If you are considering applying for a mortgage to purchase a new property as a first time home buyer but have no clue where to begin, here is our Simply Move Home beginners guide to mortgages help you through the process.
First Time Home Buyer
Beginners guide to mortgages
Purchasing as a first time home buyer is an exciting, but often nerve-wracking time, and getting a mortgage is definitely a reason why the time can become stressful! Getting a mortgage is most likely the biggest financial decision you will make! To take any added stress out of buying a house it's best that you learn all about your options and understand the full process.
Why are mortgages complicated?
There are two main reasons why mortgages get complicated:
When you get a mortgage it is “secured” on your home. This means that while the mortgage is existing if you miss any of the repayments the lender will be able to repossess and sell your house. No-one wants this to happen so numerous regulatory rules have been put in place regarding mortgages. These can often seem as though they are designed to prevent you from purchasing a property however they are actually put in place to protect you and prevent anyone from having to have their home repossessed.
Mortgages are expensive, so the first thing people usually do at the start of the process is to look for ways to make it cheaper. That’s a good idea, however, some of these solutions or “cheaper alternatives” can ultimately cost a lot more throughout the process and further down the years. It is vital to investigate what will happen in the future.
Are you ready to purchase?
The idea of owning a place of your own may seem ideal when you are fed up renting, but if you are likely to move in the next few years you are probably better off sticking it out renting. This is because buying and selling come with a lot of costs and can be very expensive! Even when the costs of repaying a mortgage is cheaper than your monthly rent payments you will need to account for life and buildings insurance and other household maintenance fees. If your situation were to change and things take a turn for the worse, it is also harder for you to receive benefits to help pay a mortgage rather than to help with rent.
How much do you need as a deposit?
The minimum deposit usually required to purchase a home is 5% with the other 95% coming from the mortgage. If you manage to save over 10% for a deposit you will be able to receive a better mortgage deal from the bank or lender.
You will often hear the term “LTV” from your bank or lender when applying for a mortgage. LTV stands for Loan to Value. A 90% LTV means a mortgage that is worth 90% of the value of the property which is what you would receive with a 10% deposit. The “value of the property” is not determined by the price you are going to pay for the property but by the bank/lender’s survey says the property is worth.
For example, when purchasing a £100,000 house with a 95% LTV mortgage you may think a £5,000 deposit seems correct. However, the bank/lenders surveyor may say that the property is only worth £97,000, not the £100,000 you have offered for the house. This means the LTV mortgage means the bank will only lend you 95% of the £97,000 which is around £92,000.
You could try to get the seller to decrease the price to what the surveyor valued the house at or you would have to pay a £8,000 deposit.
How much will the bank lend you?
In the past banks would look at your credit rating, your income, and your deposit to determine how much to lend you, but now they will often carry out extensive “affordability” calculations before they come to a decision.
The bank/lender will ask a lot about your expenses and will expect you to supply them with bank statements. The banks no longer just look into whether you can afford to repay the mortgage but they also research if you could still afford the repayments in a few years if interest rates increase.
A lot of lenders now have online calculators that you can use to give yourself a rough idea. Try Nationwide’s affordability calculator.
What if you have debts?
Banks and lenders will take debts into account when deciding the mortgage deal to offer you. This is because the repayments you must make for any other debts can affect how affordable your mortgage will be, also it shows the bank/lender that if you have previously had debt problems it may mean you can struggle with them in the future. Here are a few points to consider:
Check your credit score.
Before applying for a mortgage as a first time home buyer check your credit score and correct any errors where possible.
You will also need to provide details of any debts that do not appear on your credit record.
You will get a better and bigger choice of mortgage deals the better your credit rating is.
If you have recently had debt problems or have a very bad credit rating, you may not be eligible for a high street mortgage. There are specialist mortgages for people with bad credit record, however, these are often extremely expensive. It may be a good idea in this instance to wait a few years and clean up your credit rating and any debts before looking to get a mortgage.
What are the different types of mortgages?
This is a type of mortgage where you are only required to pay off the interest on the money that you borrowed. The monthly payments are cheaper than a repayment mortgage as only the interest is being paid off you are not actually paying off any of the debt. At the end of this mortgage, you will still owe the lender the amount you borrowed and will have to start to repay this.
With this type of mortgage, you pay both the interest and some of the actual loan. In the beginning, you are mainly paying off the interest however you are still gradually This means that this mortgage is usually paid off quicker than an interest-only mortgage.
Fixed rate mortgage:
A fix rate mortgage is where you pay the same amount each month, despite of any changes in inflation rates, for a certain number of years. Most are fixed for two or three years but can sometimes last as long as ten.
In 2016 over four out of five people applying for a mortgage chose a fixed rate mortgage. A fixed mortgage is a great deal especially when the interest rate is low or when they are predicted to increase over the next few years.
A longer term fixed rate mortgage may seem like a good idea however it will be set at a higher interest rate. Additionally, you will have to pay a fee if you chose to move during the time your mortgage is fixed.
At the end of the fixed term, your mortgage will continue for the remaining time specified with the lender at the banks/lender’s variable rate.
Variable rate mortgage:
When you chose a variable rate mortgage, the price you pay each month can vary. This depends on the economy. A “tracker” follows an independent rate which is most commonly the Bank of England Base Rate. Mortgage lenders will set their own SVR (Standard Variable Rate). This is also what you will normally have to pay once a fixed rate mortgage ends.
Ways to make affording a mortgage easier
Saving for deposit:
If you are saving as a first time buyer it may be a good idea to look into using a Help to Buy ISA to save, this way you can get extra cash for saving regularly. There is also the option of saving with the new Lifetime ISA to receive extra money. Which one will work best for you will depend on how long till you plan to buy and your age. Remember, you don’t have to get a mortgage with the same bank that you open a Help to Buy ISA with.
Help to Buy:
This is completely separate to Help to Buy ISA’s. This is a government scheme that gives you up to 20% of the price of a new home in an interest-free loan. If you save a 5% deposit and receive a help to buy loan for 20%, you would then only need to apply for a 75% mortgage. After five years the loan will no longer be interest-free so you will have to start paying this on the 20% the bank gave you in a loan. If you choose to sell you have to repay the 20% plus an additional 25% of any gain in the house price.
Right to buy:
In England, Northern Ireland and Wales, if you are a tenant of a council house, it may be possible for you to purchase your house at a discounted price. Under the Right to Acquire, if you are a tenant of the housing association you may also be to get a discount if you wish to purchase your home. For more details or to find if you are eligible contact your housing association or council.
This is a scheme that helps out if you are eager to buy a property but don’t yet earn enough to purchase an entire property. This scheme allows you to purchase between 25% and 75% of a house with the rest being owned by the government. You will have to pay rent on the percentage that you have not bought with a mortgage. In the future you may be can choose to buy a bigger share of the house. If you chose to sell your shared ownership property this can prove problematic. If property prices increase more than your income it will become harder to buy more of the property.
One of the easiest ways to reduce the monthly payments of a mortgage is to choose a longer mortgage. This is due to spreading the capital and paying it back over a longer period of time. In 2015 a quarter of first-time buyers opted for a 35-year mortgage when 25 years used to be the standard length of a mortgage. Keep in mind that the longer you extend your mortgage the more interest you will end up paying overall.
Applying for a mortgage with family or friends can be the solution if you will not be able to afford a mortgage on your own. Banks or lenders will usually only take into account two incomes so even if there are more people purchasing with you. The main issue that usually arises with a joint mortgage is when one person wants to move elsewhere either for work or to live with a partner.
We hope our Simply Move Home guide helps you as first time home buyer understand a little bit more about mortgages and the different options you have.