Getting a mortgage can help you achieve Financial Independence faster!
Getting a mortgage can be one of the single biggest financial decisions you will make in your life.
Therefore a mortgage can have a big impact in your financial journey and you have to get it right.
Owning the home you live in is very important in order to be able to build your wealth.
Studies of millionaires have shown that owning your home (rather than renting) can help you increase your net worth and achieve Financial Independence faster.
But if done incorrectly, getting a mortgage can hurt your finances.
You need to get the timing, size and characteristics of your mortgage right based on your personal circumstances and preferences.
1. Mortgage Timing
Ensure this is the right time for YOU to get a mortgage.
Have you managed to save for a deposit at least 10% of the property value?
Have you decided you will live in a specific area for the medium term, at least for the next 5 years?
Do you have a stable source of income that will allow you to make the mortgage repayments?
These are the main questions you need to answer in order to decide if this is the right time for you personally to get a mortgage.
If you:
– have not saved at least 10% for the deposit; or
– you are not planning to stay in the same area for the next 5 years; or
– you do not have a stable source of income,
this is most probably not the right time for you to get a mortgage.
In case of one of the above, the mortgage costs may outweigh the mortgage benefits.
Check out our calculation of mortgage costs vs renting costs to assess if mortgage and ownership costs exceed renting costs.
2. Mortgage Size
Ensure the size of the mortgage you are getting is the right for you. As suggested above, you need to have saved at least 10% of the property value for the deposit.
This will allow you to:
- avoid the most expensive mortgage interest rates offered by lenders in the market;
- have a mortgage payment which you can afford, and;
- own sufficient equity in your property in case the property value drops, which in turn will allow you to remortgage easier and on better terms with another lender in the future.
It is tempting to buy a bigger house or flat and choose the option which requires the least deposit by lenders.
But don’t forget that getting a mortgage should be a decision that is helping, not hurting, your finances.
By choosing the appropriate mortgage size based on your income and current savings your financial position will benefit.
Get the size of the mortgage wrong, your risk increases and your finances may be hurt.
3. Mortgage Characteristics
There is an abundance of mortgage lenders and mortgage products in the market. Therefore it is important to do a thorough research on available mortgage offers and choose the one with the best characteristics. It is important to research regularly as offers change very often.
The main mortgage characteristics you should be researching are the following.
– Interest rate, this can be fixed or variable and it can range from as low as 1% up to 5%. Usually the higher the deposit you give the lower is the interest rate on your mortgage. Key deposit levels where interest rate drops significantly are 10%, 15%, 25% and 40%. Therefore it is worth choosing a deposit at or above these levels to achieve the best interest rate deal.
– Mortgage product fee, this can range from 0 up to GBP 3,000. This is a fee that you pay when you first get a mortgage and every time you remortgage.
– Early repayment charges, many lenders will charge you significant fees as penalty if you decide to repay earlier your mortgage. Some lenders allow for up to 10% of the mortgage value annually to be repaid early without a penalty fee.
– Additional charges, e.g. some lenders will charge every time there is a valuation of your property. Some lenders may also charge when you request certain documentation related to your mortgage.
In the UK there are many comparison websites you can use to compare all mortgage offers available.
Some of the most popular websites we are using are moneysupermarket.com, comparethemarket.com and uswitch.com.
It is also a great idea to use the assistance of a mortgage broker.
Brokers may charge you a fee but in many cases they may offer their service to you for free.
Because brokers are paid a commission by the mortgage lenders you can negotiate a reduction or elimination of the fee they will charge you.
4. Personal circumstances and preferences
The most important consideration in your decision of getting a mortgage is your personal circumstances and preferences. This is a personal choice, therefore your personal circumstances and preferences are key when making a decision to commit to a mortgage.
Some of your personal circumstances and preferences that may affect your mortgage decision are the following.
– Source of income. Is your source of income relatively stable? Have you had the same job or source of income for several years? Has your income been consistent in the last few years? Do you have multiple sources of income? If you answered yes to these questions it should be easier for you to make the decision to get a mortgage.
