Buying your first home and taking that step onto the property ladder is a momentous occasion and should be driven by informed decisions. It’s a huge financial commitment, and it is crucial to have the right mortgage in place based on your circumstances. To help you navigate the vast mortgage landscape, we’ve put together this handy first-time buyers guide to mortgages.
Your first home is likely to be one of the most expensive assets to your name. It’s an achievement to be proud of, and an even more exciting journey to getting the keys for the first time.
Part of that financial commitment is most likely through a mortgage. Thousands of mortgage rates are available for first-time buyers, with hundreds of lenders available. Much like car insurance, you will need to shop around to get the best quote for you and your circumstances.
A mortgage is a financial loan used to buy a house. You will typically need to put down a deposit (usually a minimum of five per cent), with the rest of the funds put in place by a bank or building society.
Once you complete on a property and move in, you will then start paying the mortgage back every month (plus an interest rate). This will be done for a set number of years.
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There are two main types of mortgages, interest and repayment. A repayment mortgage is paid back monthly, with the interest rate added on top of it. An interest-only mortgage is where you only pay the interest back monthly, but then pay the total sum borrowed at the end of the mortgage term.
Within these two types of mortgages, there are a number of different deals and rates to choose from. These include:
A fixed-rate mortgage is where the interest rate on your mortgage stays the same, for the duration of the loan. They can be a useful way to manage your money, as you’ll have a good idea about what you’re going to pay each month.
A tracker mortgage is a type of variable rate mortgage that “tracks” a base rate – usually the Bank of England’s base rate. If you get a tracker mortgage, your mortgage repayments (including the interest you pay on your mortgage) could change every month.
A discount mortgage or a discounted variable mortgage has an interest rate that is ‘discounted’ at a certain level below your mortgage lender’s standard variable rate (SVR), for a set period of time. As the SVR goes up and down, then your discount mortgage rate will mirror the fluctuations and also move up and down. It works in a similar way to a tracker mortgage, except it tracks a lender’s SVR rather than the Bank of England’s base rate.
The type of mortgage you select will usually be valid for a certain number of years (typically between two to ten), known as the introductory or deal period. Once this period is complete, you will move onto a standard variable rate mortgage, which usually has a higher interest rate. It is at this point many homeowners look to switch to a new deal – known as “remortgaging”.
Some important things that will affect your choice of mortgage, and the deals available to you, include:
A mortgage advisor can discuss these options with you in detail, and help to identify the relevant options based on your circumstances. If you’d like a free, friendly chat about what type of mortgage would be best for you, click to book a free appointment here.
The first step (ideally undertaken before you begin viewing properties) is to get an Agreement in Principle. Also commonly referred to as:
An agreement in principle will give you an estimate of how much a bank or building society are willing to loan you. They should be free of charge and can be conducted in a matter of minutes, and will allow you to budget for properties you wish to buy. It will also help to give you peace of mind if you have concerns relating to your credit record.
The agreement in principle also helps to give you credibility with estate agents and vendors selling their properties, as it demonstrates you are a serious buyer looking to buy, rather than just browsing. They are usually valid between 30 to 90 days, after which time you will need to apply for a new one if you haven’t proceeded forward with a mortgage application.
Once you have found a home you wish to purchase within the stated budget of the agreement in principle, you can then apply for a mortgage. You will need to get various pieces of documentation in line in order to complete the application. This includes:
You will also need proof of expenses in order to ensure your mortgage loan amount suits your lifestyle and requirements. If you’re self-employed, you’ll need to provide the following additional documents required for proof of income:
Our team of mortgage advisors can help you every step of the way with your mortgage.
There are a number of different deposits commonly used by first-time buyers, which are usually acquired in different manners:
A gifted deposit is a sum of money gifted to you, be it through family or friends or a third party. Some mortgage lenders will not approve deposits from third parties due to the risk of money laundering and fraud. However, it is possible that some lenders are willing to accept deposits from third parties, subject to enhanced due diligence checks. All gifted deposits will require a form of identification from the gifter, and a signed letter.
Deposits sourced from inheritance money are common for first-time buyers. The majority of lenders will accept these as long as the inheritance funds are about to be paid or probate. They are unlikely to accept a ‘future inheritance’, where money is guaranteed in a will by an individual who is still alive.
Known as a family mortgage deposit or a family springboard mortgage. This is suited to first-time buyers who have managed to save up five per cent of the deposit, who then have a relative willing to help them by placing savings into an account the mortgage will be offset against.
Lenders are happy to accept personal savings as a form of deposit, but may require evidence of these savings increasing to the presented amount over time.
There are a number of deposit options, which although not as common for first-time buyers, are still viable. These include the sale of another property or assets by a relative/friend (evidence required), bridging finance (common with property investors) and even cryptocurrency (although many lenders will outright refuse this option).
The first payment you will make on your mortgage will be different from the rest. This is usually because there is the problem of a partial month to pay since your Completion Date is very unlikely to be the first of the month. It is also typically higher than your usual mortgage payment.
Paying off your mortgage early can help save on interest costs in the long term, however, there are early repayment costs to consider. Depending on your lender, some may charge a fee for an overpayment or paying the mortgage off entirely. You are typically permitted to pay back an extra 10 per cent of your mortgage annually without being penalised. Exact conditions will be outlined in your mortgage documentation.
If you miss a single mortgage payment, this will be classed as a “late payment”, also known as mortgage arrears. The late payment will remain on your record for several years and will have a negative impact on your credit score.
As soon as you realise you may not be able to make a payment, or keep up with monthly payments proceeding forward, you should speak to your lender as soon as possible. They will discuss a range of suitable options based on your circumstances and can draw up a new plan to better manage your payments.
If your lender has tried to help you, but all options fail (or you haven’t informed them of your circumstances), then they have the right to take possession of your home. Often, your property will be placed into an auction in order to sell quickly and for your mortgage lender to gain as much financial input back as possible.
If your lender is unable to sell your property for the sum leftover on the mortgage, then they will continue to chase you for payments even after the auction. In addition, if your home is ever repossessed, your name will permanently be listed on a register and you will unlikely be able to apply for a mortgage again.
Our in-house mortgage advisors love working with first-time buyers, and sharing the enthusiasm and joy relating to buying your first home. For more information regarding mortgages relating to your circumstances, or to book a free consultation with one of our advisors, call 0161 826 2998 or click the button below.