Category: Mortgages

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.