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Getting a mortgage for the first time can be both confusing and daunting. Which type of deal should you go for and how much can you borrow?
These aren’t the only issues first time buyers have to worry about. Thanks to steep property prices in many areas of the country, many first time buyers only manage to save a small deposit to put down, which can restrict your options.
Here at L&C, we can take you through the mortgage application process from start to finish, offering expert guidance as to which kind of first time buyer deal might suit you best, so that you can get onto the first rung of the property ladder as painlessly as possible.
Your mortgage is likely to be your biggest monthly outgoing, so it’s important to get it right first time round.
When you take out a first time buyer mortgage, you are basically borrowing an amount from a lender to pay for your property purchase. Like any other type of loan, you make monthly repayments to pay off the capital you’ve borrowed as well as the interest charged. Some are interest-only rather than repayment mortgages, whereby you only pay interest back each month, and you don’t repay the capital lump sum borrowed until the end of the term. However, it’s extremely unlikely that as a first-time buyer you would be offered this type of deal as most lenders will only consider lending on an interest-only basis if you have a very large deposit to put down.
The amount of interest you will pay on your mortgage depends on the particular deal you choose, but the good news is that record low interest rates mean that mortgage rates are currently very competitive. The bigger the deposit you have to put down, the better the mortgage rates you will be eligible to apply for.
When choosing a mortgage, you can see which deals you might qualify for based on the size of the deposit you have by looking at what is known as the ‘loan to value’ (LTV). The LTV is essentially the size of the mortgage you are taking out relative to the value of the property. So, for example, if you were buying a flat costing £100,000 and you have a £5,000 deposit to put down, you’d need to look for mortgages with a 95% LTV, as you will be borrowing 95% of the property’s worth.
Remember that when choosing a mortgage, it’s important not to look at the rate alone. You will need to factor in arrangement fees too, as these can sometimes substantially bump up the overall cost.
Applying for a mortgage for the first time can be challenging, but there are several steps you can take to boost the chances of your application being accepted.
First, you need to establish how big a mortgage you can afford. Lenders will look closely not only at how much you earn, but also at all your other outgoings, so if you can reduce these in the run up to making your application it could help your chances. As a general rule, you’ll usually be able to borrow around four times your income, but this can vary from lender to lender.
Think carefully about how long you want to repay your mortgage too. Most are for 25 years, but it is sometimes possible to opt for a longer term which will mean cheaper monthly payments as you are spreading the cost over a longer period of time. The downside of choosing a very long term mortgage however, is that you will end up paying more interest overall.
Getting a ‘mortgage in principle’ from a lender can be a good way to find out how big a mortgage you might be able to get before you make a full mortgage application. This involves you giving a lender some basic details about your finances. They will then conduct a credit search and give you a mortgage amount they would be prepared to lend ‘in principle’. Having this sort of agreement ready before you start house-hunting can help prove to estate agents and sellers that you are serious about buying.
When thinking about affordability, remember that you might need to pay stamp duty on your purchase depending on how much the property costs and where in the UK it is, as well as other costs such as conveyancing fees and mortgage arrangement fees.
Once you’ve found a property to buy, the length of time it will take to get your mortgage offer depends on whether you have all the required information ready to hand, as well as how long it takes for your application to be processed.
There are several different types of first time buyer mortgages available – the right one for you will depend on your individual circumstances and whether you think you’d be able to cope financially with any change in payments in the future.
Fixed rate mortgages are often popular with first time buyers as the rate won’t change for the term of the deal, which can typically range from two to 10 years, or sometimes even longer. Your monthly payments will therefore remain the same regardless of what happens to interest rates, helping you budget with certainty.
If you think your finances could withstand potentially higher payments in future, then you may alternatively want to consider a variable rate mortgage deal. There are three main types of variable deal available.
Capped rate mortgages: Capped deals are variable rate mortgages, so the rate and your payments can move up or down over time, but there is a cap which the rate cannot exceed. For example, if a lender offers a capped rate of 4.5%, you will have peace of mind that your rate will never be higher than this.
Discounted mortgages: These are also variable rate deals, offering a discount on the lender’s standard variable rate. So if a lender offers a discount of 2% off its 4% standard variable rate, this gives you a payable rate of 2%, but this rate can change over time if the standard variable rate goes up or down.
Tracker mortgages: This type of mortgage, as its name suggests, usually tracks the Bank of England base rate, plus a set percentage. For example, if you chose a mortgage deal which tracked the base rate plus another 2%, and the base rate was 0.75%, this would mean your payable mortgage rate would be 2.75%. The main advantage of a tracker deal is that when rates are falling you will benefit, but if and when rates start to rise, so will the cost of your payments.
Some lenders offer first time buyer mortgages which enable parents to use their savings to help you buy your first home. Parents typically put a percentage of the property value into a savings account held with the lender which allows it to remain in the parental name, but results in a better mortgage rate for you. Other lenders also take a collateral charge on the parental property as an additional security.
There are lots of schemes available to help first time buyers who are struggling to get onto the property ladder.
Shared ownership schemes, for example, enable you buy a share in a property through a housing association. You then pay rent on the part you don’t own, and can buy additional shares in your home when you can afford to.
There is also the Help to Buy equity scheme, which allows you to borrow up to 20% of the value of a new-build home interest-free for the first five years. First time buyers purchasing in London can borrow up to 40% interest-free.
If you’re not sure whether or not you’re eligible for one of these schemes, contact us and we’ll talk you through all the available options.
After taking out a first time buyer mortgage or another financial product, 93% of L&C customers would recommend us based on 1355 Reviews.co.uk respondents - as of 02/04/19. Read our reviews
At L&C, we understand that with the volumes of mortgage and insurance products we arrange, things won’t always go as smoothly as we want every time. Continually improving the service we offer and reducing the number of complaints we receive is very important to us. We regularly review the information we have about your complaints, which helps us to understand how we can make improvements. More information