HOME SWEET HOME DENTAL TECHNOLOGY STUDENT (PART 4 OF 10). BY RICHARD T LISHMAN, MANAGING DIRECTOR OF THE 4DENTISTS GROUP OF COMPANIES Leave a comment
Richard Lishman, award-winning Founder of The IFA’s – a specialist firm of Independent Financial Advisers that provides guidance and advice for some of the wealthiest individuals in the UK and around the globe, heads this series of editorials for lab technicians.
In the last editorial of the series, our character, Bridget Crown, explored ways to reduce her tax bill. Now, as her life moves onto its next step and she decides to invest in her first property, it’s time to look at how this will impact her finances and what she needs to bear in mind when making this significant purchase…
A BIG STEP
It’s often said that buying a home is the most stressful thing that a person can do. Even if everything goes to plan there’s still an element of truth in this statement, especially as purchasing a home is many people’s first significant financial outlay.
So, where to begin? First of all, Bridget will have to identify properties within her buying power and weigh up their pros and cons. This will include how far away they are from work, the area they are located in, the space available and whether they are worth the asking price.
This is often a long process, and finding a first property that ticks all the boxes isn’t guaranteed. However, let’s pretend that Bridget has been lucky. She’s found an apartment for sale near where she works, within her price range and that she likes. Now, we enter the tricky world of finding the correct mortgage.
TYPES OF MORTGAGES
In a nutshell, a mortgage agreement is a loan secured on a property and should be treated that way. There are thousands of different mortgage products available on the market with slight variations from one another. However, these can, for the most part, be categorised into three different types: repayment mortgages, interest only mortgages and flexible mortgages.
Repayment mortgages require you to make monthly payments that are comprised of part capital, part interest. There are a number of advantages to choosing this type of mortgage, including the fact that it limits any risk of taking out a policy. The repayments are clearly set out, and as long as these payments are made, the mortgage will be fully repaid by the end of the term (usually spread across a period of around 25 years).
A potential disadvantage to this sort of mortgage agreement is that it limits any possibility to earn additional investment returns. Plus, without increasing monthly repayments, Bridget won’t be able to pay off the loan early. There is flexibility with this option though, and should Bridget find herself with spare capital she could pay in a certain amount to help reduce the term of her mortgage (though certain thresholds are taxed), which in the long term will help her save money.
Another option is an interest only mortgage. This type of policy means that Bridget would only repay the interest on the loan each month and the amount that is owed remains fixed for the duration of the agreement. When the terms of the policy come to an end, Bridget would be required to pay back the principal amount of the loan, and must ensure that she has saved enough to do so. If she chose this option, she could set up a savings plan to ensure that she will have this capital available when the mortgage term comes to an end.
This type of loan can be quite advantageous; if Bridget wants to make a return on her investment this could be the best choice for her. Plus, she could more easily repay the mortgage loan early and even move the policy without disrupting the payment plan. However, this type of mortgage does come with more risk. The future is uncertain, and as so much hinges on being able to repay the principal sum of the loan at the close of the agreement, this can provide considerable excess stress. Additionally, there are two repayments to keep track of – one to the lender and the other to the investment company – which can be confusing.
There is a third, newer option available – flexible mortgages. As the name suggests, these policies are very adjustable to your needs, and, if Bridget chose this option, she could increase or decrease her monthly repayments to suit her cash flow, with some policies even giving the option to freeze repayments entirely for a set period of time. An additional perk here is that interest on the loan is calculated on a monthly, or even daily basis – a result of which is that Bridget would likely end up paying a reduced rate of interest compared to a more traditional mortgage agreement during the length of the policy.
MAKING THE RIGHT DECISION
Whatever type Bridget chooses, it is crucial that she takes into consideration exactly how much she can afford, both now and in the future. She’ll need to assess her current financial commitments and her future salary expectations. Plus, if she has any plans such as opening her own laboratory, this will need to be addressed in her decision – it may be better for her to take a longer mortgage that has smaller monthly repayments.
NEXT STEPS
So, Bridget has bought the apartment she loves – but what about protecting this investment? Purchasing a home is so much more than just settling on a mortgage policy, and Bridget will likely want to explore further options such as Buildings Insurance, Contents Insurance and Life Assurance – but these are topics we’ll touch on next time as Bridget takes another important step..
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