Mortgage advice for first time buyers. We all reach a stage in our lives where we outgrow leasing and renting. A stage where settling down and getting your own property seems like a sensible step to take.
But, this often comes with technicalities that none of us are prepared for, such as mortgage contracts and payments and getting mortgage advice for a first time buyer is often confusing.
If you’re looking for reliable advice on mortgages, you’ve come to the right place.
Below we’re going to share with you some valuable information on the different aspects of a mortgage.
What Is a Mortgage?
A mortgage is a loan that you get from a lender (usually a bank) to pay for your house. It starts with a legal agreement with repayment terms that specify how much you’ll have to pay per month over a particular time period.
You get charged that amount by the mortgage provider every month, plus interest. As such, this agreement is a declaration that the lender owns the house until you’ve paid off the amount that you owe.
Interestingly, the word mortgage actually means “Death Pledge.” But, before you freak out, the word ‘death’ in this instance means that you’ve come to the end of your pledge to repay your mortgage.
Your agreement should also feature the terms and conditions with regard to the sale. For instance, there might be a clause that deals with what’s going to happen if you decide to sell the property while you still owe a mortgage.
What Is a First-Time Buyer?
This word seems self-explanatory, we know, but that’s not necessarily the case. It’s essential to find out whether you’re a first-time buyer because this could come with a few perks, such as stamp duty reductions.
For example, if you’re buying a house worth £500,000, you won’t have to pay any stamp duty until you’ve paid off at least £300,000. Then, you’re only required to pay a stamp duty of only 5%.
If the house you’re buying is worth more than £500,000, then you won’t qualify for this stamp duty exemption, even as a first-time buyer.
Who Qualifies as a First-Time Buyer for Stamp Duty?
According to the UK government, a first-time buyer who qualifies for stamp duty is anyone that hasn’t yet owed an interest while purchasing residential property either in the UK or in any other country in the world.
The individual must purchase the property with the intention to reside in it as their main residence.
While this definition of “first-time buyer” is all about ownership and purchasing, you can own a property without buying it and that’s where the loophole comes in.
Some of this loophole is accounted for because inherited property is included, which means getting that summer cottage from your great-aunt precludes you as a first-time buyer. Even if you sell the property or decide to rent it out, you still won’t qualify as a first-time buyer.
Keep in mind that these conditions only apply to “residential” property owners, which means you can still qualify as a first-time buyer if you only own commercial property.
Also, anyone that wants to purchase property for the purpose of leasing it won’t qualify as a first-time buyer.
How Do Lenders Check If You’re Really a First-Time Buyer?
If you visit online property forums, you’ll find plenty of people wanting to find out if it’s possible to “claim” that you’re a first-time buyer and get away with it, as if that’s something to aspire to.
However, it’s important to be aware that the HMRC actually considers it a crime for anyone to claim that they’re a first-time buyer when they aren’t.
At this point, the organisation knows which signs to look out for, including fraudulent first-buyers relief claims. These offences are usually punished with serious penalties.
For the best results, stick to the legal stuff and don’t try to cut corners. If you don’t qualify as a first-time buyer, then don’t write that you are. If you’re unsure, then ask the relevant people for advice in order to get a definitive answer.
Also, you can’t be a first-time buyer after you’ve crossed the threshold of owing interest on a property.
Should You Get a Mortgage?
A lot goes into figuring out if a mortgage is the right option for you.
Here are some of the most common contributing factors:
- You’re about to move house
- The repayments are well within your means
- Your finances will change soon
- You can afford the deposit
- You can afford the maintenance of the property you want to buy
While you might feel pressured to purchase a property once you reach a certain stage in your life, it’s not a necessity and it doesn’t define your success. You never know; maybe you’re better off renting due to your unique situation.
Remember that there are other costs to consider. You have to pay solicitors, estate agents and mortgage brokers, not to mention all the time spent trying to sell the house if you ever decide to do so.
Then there’s the upkeep. Data shows that the average homeowner in the UK spends about £55.41 per month just to maintain their house. This translated to £664.92 per year. Even something as seemingly trivial as getting a mid-range combi boiler could set you back a cool £2,000 with installation.
Then you have to think about garden maintenance, painting, general repairs etc. and you’ll be spending a pretty penny.
