I live my life a quarter mile at a time. Nothing else matters: not the mortgage, not the store, not my team and all their bullshit. For those ten seconds or less, I’m free.Dominic Toretto
My first encounter with the concept of the mortgage was when I was playing Monopoly as a child with my cousins. Being older than me, they took pleasure into driving me into bankruptcy, but not before they forced me to mortgage my prime properties at Park Lane and Mayfair. As a result, my associations with mortgages were entirely negative.
How little has changed.
If you are lucky enough to afford to buy your own home, the chances are that you will need the help of a bank to lend you a portion of the purchase price. Unfortunately, they don’t do this out of the goodness of their hearts. They will charge you a chunky interest rate that means you’ll be paying it off for decades. But, with house prices as high as they are, there is no way around it.
The first thing to know is that the bigger your deposit, the cheaper your monthly repayments will be. Banks charge higher interest rates if they are lending 90%+ of the value of the home, slightly less between 80-90%, less again between 70-80%, and so on. This is known as Loan-To-Value ratio (LTV). So, if you can squeeze together enough of a deposit to get yourself into a lower LTV bracket, it will reduce the amount of interest that you have to pay.
Fixed v Variable.
The interest rate you pay will either be fixed for a period of years, or variable, moving in line with Bank of England base interest rate. A fixed deal is typically the more expensive option, but at least you have the certainty of knowing the exact eye-wateringly large figure you will be paying each month. For the thrill seeker, the variable option will likely see your repayments increase or decrease over time.
Paying It Off
When I received my first mortgage statement after buying my flat, I saw that over the course of the next 25 years, I was going to pay almost double the amount I had borrowed. All because of the added interest payments. It sucks and it’s painful, but the only way is to reduce the interest you will pay is to pay it off as quickly as you can.
It will probably be the biggest purchase of your life and therefore likely to be the biggest loan of your life. The interest costs alone are enough to make you long for the simpler days of being beaten at the Monopoly board, so the sooner you can reduce the size of the loan, the better.