What are mortgage deposits?

January 27th, 2010

In most mortgages a deposit is required, which is a sum of money that the buyer pays as a down payment before the lender will advance any money.

The size of the deposit increases the range of the mortgages on offer.  This will mean that there are more terms to choose from, including lower interest rates, different repayment periods and the ability to pay back early.  It is therefore one of the easiest ways to reduce the cost of the mortgage to increase the size of the deposit either by increasing the amount of money in the deposit or by reducing the price of the house.

The reason why deposits are so important to lenders is that it reduces the risk of the lender losing money.  This is partly because a borrower is more likely to prioritise mortgage repayments over other demands in order to keep their investment, and this tendency is likely to be more pronounced the higher the amount of money that they have.

Why is the length of the mortgage important?

January 27th, 2010

The length of a mortgage is often one of the last things that people think of when buying a house.  However it is one of the most important things for a home buyer to consider.

The first thing that the length of the mortgage affects is the size of the repayments that need to be made.  As in most mortgages the principal that the lender advanced needs to be paid off over the term of the loan, the amount of each repayment goes down.  The repayments do not decrease quite in proportion to the length of the repayment term due to the effect of interest, but the difference is substantial.  To some people a long term is needed simply because it makes a home affordable.  However the length of the repayment should not be lengthened simply to make repayments smaller, as the total cost increases.