What Types of Mortgage are Available to First Time Buyers?

Do I need to decide between an interest only mortgage and a repayment one?

You may well have heard terms like ‘interest only’ and ‘repayment mortgage’ bandied around, and are probably thinking that’s a good place to start. However, these days the most appropriate route -for just about every first time buyer – is a repayment mortgage. The reason for this is that there is a concern with an interest only mortgage that you’re not chipping away at the loan each time you make a monthly payment. You are only paying interest. Twenty five years down the line, when your mortgage policy expires, you will still owe all that you originally borrowed. That leaves a lender exposed for a long time. However, with a repayment mortgage, each time you make a monthly payment you are slowly paying back the amount you have borrowed, as well as interest. And that’s what lenders like.

As an aside, it’s worth noting that it’s actually much harder to get an interest only mortgage now even if you do want one. Many lenders have pulled out of offering them full stop. So on the whole, this article is focused on repayment mortgages.

What types of deal are out there?

Fixed rate

As the name suggests, a fixed rate mortgage is one where the interest is fixed for a set length of time. It doesn’t change. If rates go up, you pay the same amount regardless whilst the rate is fixed. If rates go down, however, you also still pay the same amount. If you think you may move house during the term of the fixed period, it’s worth checking that you can move the mortgage to another property. Plus it’s also worth checking what (if any) penalties you might have to pay.

At the end of the fixed rate period, most lenders will move you onto their standard variable rate unless you make alternative arrangements.

Variable rate

A variable rate mortgage is one where the rate can change. The rate variation can be prompted by different triggers and you will need to check with your adviser what the trigger mechanisms are for the product(s) you are looking at.

There are quite a few different types of variable mortgage, but the most common ones include:

  • Standard variable – where the lender charges their standard variable rate.
  • Tracker – where the rate tracks either an economic indicator or another rate – often The Bank of England’s base rate.
  • Discount rate – where a discount off the lender’s standard variable rate applies for a short time, often 2 or 3 years.

How flexible should a mortgage be?

There can also be additional flexible elements within a mortgage policy, so it’s a good idea to ask your adviser about these. However, to give you an idea, some examples are:

  • Can I overpay? – Some policies enable you to overpay without penalty. This can mean you manage to pay your mortgage off quicker than predicted. It’s important to note, however, that the timing of payments can make a difference to how much benefit you’ll get with respect to reducing your interest payments. It’s best, therefore, to discuss this in detail with your adviser.
  • Can I borrow back? – Some policies actually enable you to borrow back again if you’ve made overpayments.
  • Can I take payment holidays? – Some lenders will allow you to not pay for an agreed length of time. This isn’t something to do lightly and you should discuss this option with your adviser before considering it.
  • Can I offset my mortgage? – An offset mortgage keeps your mortgage and your savings in two different accounts. However, the savings portion can be used to offset what you pay each month in interest on your mortgage.

Are there other mortgage products available to first time buyers?

There are schemes available like ‘Shared Ownership’ and ‘Help to Buy’ that first time buyers can access. We’ve written a separate article on these, which can be found here.

Other articles in this series written for first time buyers…

As a First Time Buyer, How Much Can I Borrow?

Following on from our introduction to mortgages for first time buyers, one of the first questions we get asked is: How much can I borrow? There isn’t a straight forward answer to that, and here’s why…

How much can I borrow?

Before the recession, lenders typically calculated how much they would lend by applying a multiplier to the applicant’s salary. For example, if you were buying a house on your own, they might have typically been prepared to lend you four times your salary. If you were buying as a couple, they might have typically been prepared to lend you three times your joint salary. Those days of simple calculations, however, are over.

Now the key consideration is affordability. Whether you’re a first time buyer or not, the key questions are: Can you:

  1. a) Afford your monthly payments now?
  2. b) Continue to afford them if interest rates increase?

A far more detailed inventory of your income and outgoings, therefore, is now assessed. Once you’ve bought your food, paid your bills – including credit card spending and other loans – and covered the costs of running your car etc., how much is left every month? Once that’s been calculated, does the answer to the questions above stack up?

And there’s an additional aspect too… Don’t forget that how much a lender will allow you to borrow isn’t just about your ability to afford the payments. Your credit score and previous payment history on other loans is also taken into consideration. This can be where applications fail to get approval.

So it’s probably becoming clear now that it’s not possible to give you an easy answer to the question: How much can I borrow? It’s worth considering speaking to an adviser.

How much do I need to save for a deposit?

People groan at the thought of having to pay a deposit when buying a house. And yes, it does tend to be quite a substantial sum. However, it can serve to protect you in the future, so on balance it is a good thing.

