First Time Buyers
Buying your first property and taking the first step to get on to the property ladder can be daunting. It is a significant investment with plenty of industry terminology to understand. We have put together a short guide to help you understand what you need to know to help you.
General Information on Mortgages
The first thing you need to know is about Loan to Value (LTV). This is the amount of outstanding mortgage you have in relation to the property value. For example, if you had a deposit of £20,000 and you purchased a house that costed £200,000, you would have a mortgage of £180,000 and an LTV of 90%.
Generally speaking, the higher the deposit the lower the interest rates, due to the reduced LTV percentage. This implies that a larger number of mortgage products will become available.
Most people need to take out a mortgage to buy a home as they do not have enough money in the bank to buy a property outright. A mortgage is a loan that is used to purchase either a property or piece of land.
A mortgage is secured against the value of your house. This means, if you default (fail to pay) on your mortgage, the lender can reclaim your house and sell it to get back the money they have loaned to you. For this reason, it is very important to make sure you can afford to pay a mortgage before you get one.
You can take out mortgage on repayment or interest-only basis. Most first time buyers will be looking at repayment mortgages, where you pay back the interest on the loan and the loan itself in monthly installments. This means at the end of the mortgage term, you will have paid off the original loan and nothing will be outstanding.
Interest-only mortgages are where you only pay the interest each month. Most lenders do not consider these types of mortgages for residential purposes, but if you do get one, you will need to have a separate plan in place to pay off the loan at the end of the mortgage term. This could be using savings or a pension for example.
The Different types of Mortgages
When you apply for a mortgage, you will be given a "term" for the mortgage. The term is how long the mortgage will last for and it typically lasts for about 25 years (although it may be higher or less depending on individual circumstances).
Whilst there are many products on the market, mortgages fall into two broad categories - Fixed and Variable products.
Essentially, mortgage products will give you an initial discount (typically for 2-5 years) followed by the mortgage product reverting to the lender's Standard Variable Rate (SVR). For example, if lender "ABC" has a mortgage product: 2 Year fixed at 1.35%. This implies that the mortgage's interest rate for the next 2 years will be fixed at 1.35%, followed immediately by the interest rate changing back to the lender's standard variable rate for the remainder of the term.
Below are the different types of mortgage products available to choose from.
Fixed Rate Mortgages - as mentioned in the example above, typically fixed for 2-5 years, although some lenders offer longer term fixes. This implies that the rate of interest will not change despite any fluctuations in the base rate (set by the Bank of England) - can be useful for borrowers who want to budget for their monthly payments. If you decide to end the mortgage during the fixed period (either by redeeming the mortgage or remortgaging to a different lender) you will normally be charged an early repayment charge (ERC) fees. It is important to bare this in mind, especially if you could imagine yourself moving to a new home during this time; the fee may become payable.
Variable Rate Mortgages - the interest rate can change at any point, and fluctuations in the base rate can have an effect. Typically variable rate mortgages do not charge a fee for ERC's.
There are three main types of variable rate mortgage:
Tracker Mortgages - track the base rate set by the Bank of England, implying your rate will change if the base rate does. The rate you pay will be a percentage + the base rate. For example, 2% plus the current base rate - if the base rate is 0.75%, the interest rate would be 2.75%.
Standard Variable Rates - typically what the interest rate reverts back to after an initial period on a mortgage product comes to an end. This rate can change and is at the lender’s discretion - usually it changes when there is a change in the base rate but it is not limited to this.
Discounted Rates - these products are linked to a lender’s SVR, implying they can change if the lender’s SVR rate changes. Discounted rates are offered for a fixed period of time, typically 2-5 years.
What cost should I take into account when applying for a Mortgage?
When you purchase your first home, it is important to understand the various charges and fees that you will need to pay. A common oversight is not taking into account the additional costs associated with buying a property, so please have a look at some of these charges that you need to be aware of.
Product Fee - can also be called arrangement/completion fee, this is a standard fee for a mortgage product. Although you are normally able to add this fee to your mortgage balance if you wish, you should consider the increase to your total mortgage balance and the interest associated.
Valuation Fee & Survey - the lender will want to value the property to satisfy their own criteria, which will be charged as a Valuation fee. Some lenders may waive the valuation fee as part of their mortgage deal. This valuation is just for the lender, so if you wish to survey the property for your own benefit, it is worth considering carrying out your own more thorough survey. This to identify any issues before you purchase the house.
Mortgage Account Fee - the costs associated with administration of your mortgage application. Again this depends on the mortgage product and varies from lender to lender.
Conveyancing and Legal Fees - you will need a conveyancer (solicitor) to manage the contracts/documents involved in purchasing a home. They will manage the various legal processes involved in purchasing a new home, they will charge you for the property searches and land registry fees as well as the costs for their services
Stamp Duty - this is the tax payable for purchasing property/land. It is payable on the purchase of any home that costs above £300,000 (fir First Time Buyers only). For properties above £300,000 the stamp duty rate rises as the value of the home increases. Please note that there are different rules that apply if the property is a second home/buy to let.
Insurance & Protection - buildings insurance is often mandatory when taking out a mortgage product from a lender, but you should also consider contents cover to protect you belongings. Furthermore, you may want to consider protecting your life in the event of death/critical illness.
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