A little knowledge can be a dangerous thing, particularly where mortgages are concerned. If media headlines and price comparison sites have convinced people they already understand their mortgage options, then here are five persistent myths they could be labouring under:
Myth 1: Any home can qualify for any mortgage
Income and deposits are the hot topics where mortgage eligibility is concerned. And so it’s easy for borrowers to imagine that once their finances add up, they can take out any mortgage on any property. Just some of the factors they may be unaware of include the impact of LTV ratios on loan size (90% loans are only typically available for loans of £500,000 or less, for example), and the impact of land on eligibility if it represents a large proportion of the property’s value. Perhaps the most common misconception is that borrowers can use a mortgage to buy homes that need substantial conversion work. Grand Designs-style projects don’t fit most lenders’ criteria.
Myth 2: Valuations warn of problems with a property
Mortgage valuations are for lenders’ purposes only, and are focused on assessing whether a property fits the value that’s attached to it in a mortgage application. This does not involve checking how well things will work, how comfortable it will be to live in, or whether it may have structural problems that emerge in the future. To really get under the skin of the property they are buying, borrowers need to commission a separate survey of their own.
Myth 3: Interest only mortgages are cheaper
This myth is a hangover from the days before the credit crunch – but it’s reflected in the fact that some borrowers resist moving away from interest only deals. Interest only customers will actually pay more in interest over the lifetime of the mortgage because the balance that they owe does not reduce. For interest only mortgages to be cheaper than repayment products, their repayment vehicles will need to earn interest at a faster rate than the customer is paying interest on their mortgage. Add in the costs associated with repayment vehicles and the potential for some investment strategies attracting capital gains tax, and interest only mortgages will often cost borrowers more.
Myth 4: Longer term mortgage deals are best
If a borrower takes out a mortgage over 30 years, they will naturally make lower monthly payments than they would taking the same mortgage out over a 20 year period. But this doesn’t mean that a longer mortgage term is their best option. If a customer can realistically afford to pay more each month, then it often makes sense for them to do so: they’ll save on interest as the mortgage balance reduces faster, and they’ll provide themselves with far greater flexibility in the future. Paying off a £250,000 mortgage over 20 years rather than 30 costs £316 more per month, assuming an average interest rate of 5%. For those who can afford it, that could be a reasonable price to pay for being mortgage free a decade sooner, especially as they will save themselves more than £10,400 in interest by doing so.
Myth 5: Mortgage protection is a con
Controversies about payment protection miss-selling seem to have convinced many mortgage customers that insurance linked to debts is a bad idea. But turning their back on all forms of protection leaves these people dangerously exposed if their circumstances change. Explaining the difference between mortgage insurance, life insurance and other forms of income protection helps to clarify where the gaps in borrowers’ existing cover might lie. Customers with life insurance may well have ignored the dangers of critical illness or accidents necessitating a sudden, long term change in their working routines
Courtesy of Nationwide Building Society