Protect Your Future: How to be Mortgage Literate

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There is something about really big numbers that somehow deadens the brain. It’s like when you read in the newspaper that the national debt is at several trillion pounds. Looking at those details, it’s easy to think “Why even try to pay that off? Where do you even start? What harm would another trillion do right now?”

People can look at personal debt in a very similar way. Once you pile up all the bills and statements in front of you and go through them one by one, it can start to be dizzying. It’s not smart, but people do look at the debt they’re in, think “Well, in for a penny, in for a pound. Where’s the harm in another little bit?”

It’s accepted that the financial crisis which decimated Western economies at the end of the last decade was down to mortgage lending. People were borrowing more than they could afford to pay back because it was there. If you’re going to borrow £100,000, why not £150,000? Might as well get that huge bathroom if you’re still going to be paying it off when you’re in your sixties.

But no. We need to be smarter than that. We need to be financially literate, and if you’re going to buy a home, you especially need to be mortgage literate. If you are going to be paying it off when retirement is on the horizon, then make sure there is something to show for it. Borrowing recklessly leads to more and higher repayments, more chance of defaults, and a likelihood of bankruptcy.

What Do You Need To Know?

In many ways, the first thing to be aware of when borrowing a mortgage is how little you do know. This isn’t a criticism – borrowing and lending are necessarily complicated. Speaking to experts will illuminate a lot of the things you need to know.

So however confident you are, speak to a mortgage adviser. You may have found a home you love and be impatient to move, but being hasty can cost you money. There are free advisers, but be wary, as some are tied in to a particular panel of lenders, others aren’t. You can also get advice from your bank direct. Don’t take the first quote, shop around a bit.

You Can Never Have Too Much Information

Filing every official letter you get may seem like overkill to some people. You’re not the National Records Office, right? But to get a mortgage, you need to prove your credit worthiness. Bank statements, wage slips, credit card invoices, utility bills, all of it. A paper trail is invaluable when you’re looking to borrow. If you’ve lost something you can always request it from the bank or company, just make sure you have everything in plenty of time.

You should also request copies of your credit reports from the major rating providers. At a glance, you’ll be able to see what stands out to lenders. If you need to pay anything down, before you get a mortgage is the time to do it. If you can show savings, then those too will stand you in better stead for a mortgage.

You’re Not A Lawyer

Unless you are, in which case this part is easier for you. Although it depends – what’s your specialism? If you’re a criminal defence lawyer, it doesn’t necessarily mean you know anything about property law.

So check out online conveyancing quotes to make sure you are legally watertight. When it comes to transferring property from one owner to another – or remortgaging – there will be fees to pay. Again, pay as much of this upfront as you can. The less you’re paying off later, the better.

Check Out Government Schemes

It’s accepted as fact that it is harder than ever for people to buy for the first time. Saving for a deposit is a laudable goal but sometimes an insurmountable hurdle if tackled on your own. The government-backed Help To Buy scheme can turn a 5% deposit that you have raised into 20%. It’s paid to you as a loan but is interest-free for the first five years. If you’re in a profession like the NHS or a Teacher, you may be entitled to other schemes. I bought my first flat with the help of a similar help to buy scheme – I part bought, part rented it, and then sold it 2 years later and made a profit on my share that enabled me and my husband to have a deposit and buy our first home together. Find out if you qualify here.

Why Pay More? So You Can Pay Less!

Some mortgages have financial penalties for being paid off before term, but in most cases, they will be worth paying. Reducing the amount you owe will do a lot to free you financially, so if you get a chance to pay off more monthly, you should do so. Also some mortgages with better interest will have a fee to pay initially, but sometimes it’s worth it if you will be paying less over time.

Interest only is one to steer clear of. Always go for a repayment mortgage, unless you have a clear plan for when you have to repay the balance.

Reverse Mortgages?

Reverse mortgages are forms of home loans that take the pressure off borrowers because they don’t have the same requirements as regular mortgages. For instance, a regular home loan has to be paid back in installments each month. If you fill out this kind of loan application then you won’t have that worry. You or your family will only be responsible for paying off the loan when you vacate the home for any reason. That’s one reason why many people prefer these reverse loan plans over other options. The risk of defaulting on a reverse mortgage is practically non-existent, which means that you can continue to feel safe and secure while exercising some financial freedom. This is best used if you want more financial freedom in your retirement, or you’re not going to be moving out. You need a plan to be able to pay it back if you decide to move (by selling the house), and a back up in case you end up in negative equity by the house price falling from when you took out the loan. If you’re planning on your children benefiting from your inheritance, they will be responsible for paying back the loan within a set time period, so they’ll have to sell the house or buy it themselves. Any equity would be theirs.

If you get a work bonus – often paid in the amount of three months’ wages or similar – put it towards paying down the mortgage. Being mortgage-free by the time you’re thinking of retirement isn’t easy. But imagine being able to look at those days with that sense of freedom.

Disclosure: this is a collaborative post, all opinions are my own.

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