Buying a home for the first time is an intimidating process, but few things compare to searching for the right mortgage. If you’re a first time buyer this will likely be the biggest financial decision of your life so far.
The sheer variety of mortgages available can be overwhelming and complicated but there are some great advantages to being a first time buyer so, here's an easy guide to every type available and how to get started.
Preparing to get a mortgage
The first thing you need to do is make sure you will qualify for a mortgage.
This is dependent on these main factors:
Credit ratings
Deposit
Income
Other factors such as spending will also be taken into account but there’s only so much you can do to change these.
Credit rating
Your credit rating or score is a three digit number that reflects how reliable you are with money. The higher your score the better your chances of being accepted for a mortgage, and at the best rates. Look at your score on sites such as Experian, they normally have a free trial and will provide advice on how to boost your score.
Deposit
The bigger your deposit means you’ll need to borrow less. Borrowing less will mean you get a better mortgage rate and pay less interest on top.
Income
Your income will determine the size of the mortgage you will be approved for.
Types of Mortgage
This is where things tend to get overwhelming. Here is a brief run down of the different types of mortgages available without all the needless jargon.
Fixed Mortgage
This means you pay the same amount every month from the start of your mortgage. Fixed mortgages last for 2,3,5 or 10 years. This gives you stability at the start of your mortgage as you’ll be paying a fixed rate.
However, you are paying a bit more monthly for this type of mortgage. In 2019 the average two-year fixed-rate deal cost 2.52%. After the fixed rate ends you will often then be on a variable mortgage.
Variable mortgage
Payment on a variable mortgage can change month to month or year to year, depending on different factors. Such as an underlying benchmark interest rate or index that changes periodically with the market.
Variable mortgages are split into two types, trackers and SVRs.
Tracker mortgages vary on the interest rates defined by the Bank of England.
SVRs (Standard Variable Rate) vary depending on the lender's charges. The interest rate is set by your lender and can change at any time. This is the default interest rate most customers move to once their initial deal ends. In 2019 the average SVR was 4.9%.
While fixed mortgages are the most popular trackers have benefitted from the low interest rates over recent years. However, these increase so will the payments on tracker mortgages.
Interest Only
Interest only mortgages are not as readily available. With this type of mortgage, you pay off the interest but not the mortgage itself. It's advised that if you are in this type of mortgage you should save the mortgage payments in a separate high interest bank account and pay off the mortgage at a later date.
Offset mortgage
If you have a lot of money saved you can offset the mortgage against the debt. So, if you have a £100,000 mortgage and £20,000 in savings you would only pay interest in the £80,000.
Other options include discount rates and capped deals. With discount rates the mortgage will be very low, to begin with then revert to SVR after a certain period.
Capped deals are where the variable mortgage could not increase over a certain amount.
Benefits of being a First Time Buyer
Being a first time buyer does have excellent benefits with plenty of schemes that can help you get on the prperty ladder. Some are incentives to get you savings, such as Help to Buy and Lifetime ISAs but others like the Help to Buy Equity Loan Scheme support your mortgage.
Lifetime ISA
The Lifetime ISA is an account used to save for your first home with a bonus of 25% added by the government. The lifetime ISA can be used to save for a retirement fund. The Lifetime ISA unlike the HTB can be accessed before completion so you can use this towards your deposit.
Help to Buy Equity Scheme
This government scheme helps to lower your mortgage by providing 20% equity. So, if you have a 5% deposit, the government will give you 20% and the mortgage will cover the remaining 75%. The equity loan is interest free for the first 5 years then you start paying back the interest. The actual loan amount will be taken when you sell your home, so if your house has increased in value, so will the 20% you pay back. This scheme also only works on new-build homes, under the value of £450,000 in London or £250,000 around the rest of the UK.
Joint mortgages
For those whose parents or family members want to help by taking some responsibility for the mortgage. A joint mortgage takes into account their wages and credit history. Or they can act as a guarantor for your mortgage. Similar to renting a house so, if you were unable to pay for the mortgage it would be their responsibility to do this.
