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The first time buyer's guide to mortgages

First time buyers can struggle with how much goes into buying a first home – if it’s not finding conveyancing solicitors or Chartered Surveyors, it’s saving up a deposit and choosing the right property.

The first time buyer's guide to mortgages

One of the biggest concerns for first time buyers is going to be finding the right mortgage for them – after all, this will be the biggest financial decision of your life, and you’ll probably have no experience of it. You know when you find a home you like, you know how to save money (or you’re figuring it out) but when it comes to interest rates, percentages and the wide variety of choices available, mortgages can be terrifying.

So let us introduce our first time buyers mortgage guide – with everything you need to know to make a decision about your first mortgage.
 

Preparing to get a mortgage

The first thing you need to do is make sure you qualify for the best mortgage possible. This will come down to two main factors:
  • What your credit rating is like.
  • How big a deposit you have saved.
(Other factors, like your income and spending will obviously be taken into account, but these two can be fixed before you apply for a mortgage)

Check your credit score online, and make any appropriate changes. Unlinking accounts with previous housemates or partners, registering on the electoral roll and paying off any outstanding debts is a good idea. Mortgage providers want to see that you can borrow, and in many ways, even having (a little) credit card debt is better than never having had a credit card. But if you’ve missed payments or have debt that’s over half of your credit limit, it’s worth getting your finances in order before you go for a mortgage.

A large deposit will mean you have less to borrow, which means you’ll get a better rate, and have less interest to pay on top. It pays to save.

Types of mortgage

This is where first time buyers tend to get overwhelmed – there are so many mortgages to choose from, how can you know which is best? Here’s a quick run down of what’s on offer, and what those pesky terms mean.

Fixed Mortgage – this means you’ll pay the same amount every month, from when you start your mortgage. These can be set for 2,3,5 or sometimes even 10 years. This gives you stability, as you know how much you’ll be paying, but you’re paying a little more for that stability. Also, if you need to move before your set time is up, you’ll have to pay a fee for that too.

Variable Mortgage - a variable mortgage payment can change month to month or year to year, depending on different factors. This splits into two types: tracker and SVRs. A tracker mortgage varies on the interest rate defined by the Bank of England. SVRs (Standard Variable Rate) varies based on the lender’s changes. Why would anyone pick these? Well, recently our interest rate was incredibly low, meaning those on a tracker mortgage benefited from lower payments. As it changes, their mortgage payments will increase.

Other options also include discount rates, where a mortgage will be very low price as an introductory offer, then revert to a SVR. Capped deals also existed, where the variable mortgage could not increase over a certain amount.

We have not mentioned interest only mortgages up until now, and that’s because they are not as readily available – with these you pay off the interest, but not the mortgage itself. Ideally you would put the mortgage payments into a high interest account and pay off the mortgage later, but these deals are not really on offer in the current economy.

Another option, if you have a large chunk of money in savings is an offset mortgage, where the savings in your account act against your debt – so if you have a £100,000 mortgage but have £20,000 in your savings, you’ll only pay interest on the £80,000. This is good in theory, but why wouldn’t you use this money in your deposit if you had it? These can also be higher in interest - however this could be an option in the very similar springboard mortgage outlined in the next section.

First Time Buyer Mortgage Resources

It may not feel like it, but being a first time buyer actually has lots of advantages. You haven’t got the additional stress of trying to sell one home to buy another, and there are a lot of schemes to try and help you get on the ladder. Some of these are centred around saving, like the Help to Buy and Lifetime ISAs, but others act as support for your mortgage.

For example, the Help to Buy Equity Loan Scheme helps to lower your mortgage by providing 20% equity. So if you have a 5% deposit, the government will give you 20% and then your mortgage will pay for the remaining 75% of the property. The equity loan is interest free for the first 5 years and then you start paying the interest back. The actual loan amount will be taken when you sell your home, so if your house increased in value, so will the 20% you pay back! There’s also the caveat that this only works on new build homes, under the value of £250,000 (or under £450,000 in London).

For those who have parents or family members who want to help, your mortgage options can reflect this. Getting a joint mortgage with a parent can be to your advantage, as it takes into account their credit history and wages. Another option is getting them to act as guarantor for your mortgage – if you didn’t pay, they would have to cover the payments. Another option, similar to the offset mortgage, is a springboard mortgage, where a parent can put a chunk of savings into an account attached to your mortgage. If you pay off your mortgage every month with no issues, your family member gets their money back 3 years later, and they’ll have earnt interest on it.

How to pick the right mortgage for you

It’s important to look at the fine print when it comes to committing yourself to a mortgage – and being dedicated in doing the maths on how much interest you’ll be paying.

How long do you want to be paying your mortgage? Picking a longer term mortgage, like 35 years, will ensure your monthly payments are fairly low. However, you’ll be paying back much more interest on top. Similarly, are you going to be in retirement and still be paying your mortgage, because your mortgage lender may have some concerns about that (as should you!)

