First Time Buyer
Being a first time buyer is an exciting experience, but it can be difficult to know where to start. With so many lenders and mortgage types, it can be daunting for those that haven’t dealt with a mortgage before to know where to turn.
What Can I Borrow?
What you can borrow depends on a number of factors, including your income, credit rating and the number of applicants. By knowing what you can borrow, alongside your deposit, you get a good idea of what house price you can afford.
Typically, lenders let you borrow 4 to 5 times your income, but this is dependent on other factors. The best way to find out what you can borrow is to speak with a mortgage broker, who can give you the best idea based on your circumstances.
The deposit a first time buyer needs depends on the value of the property you want to buy. Typically, a deposit of at least 10% is required. 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 £200,000 and put down a £20,000 deposit, that’s a 10% deposit. Therefore, your LTV is the remaining 90%.
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.
Types of Mortgages
There are different types of mortgages, depending on what’s right for you.
Fixed Rate Mortgage
You make the same monthly payment over the term of the deal, regardless of how the interest rate changes. A fixed rate mortgage lasts for typically 2-6 years. When the deal term ends, you would switch to the lender’s Standard Variable Rate (SVR), unless you get a new mortgage products. The SVR is often a worse rate than a fixed rate mortgage, so it’s good to find a new deal.
Standard Variable Rate (SVR) Mortgage
The SVR mortgage is the lender’s standard mortgage. The SVR rate changes periodically, based on a number of factors, including the Bank of England base rate.
A tracker mortgage ‘tracks’ the Bank of England base rate. Assuming the base rate is at 0.75%, a lender may apply an interest rate of 1.5% on top of this. This means your interest rate is 2.25%. Assuming the base rate increases to 1%, your new interest rate would increase in line, to 2.5%.
How Do The Repayments Work?
There are many different mortgage types, however they’re often either known as capital repayment or interest only.
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.