- Council tax
- Utility costs
- The cost of white goods and other furniture which might have previously been included in your rental property
- DIY and general maintenance
- Refurbishment/upgrade costs, for example, the cost of changing carpets or upgrading your kitchen
Be aware of the threat of negative equity
Negative equity put simply means that the debt you have taken on exceeds the current market value of your assets. In mortgage terms, this could happen in a buoyant market when homes may be able to command much higher than usual values.
If demand is high, this is likely to stimulate prices further which could lead to properties of a certain type, in certain areas being sold at inflated prices. If interest rates were to then increase and demand for property were to decrease, you could find that the current market value for a property drops. In this situation you could be left in negative equity.
Holding your nerve and waiting through a slump out can often lead to prices recovering, but sometimes, if your circumstances change and you can’t bide your time and wait for property prices to increase again, or if for example a major new development reduces the desirability and thus the value of your home, you may have fewer options.
Negative equity ultimately means you may end up selling your property for less than you bought it for, so being aware of the conditions that could cause this to happen is critical in allowing you to make an informed decision when it comes to choosing a home and when determining how much you’re willing to spend.
Do your research and get expert advice
Before progressing with a mortgage application, do your research to find out what sort of deal might work best for you. All of the big lenders provide a variety of different mortgage products and finding the one that’s right for you will be down to your personal finances and circumstances.
There are plenty of online resources that provide detailed advice, but an independent mortgage adviser could be the best option, particularly for first-time homeowners.
Financing a home is not a decision to be taken lightly, and whilst it’s an exciting time and you might even stand to benefit from lower monthly outgoings, rising equity and a high-value asset you’ll eventually own, every individual set of circumstances are different and the utmost time and care should be taken before you apply for your first mortgage.
DISCLAIMER: We do not offer mortgage advice and we make no recommendations of lenders or individual mortgage products. Please ensure you consult with an independent mortgage advisor before taking out a mortgage and please be aware that this feature is intended as a basic guide only.