Which Mortgage Shall I Take?

The first thing that springs to mind when shopping for a mortgage on a new home is the old favourite... the interest rate. Thats very sensible and obviously most people will do this. The interest rate we pay can make a huge difference... one that can literally amount to tens of thousands of pounds. This will naturally add to the overall amount to which you will pay for your home, so it makes good sense to shop around and do it right.

With this in mind, there are still many other factors which need to be considered when thinking about a mortgage. The next most popular choice is whether to go for a fixed interest rate mortgage or one of the other many types of variable rate mortages on the market that have now been created to cater for the many different needs of the home buyer.

After the interest rate has been considered, and you have chosed the most suitable type of mortgage for you, the next question you will likely be asking yourself is how long would you like your mortgage to run. These days, the most common short term mortgage is 15 years, whilst the longer term option at the other end of the scale tends to be 30 years.

The downside to long term mortgages is the fact they rapidly increase the final amount you will pay back over that period of time, as each year passes, the interest continues to accumulate year after year. It is quite typical for a property costing £100,000 to end up costing the buyer several hundreds of thousands of pounds by the time the mortgage has run its 30 year course.

If you decide to opt for a 15 or 20 year mortgage, you will end up paying a much lesser final amount for the property, but naturally you will pay more each month. In this case, you need to look to the future a little and decide if you can keep up that monthly level of committment for the full 15-20 year term. Remember that although you may be sitting pretty today, you may have financial problems in the future such as a pay cut or even loss of your employment altogether. It all needs to be considered when planning. Like most decisions of this nature, the stakes are high and the trade off's require careful consideration. The benefits can be great, yet the monthly costs can be unsustainable.

Someone who’s willing to make short term lifestyle sacrifices for the sake of longer term gains probably will prefer a shorter mortgage. However, If your motto is “live for today” on the other hand, the idea of squeezing extra money out of your budget for the sake of a larger monthly mortgage payment won’t have much appeal.

If the idea of a shorter term mortgage appeals to you and you believe you can sustain it, ask your estate agent to show you just how much the long term savings equate to using this method. Chances are you’ll be stunned by the savings you will make. It is important to remember though that a 15 or 20 year mortgage can sharply reduce your flexibility. If a problem were to rear its head in a few years time, could you still keep up that higher payment each month? Always leave breathing space when planning how much you can realistically afford.

The better approach, which many people are recommended to try, is to take a 30 year mortgage but try to discipline yourself to make one extra monthly payment each year. If you can discipline yourself to stick to this extra payment every 12 months, ultimately it will yield the same benefits of a 15 year mortgage. Meanwhile, you’ll struggle financially less, if changing circumstances reduce your ability to make higher monthly payments. Sounds like a "win-win" situation if you can simply have a little self discipline!