You Shop for Everything Else, So Why Not Mortgages?
A key component of living the frugal life is to shop around for everything you buy. If you consider yourself frugal, it is quite likely that you do not buy anything without first comparing prices. You compare prices on everything from the groceries on your kitchen table to the clothes in your wardrobe. But did you do the same thing when you looked at mortgages and bought your house?
One of the dirty little secrets of mortgage lending that most people do not know is that there are far more mortgage deals out there than banks and building societies let on. Your local bank would lead you to believe that there are only a handful of mortgage deals that dominate the entire market. But it is not true. You can compare mortgage deals using a broker and, in so doing, get access to dozens of mortgage products your bank will never tell you about.
You Shop to Save
You have decided you need some new clothes for work. But instead of going out and purchasing the first business suit you find you spent some time shopping around. You check out a couple of stores in your local area and then compare what you find against a few suits you located online. Why do you go through all this trouble? You shop to save.
The point of comparing prices is to make sure you spend as little as possible to get what you want. If it works for business clothes, it stands to reason that comparing prices would work for mortgages too. It turns out that shopping around does work for mortgages.
The point of comparing mortgage deals through a broker is to save as much money as you can. And you save money on a mortgage by reducing the amount of money you pay for the privilege of borrowing. To make this more understandable, let us take a look at the costs associated with getting a mortgage.
The Cost of Borrowing
A mortgage lender will not give you the money you need to buy a house out of sheer kindness. Mortgage lenders are businesses that need to make money in order to stay in operation. So on top of loaning you the money, they charge you for the privilege of borrowing. They do so in a variety of of ways:
- Mortgage Interest – Interest is money the lender charges on the amount you borrow. Let’s say you borrow £100,000 at 5% interest. You would be charged £5,000 in interest for the first 12 months of that mortgage.
- Arrangement Fees – Also known as product and origination fees, the arrangement fee is a fee charged by the lender to cover the cost of putting your mortgage together.
- Booking Fee – The booking fee is essentially an application fee that covers the cost of processing your mortgage application.
- Valuation Fee – This fee covers the cost of having the property valued. It is sometimes referred to as an appraisal fee.
- Other Fees and Charges – Lenders assess a variety of additional fees and charges covering everything from title transfer to early payment fees.
All of these fees and charges are what make up the total cost of borrowing. When you see a mortgage deal advertised with a particular APR (annual percentage rate), know that the APR is based on the total cost of borrowing rather than just interest alone. That is why APR is always higher than the advertised interest rate.
Don’t Forget Loan Terms
Another reason for shopping around for mortgages is to make sure you get a loan with a reasonable term. For the record, the term of a loan is the amount of time you have to pay it back. A mortgage with a 20-year term gives you 20 years – or 240 months – to repay.
Shopping for acceptable terms is important in that the length of time it takes to repay the loan directly affects how much interest you pay over the life of that loan. The longer the term, the more interest you pay. And the more interest you pay, the higher the total cost of borrowing.
Shop with a Mortgage Broker
You take great pride in being an advocate of the frugal life. As such, you shop around before you make any purchase. Next time you need a mortgage, be just as frugal. Shop around by getting in touch with a mortgage broker who can help you find just the right deal for your circumstances.
A mortgage broker has access to deals you will never find at your bank. They have access to deals with affordable rates, reasonable terms, and a lower total cost of borrowing.
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