Thursday 21 September 2017

Beware the cost of 90% mortgages

There are an increasing number of lenders willing to grant 90% mortgages to first-time buyers, but that doesn’t necessarily mean you should jump in without exhausting other possibilities.

You see, the cost of a 90% mortgage to first-time buyers compares quite poorly to those with a deposit of 15% or more; so much so that it could actually be beneficial to take out a separate loan to cover the difference.

Currently a first-time buyer with a 10% deposit can access a two-year fixed mortgage at a rate of 1.79%. Whereas having a 15% deposit in place would lower the rate on the same product to just 1.27% (meaning there’s 29% less interest to pay!).

If you’re reading this thinking a 0.5% difference in interest rates is negligible and all the mortgage rates seem very low, you’re right! But it can still make a real difference in the long-term.

Let’s say you’re thinking of buying a £250,000 house with a 10% deposit. On a repayment basis, you can expect to pay £931 each month towards the mortgage. But by raising your deposit to 15% those repayments would drop to £827 per month OR if you paid the same £931 a month as you were going to, the mortgage would be paid off three years quicker!

You may think you have little choice; and with the average property in Chichester selling for £377,309, even a 10% deposit will require £37,731! But if you consider that by borrowing the additional £12,500 to step up to a 15% deposit could save you £104 per month in this scenario, you could actually afford to borrow this sum at 10% (interest only) to be no worse off.

So even though the interest rates on a personal loan might be higher than a mortgage, the shorter length of the loan means you’ll pay it off quicker. This will boost the level of equity in your home, which will help when re-mortgaging in the future and could save you money in the long-term.

I’m not saying you should borrow more to stretch yourself and this certainly doesn’t constitute financial advice (you should consider contacting the registered professionals for that). But, I would urge you to ensure you’re accessing money as cheaply as possible to future-proof yourself and keep more money in your own pockets rather than in the banks coffers!

(This article was featured in the Chichester Observer's property section on 21st September 2017) 

Clive Janes, CRJ Lettings.


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