Mortgages

The Risks of Taking out a Mortgage

Many people will just automatically decide that they would like to own their own home and therefore take out a mortgage. However, it is wise to think hard about the risks associated with a mortgage before you take one out as it has a long term impact on your life.

The main risk is if you struggle to make the repayments. Often a lender will allow you a few missed payments, although they will charge you for the privilege! However, if you cannot manage the payments in the long term, then the lender will repossess the house. Not only will this leave you with nowhere to live, you will have a poor credit record and find it hard to find somewhere to rent let alone having a lot of trouble borrowing money for a long time. It is difficult to predict whether you will be able to make the repayments over the whole term of the loan. You can take out insurance to protect you if you cannot make payments but this may only cover you in certain specific situations. It is worth thinking carefully as to whether it is worth paying the extra for the insurance, which will give you peace of mind, but will make the loan more expensive.

However there are other risks as well which people do not consider so often, but they are worthwhile thinking about. Other financial risks include the interest rates going up and the house being a lot more expense as a result, the lender putting up rates or fees and expenses increasing so much and taking out an interest only mortgage and not being able to afford to pay it back at the end of the term so ending up with no home.

There can also be problems if you want to move house. If you need to move to a different area because of your work, family circumstances or just a desire to move, you may find that the bank will not transfer your mortgage to a new property, particularly if they think the new property is not worth its asking price and therefore they will not lend enough money. If you sell the house and it is not worth as much as the mortgage then you may end up in trouble too as you will have nothing for a deposit on a new place and still owe money on the old one.

Another thing that many people risk is borrowing too much money. It is lovely to have a really nice home that is large, in a big area with good facilities but it will cost a lot of money. If you borrow too much, whether it is when you first take out your mortgage or after a while move house and borrow more money, you could find that it gets to be too much for you. It could be that your circumstances change and you can no longer afford the repayments or that you find the extra expense just get harder and harder to manage with your other bills as well. Of course, as mentioned above if interest rates then rise you could find it even harder. It is therefore really sensible to check out how much your repayments will be each month and make sure that you can easily afford it so that if things change, you will still have plenty of money to afford it.

Once you have a mortgage it may make it harder for you to borrow money for other things. Lenders will see that you have a big financial obligation and therefore think that you may not be able to afford to take on anything else. Not all will consider this, but some may and it could mean that you will not have access to so much money or get a less favourable interest rate.

Once you take on a mortgage moving house is more difficult. You not only have to sell the home, but you also have to make sure that it makes enough money to pay off the mortgage. It is possible to be in a situation of negative equity where the house value is lower than the mortgage if house prices drop, which does happen from time to time, particularly in the short term. So if you are likely to move, perhaps with your job or to be nearer to family, then it can be a good idea to delay getting a mortgage. It is best to wait until you are sure that you are settled.

Some people may say that it is more risky not having a mortgage. You will have to rent a home and you may find that your landlord wants to sell it and wants you out or increases the rent so that it is too expensive to live there. Although you will not evict yourself, if you cannot make mortgage repayments you could get evicted from your own home anyway. But it does give you a more secure place to live and you have an investment in the home which you can pass on to someone else when you no longer need it.

Loans

How to Decide Whether it is a Good Idea to Borrow Money

Borrowing money can be a big responsibility. You will not only have to pay it back but you will have to pay interest on what you have borrowed and that can add up to a lot. How much you get charged will depend on the type of loan and the term of the loan, but unless you can find interest free options, which are rare, you will always have to pay to borrow money. Although companies such as Emu.co.uk do seem to offer highly competitive rates!

It is wise to always work out how much the loan will cost you in total. Calculate the interest amount each month then multiply that by the number of months that it will take you to repay and that is the real cost of the loan. That is assuming interest rates remain the same. This could be a great deal of money. For example a 250,000 mortgage at 5% would cost 12,500 a year and over 25 years that would be 312500, which is more than the cost of the house in the first place. That sounds really scary, but a mortgage is an exceptional loan as it is much longer term than most and the home should increase in value over the term enough to offset that cost. However, a credit card purchase can be very different. Imagine you buy a meal out, some drinks, new clothes and accessories and fill up your car so that you can have an evening of fun. That could add up to 250 and the interest will be higher so lets assume 7.5% this means the interest would be 18.75 a month and if you only paid the interest each month for a few years you could end up paying out 450 before you even start to pay back what is owed. That means that the evening out costs you almost twice what you paid for it. It is worth doing this calculation before borrowing any money to work out whether you think that the item that you are buying is worth the real cost that you will be paying for it, once you add on the loan charges and interest. This is harder when you are calculating it for an overdraft or credit card, but look at how much it will cost a month and consider how long it is likely to take you to pay it off.

