First Time Buyer Mortgages
As a first-time buyer, getting the keys to your first home is one of those life defining moments. It’s a huge investment that will be with you for years if not decades, so it’s important you get the best advice you can.
There are loads of mortgage products aimed at first time buyers, but the higher your deposit, the more options you’ll have.
The most important thing you need to be aware of is how much you can afford to borrow, and what percentage of the purchase price this equates to. This is known as the LTV. For example, if you want a property for £250,000 and have £50,000 saved up, then you have 20% deposit. You’ll need a mortgage of £200,000 and a LTV of 80%.
Don’t worry, despite all the unnecessarily complicated terms and jargon of the industry, we’re here to make sure you know exactly what you’re getting and what it will cost you!
What even is a mortgage?
You can think of a mortgage as a massive loan that you take out in order to buy a home. If you default on this loan (i.e. you fail to pay), then the lender can take back the home and sell it to recover the money they gave you.
The majority of people use mortgages to buy property in the UK, and the first big decision you need to make is whether or not you want to take out an Interest Only mortgage or a Capital Repayment mortgage. With Interest Only, you only pay the interest on the amount you borrowed and still at some point in the future need to repay the full loan. With a Capital Repayment mortgage, you pay interest as well as clearing some of the original loan.
Interest only mortgages are therefore generally quite a bit cheaper each month, but you need to have a plan of how you’ll pay off the original loan. So the savings you make should really be invested in another vehicle.
How much can I borrow?
How much you can borrow depends mainly on how much you earn. Your income determines the affordability of your mortgage, as the lender calculates whether you are likely to be able to afford the mortgage repayments throughout many years of borrowing.
To give you a very broad illustration of how much you are likely to be able to borrow, most lenders offer a simple, online calculator, where you key-in your income, outgoings and credit status.
Subject to the more detailed considerations made by the lender once you make your formal application, the amount you may borrow is typically around 4.5 to 5 times your income (or the joint incomes of you and your partner if you are looking for a joint mortgage). But that’s a very rough guide, so be sure to speak with an adviser to get a more accurate answer.
What are the types of mortgage I can get?
There are literally thousands of mortgages to choose from when you look at the whole of market. But broadly speaking we can break them down into a few main categories.
Fixed rate; As the name suggests, this is a mortgage with a fixed rate of interest for a set period of time. The benefit being that you know exactly what you’ll pay each month, so you can budget for it. But when did a bank ever do anything out of the goodness of it’s heart? The lenders will charge you a premium for the fact they are taking the risk that rates might go up during your fixed rate period.
You can fix your mortgage rate from between 2 and 10 years, but you need to be aware that lenders will usually charge you a penalty (early redemption charge or ERC) if you pay off more than a certain amount before the end of the term.
Variable tracker rate; The names are at least descriptive, aren’t they? With this type of mortgage, the interest rate you pay will vary during the term. The rate will usually follow the Bank of England Base Rate (BBR) and will be quoted as a percentage above Base rate. In some circumstances the rate might track the LIBOR, which is the London Interbank Offer Rate. This tends to be more for commercial and investment mortgages though.
The downside to this type of mortgage is you can’t budget as easily as the cost of the mortgage might change during the term you have the variable tracker rate in place. However on the plus side, they tend to be slightly cheaper than fixed rate mortgages.
Variable discounted rate; This is very similar to the above, however instead of tracking an external interest rate like the Bank of England Base Rate or LIBOR, it simply tracks the lenders own variable rate.
The pros and cons of this are the same as a Variable tracker rate.
Standard Variable Rate (SVR); This is the rate that the lender sets at its own discretion. All mortgage deals will convert to this rate once the term has expired. If you get a 3-year fixed rate deal, 3 years and 1 month later you’ll be paying the SVR.
Generally, the SVR will move in line with the BBR, but it doesn’t have to.
You want to avoid paying the SVR as a good mortgage adviser should be able to get you a better deal at the end of your mortgage term.
First Time Buyer Enquiry
If you’d like more information you can always read some of our articles;
The idea of buying your first home can be terrifying, it’s almost certainly the most expensive thing you’ve ever bought in your life. And it’s not something most people do on a regular basis, so it’s hard to get advice on what to do.Hence, this cheeky little house buying process guide for you