– Security & Stability. How much do you value security and stability in your life and your finances? Owning your home by getting a mortgage can provide you with a sense of security and stability. For some people security and stability are very important and owning your home means that you will be living in the same place for much longer compared to renting different places.
– Risk tolerance. Are you completely risk averse or are you comfortable with taking some risk? Getting a mortgage is a substantial financial decision which can be daunting or even scary for some people who do not like assuming big risks. Having a large debt outstanding in your name may be too stressful. Furthermore ownership means you will need to fix anything that goes wrong with your home. Maintenance and repair costs can be very expensive in the short term, especially when a significant amount of money is required immediately.
– Flexibility. How much do you value flexibility? Are you at a stage of your life or your career that you need flexibility in terms where you will live in the next year? Are you able to live with friends or relatives for a period of time in order to save on rent? Although owning provides you with a sense of security, renting offers the flexibility you may need based on your personal needs and circumstances.
Benefits of mortgage & ownership
Mortgage and ownership has some important benefits.
– Saving on rent expense. The immediate benefit from owning your home is that you stop paying rent each month. Rent expense is one of your biggest monthly expenses and therefore this can be a big monthly saving. Of course you will need to make the mortgage repayment each month but if you secure a good mortgage deal the largest part of the repayment will be going towards your home equity rather than the interest paid to the lender.
– Wealth building. This is probably the most important benefit of home ownership. Owning your home and repaying your mortgage can accelerate your wealth building and help you achieve Financial Independence faster. Firstly repaying a mortgage forces you to save a certain amount each month towards your home equity. Building home equity will help you increase your net worth and achieve Financial Independence faster. Secondly you get to benefit from any future appreciation in your home’s value. Over a long term period a home value appreciates on average 3% to 3.5% each year. These two factors, a) discipline in saving and b)value appreciation potential, are extremely beneficial in building your wealth over the long term.
– Peace of mind. Once you pay off your mortgage your home is yours This means you won’t have to worry about paying for somewhere to live. This gives you a sense of security which is invaluable for some of us.
– No restrictions – Renters face certain restrictions in what they can or can’t do in the home they live in. As a homeowner you can make any changes you like to the decoration or even the structure of the property.
Benefits of renting
Renting may be the right choice for you at this particular stage of your life and financial journey as it can have the following benefits.
– Flexibility. This is probably the biggest benefit of renting. Renting gives you the flexibility to decide where you can live or how you want to live. You can decide fairly quickly and without much cost to go and live in a different location. You can also decide to alter the quality of the home you live in by renting a more expensive or a cheaper flat.
– It can be cheaper to rent. In some cases the cost of a mortgage and the overall cost of ownership can exceed the cost of renting. In such cases it is more financially beneficial for you to continue renting rather than getting a mortgage. Check out our calculation of mortgage costs vs renting costs to assess if mortgage and ownership costs exceed renting costs.
– Liquidity – Renting allows you to have funds available to invest or use for emergencies and not locked up in the home equity. The opportunity cost of tying up cash in home equity by using your savings to put down a large deposit can be significant. For example, you may not have the funds to invest in your business or in your personal development.
Furthermore owning a home is expensive and you need to have sufficient funds to cover emergency expenses. This means you may not be able to use some of your liquid funds for investing and increasing your wealth.
– Quality of living. When you are buying your first property you have to pay a large sum of money as a deposit. That usually restricts you in the size or the quality of the home you can afford to buy. Maybe you can rent a bigger or more modern place that the home you can afford to buy at this particular time. If you value the quality of living you have through renting, continuing renting until you can afford to buy a similar property may be the best choice for you.
Conclusion
Mortgage has many benefits and if done correctly it will help you reach Financial Independence faster.
FILIP Formula goal no.4 suggests saving for a deposit for your first home and getting a mortgage.
However you have to ensure that you get the timing, size and characteristics of the mortgage right.
You also need to decide based on your personal circumstances and what you value most in your life.
We hope that the above considerations will help you to make the right decision for you.
Until the next article or video let’s all make informed financial decisions!