What questions should you ask yourself and the lender before you take out a mortgage?
Knowing the basics of mortgage packages and how lenders sell them can protect you from making an expensive error. Never accept anything you do not fully understand and never look upon one lender as the only option available.
What kind of mortgage do I require?
There are two types of mortgages offered in the State - annuity and endowment mortgages. Annuity mortgages now dominate the market and involve paying off the capital sum of the mortgage, plus the interest every month.
Endowment mortgages involve just paying off the interest and not the capital sum. Instead the borrower will pay into a endowment fund, normally a long-term insurance policy or equity-linked fund which in theory should cover the cost of the capital sum when the mortgage comes to the end of its life.
What kind of interest rate can I get?
The lending institutions do not vary greatly in terms of the Annual Percentage Rate (the actual interest rate on which your monthly repayments are based). However, it is a good idea to shop around. Some lenders have more attractive rates than others, but they may levy more for their life cover product, house insurance and early repayment charges.
Make sure you get the lender to compare rates across the various options - fixed and variable.
Which is the better option - fixed or variable?
Lenders tend to direct customers towards fixing because it gives them a guaranteed return on their loan for a set period. The options should be assessed on the basis of monthly repayments. You should establish how much more you will have to pay for every interest rate rise.
The benefit of a fixed mortgage is that you can budget and plan with a degree of certainty. If you fix for five years, for example, you can estimate what you will be paying that far ahead, whereas a variable mortgage can change month-on-month. The downside is you will be tied into a set repayment rate even if interest rates fall.
Some lenders like the Irish Permanent offer short-term, fixed mortgages including a clause that if the variable rate falls below the fixed rate at any stage, the borrower will be given the option to switch to the variable rate for free.
What length of mortgage will I take out?
This is probably one of the most important decisions you will make and it also contains the greatest risk. Take the example of a young man who opts for a 25-year mortgage involving repayments on a £56,000 loan of £402.50 a month. The alternative is a 20-year loan which would require repayments of £440 per month.
While the 25-year option is easier on his pocket in the short term, the longer period will ultimately cost him £15,112 more in terms of overall repayments. The same principal applies to the new 35year mortgages which have come on the market in recent months.
Mortgages must be examined on a long-term basis. After seven years - the typical time at which home owners decide to move on - a 35-year mortgage holder will have only repaid some 5 per cent of the total loan. This compares with 20 per cent of the loan under a 20-year period.