The terminology that’s often used is ‘Loan to Value’. It’s unlikely that you’ll find a mortgage for anything more than 95% of the value of the property, and this would be referred to as an LTV of 95%. So, if you are going for an LTV of 95%, the minimum deposit you’ll need to have saved is 5% of the value of the house you want to buy. There is a good reason, however, to try to put down more than this…

You are far more likely to get a better rate the more deposit you put down. Going from only paying 5% to paying 10% deposit can make a huge difference to the rate you get, as well as the monthly payments you will have to make. If you can go even higher, the rates improve even more. Think of it like this:  The more deposit you pay… the less you borrow… the better rate you get… the less your monthly payments are… which means, overall, the cheaper your mortgage is.

Other articles in this series written for first time buyers…

 

I’m a First Time Buyer… Do I Need an Adviser?

If you’re reading this article, then you are probably the sort of person who likes to be informed before you make a decision. You may understandably, therefore, be wondering if you need an adviser at all for your mortgage. Notwithstanding the fact that you’re a first time buyer, and this is your first mortgage, you’re thinking you should be able to pull it all together yourself and not have to pay for the services of someone to do it for you. And that’s very possibly the case, but it’s worth being aware of what benefits you get if you go through an adviser.

An adviser affords you a level of protection

Any advisers providing advice on mortgages have to be qualified to do so. Other than the fact that this means they understand the complexities of the mortgage market, an adviser who is regulated by the FCA (Financial Conduct Authority) also has a duty of care to you. They have access to the whole of the market and, because of this duty of care, have to recommend a mortgage that is suitable to your circumstances. If they fail to do this, you are protected and have the right to complain and be compensated.

An adviser is on your side

Because advisers have access to the whole of the market, they really are looking for the best mortgage for you. They aren’t on the lender’s side, and their advice is unbiased. If one lender doesn’t offer the right sort of product for your circumstances, other lenders will. An adviser will seek those products out.

They have experience and knowledge – things that take time to build up

Submitting an application for a mortgage these days isn’t as simple as just filling in a form. There are a lot of hoops to jump through to prove that you can actually afford a mortgage, and it’s easy to make a mistake. With this in mind, it’s worth knowing that each lender has its own preferred criteria. An adviser understands what these are and can therefore save you a lot of time and heartache.

Other protection

An adviser is mindful that it’s worth borrowers being aware of other financial products available when they have a mortgage. Life insurance, for example, to ensure the mortgage is paid off in the event of the mortgagee’s death. And of course, there’s buildings and contents insurance too.

A good adviser, who has experience and knowledge, will also be able to provide you with advice on other types of protection too with respect to your mortgage arrangements. Examples would be:

  • Death cover
  • Critical illness
  • Long term illness
  • Payment protection

But how does an adviser make their money?

There are two ways an adviser can earn their crust:

  • By charging you a fee
  • By receiving a commission from the lender – for putting business their way

Either way, however, it’s important to note that your adviser has to provide you with a Key Facts document that details any fees or commissions they make.

In summary…

Only you can decide if the benefits of using an adviser are right for you. It’s true that they will either charge a fee or make a commission for their services. However, in return for that, as a first time buyer you are working with someone who not only has knowledge, experience and access to the whole of the market but is also helping you find the best mortgage for your circumstances.

Other articles in this series written for first time buyers…

Introduction to Mortgages for First Time Buyers

Buying your first home is an exciting but nerve-wracking time. There is a lot to take in and understand. So, bearing in mind how important it is to get things right, we thought that a series of articles specifically addressing the concerns and queries of first time buyers would be helpful. The topics that we cover in this series are:

What is a mortgage?

First things first, it’s worth remembering that a mortgage is, in essence, just a loan. What makes it slightly different to other loans that you may take out, though, is that it:

  • Usually runs for a longer  period – 25 years is a common mortgage term
  • Is secured against your property

What does that second point mean? Well, it means that in return for lending you money to buy the property, a lender protects themselves by putting a charge on it. This means that in the event you cannot, or simply stop, paying your monthly payments, they have the right to repossess the property, sell it, and recoup their money.

How does a mortgage work?

We’ll cover this in more detail over the next few articles, but in summary once a mortgage policy starts it is broken down into these components:

  • Deposit – This is the initial payment you pay and is not included in the capital amount you borrow.
  • Capital – This is the amount of money you borrow.
  • Interest – This is the amount your lender charges you for borrowing the capital until it is paid. Depending on the type of deal you choose, this may be charged at a variable, fixed or capped rate.

You then pay back the interest and capital to the lender, usually on a monthly basis, until the loan is paid off. The usual term is 25 years, but it can be shorter or longer depending on your requirements and circumstances.

What happens if I can’t pay my monthly payments?

It’s important to note that throughout the length of the mortgage policy, the loan is secured against the property you’ve bought. This means if you can’t afford to make your monthly payments, your lender will have the right to repossess your home and sell it to recover the amount you still owe. Plus, you need to be aware that if they sell your home for less than the outstanding amount, you still owe them the difference.

It is very important, therefore, to only borrow what you are sure you can afford to repay on a monthly basis. And it’s critical that you pick the right sort of mortgage from the start…

To find out more about mortgages for first time buyers, please see the other articles in this series.

Other articles in this series written for first time buyers…