Drawbacks of Mortgages

A mortgage is one of the few ways for people to be able to buy a house. Without the potential of mortgages, most people would never be able to get on the property ladder. However, if you are considering getting a mortgage, these are some of the drawbacks and potential disadvantages of a mortgage.

Monthly Repayments

With a mortgage, you are committed to a regular monthly repayment. If you fail to meet these repayments, your home is at the risk of repossession. This is a major problem and will seriously affect your credit rating.

Variable Interest Rates.

Most people in the UK who get a mortgage choose a variable mortgage. This means that your monthly repayments are dependent upon changes in the base rate (set by MPC). This can be a disaster when interest rates increase. For example, in 1992, UK interest rates rose to 15% ( to try and maintain value of pound and reduce inflation). This meant that the monthly cost of mortgages became unaffordable for many people. Even a small 1% rise in interest rates can make a big difference to disposable income of homeowners.

To some extent you can insure against these variations in interest rates by getting a fixed rate deal. However, even fixed rate deals only guarantee interest payments for a certain number of years (typically 2,3, or 4 years). For example, many people who got a fixed rate 2 years ago are now having to negotiate a new deal and are facing significantly higher rates.

Lack of Flexibility.

With a mortgage, you are tied to living in a house. It is possible to sell and move, but, the process can be long and tortuous. If you need flexibility to move around renting provides a better alternative. You are not tied to a particular living environment, but can travel around the world.

Deposit.

To get a mortgage, a deposit of at least 5% is usually required. However, to save 5% of £200,000 (typical house price) is very difficult for post graduates. Young people often leave university with student loans and face expensive loans. Therefore, to save for a deposit can be very difficult and require significant financial sacrifices. It is a shame to waste the best years of your life by working hard and saving for a mortgage. If you rent, you will not own your own house, but, you can have more disposable income.

House prices have increased faster than incomes

In the UK house prices have increased faster than incomes and the cost of renting. This means that a mortgage takes an increasing % of disposable income

Negative Equity

Falling house prices in the US, have left many people with a negative equity. I.e. if they sold their house, they would still owe money on their mortgage. Hopefully, house prices may rise in the future; but, at the moment there is no guarantee this will occur. In the UK, 2008 could see a fall in house prices

See also: Advantages of buying a house in the UK