Stage five to becoming debt free and setting up for financial success

Now that we have our emergency fund set up so if those inevitable problems happen it is now time to start setting ourselves up for the long term. For people who do not own a property for themselves this is the stage at which we start saving for a property to live in.

Really we want to save a large deposit so that we do not have to take on a big mortgage, most mortgage companies will be looking for a deposit of at least 15-25% so that you can access the lowest possible mortgage rates.

When looking for a mortgage it is a good idea to search the internet for any banks and building society’s that you are already banking with along with checking if your work place or union has any special deals or arrangement with any banks or mortgage brokers. Once you have looked at these options it is also a good idea to approach a mortgage broker who will be able to look at other companies that you may not have ever heard of. The mortgage broker may also have access to other deals that you could not get access to. Sometime estate agents will have a mortgage broker but they may not be able to access the best deal for you so it is always worth looking for another option.

Once you have looked at these options you need to check which deal will require the lowest payment along with deciding if you want to pay a fixed rate of base rate tracker type mortgage. A fix rate mortgage does exactly what it says in which you pay a fixed rate of interest for a certain amount of time. For example if you take a 5 year 4% fix rate mortgage for 25 years then you will pay a fixed amount for the first five years, after five years you will be put on the mortgage companies variable rate or you may want to re-mortgage on to a new deal.  The other option is a base rate tracker, this type of mortgage charges a certain amount of interest above the relevant central banks base rate. For example you could have a 5 year tracker 0.75 above base rate for 25 years. On this occasion if the base rate was 1% then you would be paying 1.75% interest therefore this mortgage would be cheaper than the fixed rate mortgage example but you must keep in mind that if interest rates rise over the five years then this could end up costing more than the fixed rate mortgage. It is therefore important that you are happy with this risk.

Do not forget to check if there are any arrangement fees as these will add to the cost of the mortgage and may make a lower interest mortgage more expensive than a higher interest mortgage without a fee.  

You will also need to make sure that whatever payment you need to make can be covered by whatever salary or income that you have. The bank will also want to make sure that you can afford your payment via an affordability check this will usually be by some sort of interview or form filling exercise over the internet. A lot of banks have started to do this since the last recession so that they can make sure people can afford their mortgage payment.

The reason the banks want to make sure that they do not end up with people being unable to pay their mortgage is so they don’t end up foreclosing on the property and therefore the owner ends up  handing the keys of the property to the bank. The bank will usually then want to sell the house to try a recoup as much of their money as possible.  The only problem is when this happens the banks are usually selling at low price and may come after you for the difference between the sold price and the outstanding balance on the mortgage.

Please be careful and make sure that you can afford the mortgage over the term that you are taking out. If the mortgage payment is a bit much then it is probably best to continue to save for more of a down payment.

That’s all for now but let me know what you think either in the comments or via our facebook site

The Normal Person

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