But, being a homeowner isn’t all gloom and doom. There are certain perks to be had, such as tenure security which means you get to own and keep the property as long as you want.
Plus, the more you pay your monthly mortgage the more of your home you get to own and the goal is to own it completely eventually.
The best part about owning your own house is that you can do whatever you like. Of course, you must consider your neighbours’ needs and be reasonable. But for the most part, you can change the décor as you like and really customise it to your liking.
So long as you don’t mess with the foundational structure you should be fine.
What You Should Do Before Applying for a Mortgage
The first thing you need to do before you even apply for a mortgage is to make sure you can afford it. Start by checking your credit score through a reliable credit agency such as Equifax, Callcredit and Experian.
It only costs a couple of pounds per file. Also, put off any monthly services offered by these agencies because they’re usually not worth it.
One of the most important things to check on your credit files is the accuracy of the data included. Look out for electoral roll, lenders and date details.
You don’t want any outstanding debts or expenses and you shouldn’t be linked to anyone else as that can affect your credit rating down the line. This goes for your family members or close friends.
Also, try to clear as much of your debts as possible prior to starting your application. On the other hand, you should have a little bit of “healthy” debt to boost your credit rating.
Generally, credit cards are a great way to boost your credit score because they carry a high-interest rate. But make sure you can afford the repayments before you take out a credit card and use it responsibly. A good credit score might help you score a lower interest rate when you do eventually apply for a mortgage.
It’s also important to pay your bills in a timely manner in order to avoid getting a bad credit rating. Direct debits are the easiest way to achieve this, and don’t forget to register at your local electoral roll for a smoother credit application.
Keep in mind that every credit reference agency practices a unique scoring system so it’s important to check your score with at least two or three and see what lending institutions will see when they check your score.
Sort Your Deposit
The deposit is an integral part of the mortgage process. Most mortgage providers require a deposit in case of a default. It’ll also come in handy if the property ever goes into negative equity. This usually happens when you end up owing more than the value of the property.
The deposit you get charged can be anything from 5% to 40% of the property value and it’s commonly referred to as a “loan to value” which is reflected as a percentage.
For example, you might see something that says “60% max LTV which means your deposit can’t be less than 40%. That’s how much you need to get your foot in the door with the mortgage lender.
It’s also worth noting that a higher deposit typically yields a better rate. A minimum 40% deposit will get you a really good rate and usually without even shopping around. Of course, there’s no substitute for good credit.
In order to save for a deposit, you should try to save as much as you can over a long period of time. At first, it might seem like a great ordeal, but it’s well worth it.
If you’re already a homeowner then you’re probably paying it off which means your deposit is already locked in. You can also ask your parents for help. They might have enough to help you put down a sizeable deposit.
5 Main Types of Mortgage
There are different types of mortgages to choose from and the one you end up with will depend on what you consider to be a good deal. For the most part, they end up being the same amount in the end, or very close.
However, paying a higher deposit can reduce the monthly repayments you’ll have to make. If you’re really lucky, then you’ll be able to get a reasonable down payment and affordable monthly payment.
Usually, the only thing that’ll get you a low price is a big deposit of say, 40%. Banks consider you less of a risk if you’ve a higher deposit because it means they’ll be able to recover most of the funds in case you don’t pay.
A fixed rate is the typical starting point for most people because it’s the most reasonable. But, it comes with conditions such as a high-interest rate, and a fixed mortgage that’ll last for two, five or even ten years.
Ten-year deals are the least popular because they usually come with high-interest rates and they’re difficult to change once interest goes down. For example, homeowners who took high-interest rate deals in 2007 took a good seven to eight years to benefit from the reduced interest rates.
Standard Variable Rate
Your lender essentially determines your standard variable rate and it doesn’t necessarily follow the base rate set by the Bank of England.
But, if the Bank of England base rate increases, then the ender might either:
- Lower the rate
- Keep it as is
- Increase the rate
As such, a standard variable rate usually comes with a beneficial long-term deal with a low risk. The lender is free to design and offer a fair and attractive long-term deal which suits the needs of each and every customer.
But, if the Bank of England rate is low at the time then it might be a good idea to opt for a tracker or fixed rate deal instead.
