Your mortgage is probably the biggest financial commitment you’ll ever make, so it’s really important to get things right. Seemingly small mistakes could set you back hundreds, if not thousands, of pounds and cause misery further down the road. Read on to discover the five biggest mortgage mistakes and how to avoid them.
1. Going onto your lender’s Standard Variable Rate
When your mortgage deal comes to an end, your lender will usually move you onto their Standard Variable Rate (SVR). This could result in a significant increase in your monthly mortgage repayments.
According to the latest Moneyfacts data, the average rate on a two-year fixed-rate mortgage is 2.49%, whereas the average SVR is 4.41%. An increase of 2% might not sound like much, but because mortgages are typically very large, even small increases in the rate can make a big difference.
The Which? mortgage repayment calculator shows that if you have a £200,000 mortgage with 20 years remaining on a rate of 2.49%, it would cost you £896.23 each month. If you moved onto a SVR of 4.41%, your repayments would rise to £1,101.47 – that’s an increase of £205.24 every month.
To avoid being moved onto your lender’s SVR, it’s a good idea to start looking for a new deal around three months before your current one ends.
Sometimes, lenders will get in touch to offer you a new deal just before your existing deal ends. Sticking with your existing lender might seem like the easy option, but it won’t necessarily be the right option for you.
It’s always worth shopping around to see if you can find a more competitive rate. Bear in mind that if your property has risen in value, you could have a lower loan-to-value. This is the size of your mortgage in relation to the value of your property.
If your loan-to-value has fallen, you might qualify for a lower mortgage rate. This is because you’ll be seen as less risky by lenders.
Your circumstances could also have changed since you first took out your mortgage. For example, if you’re earning more money, you might be able to afford higher monthly repayments, which could reduce the length of your loan. Shopping around will enable you to find the mortgage deal that’s right for you.
A common mistake among borrowers is to look at the mortgage rate in isolation and fail to consider all the other costs involved. There are several fees and charges you might need to pay when you take out a mortgage.
Some of these fees are paid upfront, whereas others can be added to your mortgage. If you add fees to your mortgage, this will increase your monthly repayments.
When you’re shopping around, make sure you add up all the charges. Compare your monthly repayments as well as the total cost of each deal.
If you have financial dependants, it’s really important to think about how they’d cope if you died or became seriously ill. Without your income, they might be unable to pay the mortgage and be forced to sell their home.
Life insurance pays out a lump sum to your loved ones when you die. Often, homeowners take out life insurance on a 'decreasing term' basis, where the level of payout reduces in line with a repayment mortgage. This is also known as 'mortgage protection' or 'mortgage life insurance.'
Critical Illness Cover pays out a lump sum if you're diagnosed with a specified critical illness. It covers conditions such as heart attack, stroke, and certain types of cancer. Again, you could use the payout to pay off your mortgage.
Finally, Income Protection can help you cover your monthly mortgage repayments and other bills if you’re too ill or injured to work.
Taking out protection is a great way of protecting you and your family from the financial hardship that illness and death could cause.
A simple way of avoiding mortgage mistakes is to seek advice. A mortgage broker will take the time to understand your needs and circumstances, and then search the market for a competitive rate.
Mortgage brokers usually have access to a much wider range of deals than those found on comparison sites, so you can rest assured that you’ve got the right deal for you. They’ll be able to explain the ins and outs of each deal and compare the overall cost.
Most mortgage brokers also provide advice on protection. Whether you’re a first-time buyer or have had a mortgage for several years, they’ll be able to explain which type of protection is suitable and how much cover you’ll need.
At NM Money, we can guide you through the process of finding the right mortgage and protection for your needs and circumstances. To speak to one of our experts, request a callback or call us on 03300 583 859.
Please note: Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.