When choosing a mortgage, be careful to shop around carefully. Otherwise, you may end up with the home loan from Hell!
One of the most important choices that the average person makes is deciding which home to buy -- and choosing a mortgage to pay for it.
Of course, most of us can't afford to pay cash for a new home, so we're forced to borrow money from a bank, building society or other lender in order to raise the extra cash that we need. Hence, there are over 11.6 million mortgages outstanding in the UK, and our total mortgage debt exceeds £1,035 billion.
Now for the tricky bit: choosing the best home loan to suit your needs is horribly difficult, because there are over eight thousand different mortgages to choose from. Hence, it's like hunting for a needle in a haystack, so the odds are stacked against you.
When it comes to choosing a mortgage, my advice is always this: you need an expert on your side, which means finding a reputable mortgage broker. Around two-thirds of mortgages are arranged via brokers, so most of us have used one at some point. However, the advice from these middlemen often comes at a high price, as some brokers charge broker fees of upwards of 1%, which comes to £1,000 on a £100,000 loan.
Now for the good news: the Motley Fool's Mortgage Service is run by London & Country Mortgages -- an award-winning broker which doesn't charge any fees. By searching the entire market (and offering exclusive in-house deals), L&C can cut through the red tape to find you the perfect home loan; simply click here or call 0800 073 1953.
Nevertheless, although expert advice is just a phone call away, many homebuyers or homemovers don't use a mortgage broker -- or even look at the Best Buy tables. Indeed, every year, thousands of borrowers simply visit their local bank branch and are grateful for whatever home loans they are given. This is a big no-no: why on earth would you restrict yourself to a single provider, when there are over a hundred different mortgage lenders eager to lend to you?
What's more, this blinkered approach to finding a home loan can backfire spectacularly if you end up with an unsuitable or burdensome mortgage. Of course, with house prices at all-time highs, homebuyers are forced to dig very deep in order to raise enough money to buy a roof over their heads. This can lead to desperation, which is the enemy of sensible money-management.
Indeed, if you overstretch yourself too far and find yourself with an oppressive mortgage, it can turn into a millstone around your neck. Push yourself to the limit and you might not be able to meet your monthly repayments, which could put your house on the line. As the wealth warning reads: "Your home is at risk if you do not keep up repayments on a mortgage or other loan secured on it."
It's time for me to cut to the chase: here are three home loans that I'd give a wide berth to if I were you!
1. Northern Rock's "Together" mortgage
I rather like Northern Rock (in fact, I'm a customer of this bank), but its "Together" home loan genuinely scares me. With Together, you can borrow up to 125% of the value of your home, made up of a mortgage of up to 95% of its value, plus an unsecured loan of up to a further 30% on top, with an upper limit of £30,000.
Hence, to buy a modest home worth, say, £100,000, you could arrange a Together mortgage of £95,000, plus a top-up unsecured loan of £30,000. The mortgage and loan both charge the same interest rate, which can be a fixed or variable rate. You can learn more about the Together mortgage (including how expensive it can be in the long run!) in Home Loans That End In Tears.
This mortgage leaves me shaking my head, because if you have £30,000 of unsecured debt or are comfortable borrowing such a large amount, I have doubts about your ability to manage your finances sensibly. And if you can't look after your household budget, then your home is at risk. In fact, as I warned in How You Could Lose Your Home, in 2005, two-ninths of all mortgage arrears (22%) were caused purely and simply by financial mismanagement. Ouch!
2. The "Max 130" mortgage from Mortgage Express
As I explained in A Mortgage To Avoid, Mortgage Express, a division of Bradford & Bingley, goes even further than Northern Rock dares to, as it is willing to lend you up to 130% of the value of your home. So, even if your house rises in value by 30%, you may find that you don't own a penny of it. This loan is expensive, onerous and bonkers. Avoid!
3. "Share to Buy" mortgages
Young people in particular find it very hard to buy property at the moment. For example, many are forced to beg or borrow a deposit from their parents just to get on the first rung of the property ladder. Others decide that the only way forward is to gang up with friends or relatives to buy together.
Britannia BS kicked off the "share to buy" bandwagon with a mortgage marketed via mortgage broker Graduate Network which allowed up to four people to club together to buy a single property. Alas, as I warned in Avoid This Mad Mortgage, these deals are fraught with risk. Nevertheless, I see that HSBC has joined in the fun, as it is promoting a shared mortgage for up to four buyers in my local branch. Not for me, thanks very much!
In summary, if you want to find the right mortgage, consult a professional -- and don't bite off more than you can chew!
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