Mortgage – Blessing or Curse –

What is mortgage?

Food, clothes and shelter are three important and basic needs of human life and man struggles their life time to make most of them. Although we cannot overlook the importance of food and clothes in human life but in this article I will only touch “Shelter”.

Living at a peaceful, beautiful and clean place is what everybody wants when it comes to home. In this very price rising environment it has become very difficult for middle class to build or buy their own house. It takes huge part of human’s life to make just one home. Many people in the UK still does not own home. According to a research conducted in 2003, 71% of the people owned their houses, while this number reduced to staggering 64% in the early 2016. When it comes to ownership we here in UK consider Mortgage as ownership too.

But question is whether a house on mortgage is ownership of house or merely a rental home? Well Mortgage simply means buying a house now and paying later. It is kind of Buy now pay later offer which is very affordable for many people. Many of us do not have very big amount of money with which we can buy our houses, so most of us prefer to pay in installment instead of paying lump sum which we can’t.

How It works in the UK?

If I like a house I will go to my bank to ask them to buy that house for me. Bank will assess my financial position, considering incoming and outgoing every month. They will also consult credit reference agencies to know my credit rating. Which will enable them to know how risky it is to give me loan to buy that house? After all these formalities Bank will eventually ask me how much I can pay as down payment and how much will I pay monthly.

Down payment simply means what you pay in advance (whatever your savings are) of course more you pay in down payment, less your interest charges will be as your bank will be paying less amount towards your house.

So after agreeing terms of monthly payments and duration of payments, bank finally buy that house for me but ownership will remain with bank. Bank will however give me right to use that house in whatever manner I may want. Using means either living in the house or renting it out to someone.  If at any stage I am unable to keep up with my payments, bank will kick me out of the house.

Risks as Buyer?

There are plenty of risks involved specially with regards to not keeping up with the payments and losing the house. What you should really do in this case is to consult a financial advisor who will tell you how much you can afford to pay every month and which mortgage is best for you. It will also tell you the duration it takes to clear out balance and interest charges you will pay in the course of this duration.

 

 

Mortgage period?

Mortgage period varies from people to people as different people have different affordability criteria and different level of income. But It can range from 10 t0 30 years on average.

Interest and other charges?

There are interest charges involved because it’s where the bank is going to make its money from. Interest charges will again vary from people to people depending on the risk involved from bank point of view. If bank thinks it’s too risky to give you the house then bank is going to charge huge lot of interest, however if bank thinks otherwise then there could be as little as 4%/annum interest.

There are other charges like initial charges when starting a mortgage and if you make any payments late they will be late payment charges too. If you ever miss any payment you will have to incur great amount in missed payment charges. These missed or late payments indicate that client is struggling to pay its debt and hence is considered risky. It will harm your credit profile and you could face difficulties in obtaining further credit. Again before going for mortgage, consult an Advisor who might charge some money but trust me this money is worth every penny because mortgage is not a commitment of every day, it’s a commitment of decades and you don’t want to get into trouble.

IS mortgage good idea or bad?

Every person has different mindset and thinks differently, as per my mindset, mortgage is a blessing for poor and middle class families who cannot afford to buy their houses and continue to live in rented ones.

Assume you don’t have a house and you don’t want to take mortgage, you will have to live in a rented house? Isn’t it a better idea to contribute that rent into your own house in the form of mortgage? Yes you’re right it is a good idea because you are going to pay the rent of house anyway, why not get a mortgage after consulting the financial advisor and you’re are all set.

 

Writer of this article is a Qualified Chartered Accountant and a Financial Advisor.  For Financial Advise on Mortgage or any other financial matter drop an email and book an appointment.

Email: [email protected]