Help to Buy ISA (Discontinued)
Very briefly a Help to Buy ISA (HTB) is a special savings account for people over 16. You can save a maximum of £200 a month and the account holds a maximum of £12,000. This means when you come to buy a home the government will give you £3000 towards your new home. This account cannot be accessed until the completion of your property. These are no longer available so don’t waste your time unless you already have one.
Springboard Mortgage
A parent or family member can put a chunk of savings into an account attached to your mortgage. If you pay off your mortgage with no issues, your family member gets their money back 3 years later and they will have earnt interest.
As with all mortgages, repayments must be made on time. With a Springboard mortgage if you miss a payment your parents money can be held until repayments are up to date. Some mortgage lenders will keep your parents or family members money for up to 12 months extra if three payments are missed.
Therefore a springboard mortgage isn’t a decision to take lightly.
Considerations when choosing your mortgage
Length
How long do you want to be paying off your mortgage? Picking a long term mortgage like 35 years will ensure your monthly payments are low however paying for it over 35 years compared to 25 means overall you’ll be paying more with interest.
You may want to consider a flexible mortgage. I know it might be daunting to think about moving again while you are buying your first home but if you intend on only being there for 5 or 10 years, locking yourself into an inflexible mortgage means you may be liable to pay an early repayment charge (ERC) when you look to move. An ERC is usually a percentage of the outstanding mortgage and typically between 1% and 5%.
Over paying your mortgage
If your income increases or you inherit some money you can pay more off your mortgage to cut off a few months or years of interest.
You can pay off your mortgage early with overpayments to reduce the length of the mortgage and save money by paying less on interest. This generally happens with income increases or inheritance.
If this is likely you need to pick a mortgage that is flexible enough to let you overpay. Check to see if there is a yearly limit and if so, how much it is.
Getting a Mortgage
The best way to begin is to speak to a mortgage broker, or advisor. Look online or use Zump Pros to find better prices or ones which come highly recommended. Before purchasing a home you will need a Mortgage in Principle (MIP), also known as a Decision in Principle (DIP), Agreement in Principle (AIP) or a Mortgage Promise. This is a statement from a lender or a broker saying that in principle they will lend you a certain amount of money based on the information provided. Most estate agents will need to see proof of this before they accept an offer on a property.
Please note that a DIP, AIP, MIP, or mortgage promise does not guarantee you a mortgage. The property will need to be valued by the bank and a hard financial check will be required also.
What you need when applying for a mortgage
Proof of employment (pay slips)
Proof of deposit (bank statement or letter from the person providing the deposit)
3 months bank statements
Proof of any bonuses
P60 Tax Form
Or SA302 form if you are self employed. This can take ages to arrive so get it in advance.
Fees
You will pay most mortgage brokers a fee of this is an average of £200, however they may also get commission from certain lenders. They should be impartial and will have to tell you any fees and payments they receive upfront too.
Lenders will require payment upfront. This can be anything from £0 to over £2,000. This can be paid the first month you move in or be added to your mortgage.
You will need to consider insurance too. Most mortgages require home insurance and recommend payment insurance.
Mortgage payment insurance, in case you become ill and cannot make payments.
House insurance is often required to be able to have a mortgage
Life insurance may also be required too.
Other essential information
There are instances when you will not get a mortgage on certain properties.
A home without kitchens or bathrooms may be rejected
Some blocks of flats, due or cladding or other areas of the building not being up to regulation
Some types of builds. A concrete build may be rejected
ex -council houses
A lot of work needs to be done in the house, for example if it has a lot of cracks or damp
Speak to the estate agent selling the home to see if they think there is any reason a mortgage might be rejected.
If you are thinking about moving out of your home and renting it you will need permission from your mortgage lender. They may give you “consent to let” or they may switch you to a buy to let mortgage but these could increase your mortgage rate/interest rate.
Summary
We know it is a lot of information and can seem extremely overwhelming but just follow this guide and don't overextend yourself financially. If you struggle with your mortgage payments you could risk losing your home so just make sure you have enough money in your budget to keep yourself safe.