Last week we discussed the importance of sticking with a personal budget, eliminating debt and controlling spending. This week's topic is mortgages and loans for first-time home buyers, which also requires discipline and planning. Buying a house is probably the largest, if not most important, investment you will ever make, and it is vital to understand the various risks and responsibilities involved in the endeavour.
Your priority is paying off your mortgage as rapidly as possible. Doing so makes you the owner of a valuable asset and does not leave you dependent on a landlord. Careful planning is key, so your deposit, or down payment - a lump sum that reduces the monthly payments to your mortgage lender - will play a major role in getting you on the property ladder. The balance of the cost of your home is financed through your mortgage, which is normally structured over 10, 20 or 30 years. Building a deposit for a house is not easy, and you need to save diligently to amass this sum.
The size of your deposit has a significant effect on how much interest you will pay on your mortgage. In today's climate, a first-time buyer's down payment will generally be between 25 and 40 per cent of the value of the house. Most lenders will "pre-qualify" you for a certain amount, which focuses you on homes you can afford and makes you an attractive buyer. There are three popular types of mortgages, and it pays to know which one would suit your needs.
A tracker mortgage follows central bank rates and is therefore a type of variable-rate loan whose interest changes depending on the prevailing rates. A fixed-rate mortgage is a popular option because it assures that you will pay the same interest for the life of the loan, which helps you plan your long-term budget. However, if interest rates come down your monthly payments do not. But in many cases, it is possible to pay an early repayment penalty and transfer your fixed-rate mortgage to another type to take advantage of the lower interest rate.
Variable-rate mortgages are based on standard interest rates offered by lenders, and therefore not entirely governed by movements in central bank rates, though tracker mortgages most closely follow these moves. These mortgages generally allow borrowers to switch to another type of mortgage without an early repayment penalty. With this mortgage, if interest rates jump significantly your rates will follow suit, but when (or if) the rates come down you may find that your lender will not necessarily pass on the savings to you. This is not so with fixed-rate mortgages.
Finally, there is Ijara, or "forward rent", a method of financing similar to a conventional mortgage that is sharia compliant. However, one not need to be Muslim to qualify for Ijara, and this type of product is a growing alternative to other mortgages, in large part because your down payment can be a little as 5 per cent. For more about Ijara, visit www.ijaraloans.com. Finally, pay attention to the following factors, because they affect how much you can borrow and the interest you will pay for your mortgage: your salary, the size of your deposit, your credit history and the central bank's interest rate.
If you feel uneasy about navigating the mortgage market on your own, it is a good idea to hire a certified broker; an online search will help you locate one in your area, and be sure to ask your homeowning friends for a reference. John McGaw is a financial adviser based in Dubai. Contact him at email@example.com