Personal Finance Essay

1661 words - 7 pages

Personal finance
Assignment

Student Number
09005308

Question 1
a) Buying a house in the UK typically takes 12 weeks, which is twice the amount of time it takes in other developed countries (Home.co.uk. 2010). Home.co.uk (2010) is an independent property search engine and believes there are seven stages to buying a house, as shown below:
1) How much can you afford and get a mortgage agreement in principle - it is important to find out how much you can borrow to give you an idea of what type of house you will be able to afford. Also, speak to a mortgage advisor to find a mortgage that will suit you.
2) Choose your home – View several properties before choosing your home. ...view middle of the document...

This stage can take quite long depending on if the lender requires any more information.
4) The final stage is that the lender will give you a mortgage offer. You should make sure that you understand the offer and checked it is correct before you sign it.
c) The average house price in the UK in May 2010 was £165,314 (land registry. 2010). For this answer I will assume that I am the first time buyer has an annual income of £27000, savings of £45000 for a deposit and is buying a house valued same as the average house in the UK. In addition, I want a mortgage over 25 years.
The first option I have is if I want an interest only mortgage or repayment mortgage. An interest only mortgage is where you will only pay the interest on the loan and repay the loan amount at the end of the term. This means that the monthly payment are simple and much lower, however the debt will not be paid off. This means I must ensure that my investment or saving plans are on track so I will be able to pay back the mortgage at the end of the term.
On the other hand, with a repayment mortgage you will have to pay the interest and part of the loan every month, so by the end of the term the mortgage will be paid off. The monthly payments are higher but decrease as the mortgage decreases. The benefit of a repayment mortgage is that by the end of the term the mortgage will be paid off (moneysupermarket.com. 2010a). My next option is which type of mortgage is best suitable to me; three options are shown below provided by moneysupermarket.com (2010b).
Option 1
The first option is to have a fixed mortgage. A fixed mortgage is a mortgage where the interest rate is fixed for certain period during the mortgage. This means that the interest rate is not affected by changes in the base rate. However if the base rate decreases the rate I will pay will not decrease. The best mortgage available to me is Woolwich 2 year fixed mortgage. The rate is fixed at 3.59% then goes onto a 2.99% variable rate and the overall cost of the mortgage is £174683.77.
Option 2
The second option is to have a variable mortgage, which is a mortgage where the interest rate will change if the base rate changes. Therefore, if the base rate increases the interest rate will increase and mean that the monthly payments will increase. This mortgage can be very complex but means that you not fixed to a high interest rate. The best variable mortgage available is NatWest 3.75% variable mortgage and the overall cost of this mortgage is £186490.00
Option 3
The third option is to have an offset mortgage, which is mortgage that is combined with your savings. The savings account is used to reduce the mortgage payments by using the saving interest to offset the mortgage interest. This type of mortgage allows flexibility and there is tax benefits as the interest on savings are not taxed (Mortgage Guide UK. 2007). However, this mortgage relies on having large savings to offset mortgage interest. The...

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