What about being flexible? Do you want to be able to move your mortgage if you move home? It’s hard to imagine having to move home whilst buying your first home, but it’s a consideration – are you planning to stay for 5 years, or 10? Locking yourself in to an inflexible mortgage and deciding to move will mean lots of fees.
What about overpaying? If your wages increase, or you come into some money, you might want to pay some more off your mortgage, to cut off a few years or some of the cost of the interest. The sooner you pay off the beginning chunk, the less interest you’ll be paying. So make sure you pick a mortgage that is flexible enough to let you overpay. Check whether there is a yearly limit to how much you can overpay, if you go over that there’s sure to be fees.

Remember that you don’t have to stay with your mortgage provider once the set time is up – you can often get a better deal when switching, so make a note a few months before your mortgage is up to have a look around and see what the best option is for you. Your circumstances may have changed, and a different type of mortgage may now be better for you.

When do I get a mortgage

Often first time buyers become confused about where in the house buying process they need to get a mortgage. As your mortgage will be based on the value of the property you want, you’ll need a mortgage after you find your dream home.

However­ – getting a mortgage in principle will probably help your case when the time comes to making an offer, so you want this before finding the property you want. A mortgage in principle is an assessment by the bank, who basically say that they would be willing to give you a mortgage. This is not a guarantee, and it’s not specific, but it will help sellers know that you’re serious and that you have the money to buy their house. Getting a mortgage in principle is one of the best things a first time buyer can do to solidify their position, as buyers who have already owned a home have shown they could get a mortgage - you have to make the sellers confidant that you’re ready to own a property, and the sale won’t fall through.

How do I get a mortgage?

The best way to start considering mortgages is to get a mortgage advisor or mortgage broker to do this for you. They will be able to explain anything you’re unsure about and will have access to a wide variety of mortgage options. However, don’t let this stop you from looking online too – some offers are direct to buyers, and may work out better for you.

Remember that a mortgage broker will not only be paid by you, but may get a commission from whichever lender you choose. However, they are meant to be impartial, and will have to tell you upfront about any limitations in choice, as well as fees and payments. They will take into account your financial situation, monthly spending and will only recommend mortgages that you can afford. Having a clear idea before meeting with an advisor of how much you spend every month and what you are willing to spend on a mortgage is a good idea.

When applying for a mortgage, you’ll need to take the following information with you:
  • Proof of employment (pay slips)
  • Proof of deposit (bank statement or letter if parents are providing the deposit)
  • 3 month’s worth of bank statements
  • Proof of any bonuses
  • P60 tax form
  • SA302 form if self employed (get this well in advance, it can take weeks to arrive)
When you’ve chosen a mortgage lender, the mortgage advisor will set everything up and will arrange for a valuation of your chosen property. Assuming the mortgage fits with what you can afford and the property fits the lender's expectations and value, your mortgage will be approved and you can move forward with the purchase of your first home. 

Fees to be aware of

It’s easy to think about the cost of a mortgage – it’s probably the largest sum of money you’ll ever borrow. But what about the associated costs?

You’ll pay an arrangement fee for setting up the mortgage, you may pay for your mortgage valuation (though this may be included in the costs) and you could also pay a booking fee. Make sure you know what all these costs are upfront.

Lenders are going to want to make money on top of your mortgage, but don’t feel pressured into buying extra products – always ask if you need to buy this product from them (or indeed, at all) in order for your mortgage to go through. Mortgage payment protection insurance, for example, may sound like a good idea, covering your mortgage payments if you aren’t able to pay – but check the small print to make sure it applies to you and that you could access it if necessary. Often the selling of these services is not personalised. Mortgage lenders may also try to sell you life insurance. What you absolutely do need is building insurance – but you don’t have to get this through your lender.

Tips, tricks and essential info

  • There are instances where you may not get a mortgage on your dream home. Some lenders will not approve properties in blocks of flats, ex-council, concrete built, those without kitchens or bathrooms (even if you plan to put them in). It may feel like the lender is investing in you, but they’re actually investing in the property.
  • A mortgage valuation may assess that the value of the property is less than the price you have agreed to pay. Not good. This means you’ll only get the mortgage for the value they deem correct – and you’ll have to find a way to come up with the rest yourself. If you can’t do that, you can try to knock down the price with the seller, or you’ll have to pull out of the purchase.
  • APR can look scary when you’re comparing mortgages, but it’s almost meaningless. It works out the average annual interest rate using the whole of your mortgage, but the truth is, you’ll probably switch providers to get a better deal, and APR is variable. Knowing how much it would cost you per year over a 25 year mortgage isn’t really helpful when so many things can change. Instead focus on the initial discount rate, and the SVR rate after.
  • If you’re thinking about moving out and letting out your property, you’ll need permission from your mortgage lender. They may give you ‘consent to let’ by increasing your rate, or may switch you to a buy to let mortgage rate.

In summary

First time buyers don’t need to be overwhelmed when it comes to finding a first time buyer mortgage – just do the maths, consider your future plans and whatever you do, don’t overextend yourself! If you will struggle to pay your monthly mortgage payments, it becomes easy to get into a spiral of debt and you risk losing your home. Always work out a monthly budget and make sure you have enough of a cushion that you could pay your mortgage if you got into trouble.
 

 

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