First Time Buyer
Being a first time buyer can be a daunting experience. With many mortgage products to choose from, each with different pros and cons, it’s difficult to know where to start.
What Can I Borrow?
Once you understand what you can borrow, you get a better idea of the house price you can afford. What you can borrow is dependent on a number of factors. These include your income, your credit rating and the number of applicants.
To find out exactly what you can borrow, it’s best to speak to a mortgage broker. They’ll help you find out what lenders will let you borrow. Lenders may typically offer you 3 to 5 times your annual household income.
What Deposit Do I Need?
The deposit a first time buyer needs depends on the value of the property you want to buy. Typically, a deposit of at least 5% is required, although it’s likely to be at a higher rate. However, the higher your deposit, the better. A higher deposit can help secure you a lower interest rate, due to a lower loan to value (LTV).
The LTV is a percentage of the house value that is bought with a mortgage. If you buy a house worth £150,000 and put down a £15,000 deposit, that’s a 10% deposit. Therefore, your LTV is the remaining 90%. Higher deposits and lower LTVs can often result in lower interest rates as it’s deemed a lower risk investment in the lender’s eyes.
‘Help to Buy’ Scheme
Through the Government’s ‘Help to Buy’ Scheme, you could only need a 5% deposit. The Government loans you 20% of the property value, which you pay interest on for the first 5 years. You then need a 75% deposit to pay the remaining value of the house.
What Type of Mortgage Do I Need?
There are different types of mortgages, depending on what’s right for you.
Fixed Rate Mortgage
A fixed rate mortgage lasts for typically 2-6 years (sometimes longer). You make the same monthly payment over the term of the deal, regardless of how the interest rate changes. When the deal term ends, you would switch to the lender’s Standard Variable Rate (SVR), unless you get a new mortgage products.
Standard Variable Rate (SVR) Mortgage
The SVR mortgage is the lender’s standard mortgage. The SVR changes periodically, based on a number of factors, including the Bank of England base rate.
A tracker mortgage quite literally ‘tracks’ the Bank of England base rate. Assuming the base rate is at 0.75%, a lender may apply an interest rate of 1.25% on top of this. This means your interest rate is 2%. Assuming the base rate increases to 1%, your new interest rate would increase in line, to 2.25%.
How Do The Repayments Work?
There are many different mortgage types, however they’re often either known as capital repayment or interest only.
The more common capital repayment mortgages is where you make monthly payments to pay off both the interest and property value. When your payment term has finished, you have full ownership of the house.
Interest only mortgages are when you pay off only the interest in monthly repayments. Once you’ve made the repayments, the value of the property is due. This is often paid by selling the house.