Mortgages for First Time Buyers: Read our Complete Guide
- 1 Mortgages for First Time Buyers: Read our Complete Guide
- 2 Deposits
- 3 The length of your mortgage
- 4 Mortgage rate structure
- 5 Additional fees and services
- 6 Mortgage guide for first time buyers – The verdict?
Purchasing a property will be the largest investment you will ever make – so ensuring you have a comprehensive understanding of all the relevant facts prior to taking the plunge is pivotal. The end-to-end mortgage process for first time buyers can feel somewhat daunting, especially when one takes in to account the Wild West of interest rates, re-payment plans, minimum deposits and legal structures.
In fact, whilst choosing the right mortgage plan is primarily based on finding the most competitive rate, these days it is also about improving your chances of approval. Nevertheless, by taking the time to understand the key fundamentals, you can ensure that the route to owning your first home is a seamless one. In our mortgage guide for first time buyers – we identify five crucial specificities for you to consider.
Before getting started, it is important to recognise that you will be required to provide your lender of choice with a deposit. The minimum deposit amount will be specified by the financial institution in question and is calculated as a percentage of the total value of the property you want to buy.
In most cases, it is always better to pay the highest deposit that you can afford, as lenders often reserve the most favorable rates for those that are prepared to deposit higher amounts. This makes sense, as the underlying risk for the lender is subsequently reduced in direct correlation to the amount they have to loan out.
Although the best mortgage structures are often reserved for those willing to deposit up to 20% of the property’s’ value, there are still some excellent deals to be had for those who do not have adequate savings. In fact, if opting to utilize the Government’s Help to Buy Scheme, you are only required to provide the lender with a 5% cash deposit.
You will also need to take some time to understand how credit worthy you are in the eyes of the lender. If you have a poor track record when it comes to repaying debt, then there is no doubt that this will go against your chances of having your mortgage application approved.
Prior to making an application, you should attempt to reduce any outstanding debts that you currently have. Ensure that any outstanding balances on credit cards, loans and overdrafts are kept out of the red, as any missed payments will be clearly visible to lender through your credit report.
A second avenue that lenders will scrutinize when it comes to credit worthiness is affordability. At an absolute minimum this will require you to provide the lender with a proof of income. This is a fairly straightforward exercise as most financial institutions will accept a P60, which your employer should give you at the end of each tax year.
If self-employed, the process can be slightly more tedious as the lender will more than likely ask to see your accounts from the previous three years of trading. If you are unable to provide this, your chances of approval will be significantly reduced.
Moreover, the lender will also request copies of recent bank statements so that they can ascertain what your spending habits are like. If it appears that you often spend beyond your means, this will most likely go against you. In the short-to-medium term, make sure that your finances are in good health.
The length of your mortgage
At this point of the application process you will need to consider the amount of years that you think you will need to repay the mortgage. The vast majority of first time buyers take out a mortgage that spans 25 years, however there is no hard and fast rule. As you can probably imagine, shorter repayment plans will result in less interest being paid and on the contrary, longer terms will ultimately be more costly.
You need to consider how much you will be able to afford each and every month – or collectively if you are purchasing a property with another person. In the eyes of the lender, a mortgage of less than 20 year years would be considered short-term and if more than 30 years – long-term. Although interest rates can be a highly complex art, to give you an idea of how the length of your mortgage can affect the total amount you repay, take a look at the following example.
Let’s say that you take out a mortgage that is valued at £200,000 with a fixed interest rate of 3%.
|Mortgage Length||Monthly Repayments||Total Cost|
As you can see from the above example, although taking out a longer plan results in cheaper monthly repayments, it ultimately costs a lot more over the course of the mortgage. On the other hand, a shorter plan will cost more on a monthly basis, however the overall cost of the mortgage is much cheaper.
Ultimately, the plan that you choose will need to depend on how much you (and/or your partner) can afford to repay. Spending some time working out the amount of money that you earn, alongside how much you normally spend each month is a great starting point.
Mortgage rate structure
Attempting to understand the different mortgage rate structures is potentially the most daunting task for first time buyers. In a nut shell, this is the underlying package that outlines how your mortgage repayments are calculated and in some cases, how they can change over time.
In the UK, there are normally two rates that will determine how much you end up paying over the course of the mortgage, which are identified as the fixed rate and the variable rate. To make things easier for you will have broken the rates down in greater detail below.