The cost of the loan is determined mainly by the interest rates, although there may be some additional fees as well. So if the rates are high then it will be much more expensive to borrow money. Therefore you may conclude that if interest rates are low and it is cheap to borrow money then it would be sensible to do it then. It is not as simple as this though as the base rates change. They are reviewed on a monthly basis and they can be changed up or down by any amount. These base rates are the rate that banks can borrow at and if it is more expensive they will charge their customers more for borrowing as well. If they are cheaper they may charge their customers less. However, if you have a variable rate on your loan, then the lender can change the rate whenever they like by how much they want and therefore may not follow the changes in the base rates. This means that there is a lot of uncertainty and it is hard to predict what may happen. It is easier to predict the short term, but even then there is no certainty and so you need to be prepared for the loan to be more expensive than you first calculated. Therefore you need to make sure that you have more than enough money to cover the repayments.

It is also worth looking at the time of life that you are in and whether you want to take on the responsibility of a loan. Think about what life events might happen in the future, but within the term of the loan which could make it difficult to manage. You might settle with a partner, buy a home, have children, retire, become unable to work or something else which may affect your ability to repay a loan and so it is worth a lot of thought.

It is not an easy decision to make. You need to weigh up how important it is for you to have the money and compare that with the cost of it. Think about your ability to pay it back and whether the cost is likely to go up over time. Imagine the future and whether you think you will be able to keep paying it back even if there are changes in your future. There are a lot of things to consider and it is something that you should take time to think about and it could even be wise to discuss it with other people before you make the decision.

Credit Cards

How Many Credit Cards Should You Have?

Some people do not like having credit cards at all and there are other people who have loads of them. Most people have at least one card though, but it can be hard knowing how many you should have and it can really depend on how you use them.

If you are the type of person that would spend all the credit available on a card and then only repay the minimum balance then it would not be wise to have one. This is a very expensive way to use a credit card and will mean that you will end up paying a lot more money for the items than their ticket prices because of the interest charged by the credit card company. Although it can feel good being able to spend money and not pay it back, you will have to pay it back eventually. By the time you pay it back you may have forgotten what it was you spend it on or it may have worn out or got broken and so it will not feel much fun.

However, if you find a 0% interest card which you plan to pay back before the 0% interest period runs out then this is worth having. You can make lots of purchase on the card and you will not have to pay for them. Keep the money that you would have spent in a savings account earning interest and then when the zero interest period is up you can use the savings to pay for it. You have to have a lot of self-discipline to do this. It is also better to do it when savings account interest rates are higher because it means that you will make a lot more money from it and it makes it worthwhile trying. If you can get a lot of cards at 0% then you can keep taking advantage of this offer so it is well worth it. You will need to monitor them carefully though and make sure that you save enough money to pay off the full balance of each before the interest rate changes.

For some people a credit card will encourage them to spend more money. They will know that they have extra money available than is in their bank and so will be tempted to buy things that they would not normally be able to afford. This is not a good thing as when it comes time to pay off the credit card, there may not be the money to do so or it may be a struggle to manage that month.

However, credit cards can be really handy. They can be a great way to pay for things online as you can claim back a payment if you do not receive the item that you buy or it is faulty in some way and you do not get any luck trying to pursue this with the seller. For this reason it can also be a good way to buy more expensive items. It can also be a good alternative to carrying cash and help you out if you happen to be short of cash and not have access to a cash machine.

Some credit cards will give you cash back or rewards as well. You might get a percentage of what you have spent on the card back as a credit for the next month or you may accumulate points that you can use to buy things or air miles. There are many different cards out there that offer these sorts of things. These are really great if you can be completely sure that you will be able to pay back the outstanding balance each month and many people manage this successfully by budgeting their spending and having a direct debit set up to pay it off. However, the interest rates on these cards are higher than standard cards usually and so if you are likely to not pay off the full balance then it is wise to not use one. In fact it is best mot to have a card at all, but if you do want one then choose the one that has the lowest interest rate and will therefore be the cheapest for you to use.

However, you need to remember that if you do not pay a credit card back in full when the bill comes you will be charged interest (unless you have a zero interest card). This means that you will be paying more money for the items that you purchased with it. Pay back the balance in full and they are well worth having. However, delay payments and you could get yourself into financial trouble. Therefore you need to keep a very careful track on how much you spend with the card and make sure that you will be able to pay back the full amount when it becomes due.