Essentially, if opting for a mortgage structure that is based on a fixed rate plan, it means that your monthly repayments will never change. You will be assigned a fixed interest rate, meaning that you will always know how much you need to pay for the remainder of your plan. In the two examples above where we calculated the monthly and overall cost of a mortgage over both 15 and 25 years, those figures were based on a fixed rate plan as the monthly repayments remain unchanged.
The greatest advantage to going the fixed rate route is that you can comfortably budget, giving you peace of mind that your payments will never go up. On the other hand, fixed rate deals are most commonly costed at a higher rate than their variable rate counterpart, as lenders are unable to mitigate against a rise in interest rates. Furthermore, if the Bank of England (BoE) decide to lower interest rates, you would not benefit as your repayments are immune to change.
Unlike a fixed rate mortgage, your monthly repayments can change in direct response to an adjustment of interest rates. This would have been highly beneficially in 2009, where BoE interest rates were reduced from 5% all the way down to 0.5% in less than 12 months. As a result, your monthly repayments would have been reduced. On the contrary, if rates go up, then your monthly repayments will follow suit.
It is important to recognise that your variable rate can change even if the BoE do not engage in an interest rate adjustment. In fact, the lender can increase or decrease the rate as and when they see fit. However, if you are interested in a mortgage structure that mirrors that of the BoE (which usually includes a margin rate above or below it), then this is known as a tracker mortgage.
Nevertheless, a further benefit when opting for a variable rate is that you usually have the option to make overpayments. This is where you contribute more money than your minimum monthly payment (for example where you have surplus funds available), which in the long run, can help you repay your mortgage early and subsequently, reduce the overall amount of interest that you pay over the course of the loan.
Monthly introductory rates
When shopping around for the best deal, you should spend some time evaluating introductory rates that different lenders are offering. In most cases, this will include a special fixed-rate for a particular amount of time, before the mortgage transitions over to a variable rate. In order to win your business, lenders will normally offer highly competitive introductory rates – with some lasting for up to 10 years.
Additional fees and services
Although the life-time cost of your mortgage is of utmost importance, you also need to consider what other fees you will need to pay as part of the application. According to Martin Lewis of the Money Saving Expert platform, mortgage application fees have gone up by more than 300% over the past 10 years and can add thousands of pounds on top of the overall cost of the mortgage.
Don’t forget, these fees will be payable as and when they are due, which will normally be well before you get your hands on the keys to your new home. Let’s take a look at some of the most common services you will need to take in to account.
An arrange fee is the amount you are charged by the lender for setting up your mortgage. This can either be in the form of a fixed amount or alternatively, a percentage of the total amount that is being borrowed. Although most lenders ask for this upfront, some will allow you to add it to the total cost of your mortgage – however this will ultimately cost you more as you will be required to pay interest.
The valuation fee is the amount that you pay an organization to survey the house you intend on purchasing. This is usually a rather basic exercise so that the lender can check that the property resembles a suitable security against the loan.
Due to the size and nature of the value of the mortgage, you will need to employ the services of a legal practitioner. Their role will be to produce the required legal paperwork for the purchase to go through. In mortgage lingo this is known as conveyancing. In most cases this will be charged as a percentage of the value of the mortgage. Some lenders will offer to contribute towards the fees of a solicitor as part of their introductory rate, so it is well worth keeping an eye out.
Mortgage guide for first time buyers – The verdict?
If you have read our guide from start to finish, you should now have a really good understanding of the things you need to consider prior to taking the plunge. At first glance the end-to-end process can seem overly complex, however by breaking each specificity down you can avoid the stresses often associated with mortgage applications.
As we have detailed, you first need to ensure that you financial circumstances are suitable for an application. This not only means making sure you have enough funds for the initial deposit, but also that you will be able to afford the monthly repayments. Furthermore, now that you have a better idea of how stringent the application can be – you also need to consider how credit worthy you are. The lender will scrutinize your financial standing in its entirety, so to give yourself the best chance of success you need to ensure that you in a state of good financial health.
You should now also have a firm understanding of the different types of mortgage structures and that by choosing the right re-payment plan, you can combine affordability with price. Ultimately, buying a property is the best investment that you will ever make. We hope that by reading our guide we have made the process slightly easier.