The Bank of England sets the tone for tracker mortgages but they also come with a higher margin. For instance, if a bank offers a tracker rate, it’ll come with an additional 1.5% which increases your rate considerably.
The good news is a decrease in the interest rate will immediately benefit you and you won’t have to wait for years after it has come into effect as with a fixed rate. However, this also means that interest rate increases will be reflected in your account immediately.
If your introductory tracker is low this means it’ll have a higher “above base” margin. However, it’ll still be lower than most other options.
Interest-only mortgages come with incredibly strict regulations and it’s difficult to qualify for them.
That’s because there’s a lot of risks involved so it’s important for the lender to make sure that the person borrowing the money has the ability to pay it back.
The lender needs to look at the different ways through which the borrower can pay back the capital amount, whether it’s through investments, shares, endowment policies or stocks.
You probably won’t get an interest-only mortgage because that’s rare.
But, if you do then expect to get asked a lot of questions about your cash flow. The lender will expect a large cash flow on your end. They’ll also expect a large deposit and a minimum annual income of £75,000 and above.
As the name implies, offset mortgages offset the amount you owe using your savings.
Offset mortgages might be a good idea if they offer a similar or the same rate as a fixed, SVR and standard tracker rate at the time of your application. It’ll also work well for anyone with large savings in the bank account.
But, offset mortgages can be a tad expensive if you don’t have a lot of cash flow. Your savings should account for at least 10% of the mortgage amount and your lender will do the rest of the calculations.
Let’s assume you have a mortgage of £100,000, then your standard variable rate mortgage should be about 3%. Now, if you’re getting a 4% offset mortgage then you’ll need to put down at least 10% of the capital amount to save in terms of the monthly repayments.
However, if you get an offset mortgage of 5% then you’ll need to put down 20% of the capital amount in savings plus extra setup costs.
How to Compare Mortgages?
Comparing mortgages can be quite complex because of the various terms, rates, and fees you have to consider.
Usually, lower rates come with higher fees, which means you’ll pay higher upfront costs.
But, you might get higher tracker or standard variable rates with higher exit fees as well.
Every mortgage lender is required to provide an APRC also known as an annual percentage rate of charge. It includes rate changes and fees. It usually works in the following way:
Loan Case 1
For example, if you choose a 0.99% fixed tracker over a period of two years it’ll probably cascade into a 4.99% standard variable rate later.
You’ll end up paying fees of up to £1,730. This translated to an APRC of 4.5%, including any and all extra costs.
Loan Case 2
But then let’s say you see another loan with an APRC of 3.8%. That’s because the tracker is fixed for two years with fees of up to £999, while the SVR is only 4.49%.
A lower SVR can and will affect the APRC even with a higher initial fixed rate. This doesn’t necessarily translate into a better overall deal because you’ll likely receive a bigger 25-year rate that’ll significantly affect the overall calculation.
APRC probably won’t consider how much you have because this is all completed based on a theoretical loan amount. The larger your mortgage amount is the less you need to worry about the fees, while a smaller mortgage usually comes with higher fees.
The APRC doesn’t really matter that much in the larger scheme of things because like most people, you’ll probably end up re-mortgaging once your fixed rate is done.
Other Ways to Compare Mortgages
Start by checking out your initial rate, add the required fees such as brokerage, valuation and arrangement, and then look at the exit fee as well.
This’ll give you a good indication of what to expect in terms of the total mortgage amount. It’ll also help you figure out if you should transfer it to a lower fixed rate or carry on with it as is.
It might be worth it to consult with an independent financial adviser. They’re usually easy to find through the FCA register. You can always ask family or friends for referrals as well, or look at online reviews and recommendations.
A financial advisor is important because they’ll provide you with different options to choose from and educate you about each one.
The bank or lender is obliged by law to take you through the available options and make suggestions based on the best products for you. This’ll give you the right to claim should you end up with a product that doesn’t work for you.
Most people in the UK are on fixed rates. For best results, it’s recommended that you pay a large upfront deposit in order to get a better deal in the long run instead of trying to save money upfront only to pay a hefty long-term rate.
It might be a good idea to crunch some numbers at this point to see how much you’ll end up paying in fees.
Should You Get a Mortgage Broker?
A mortgage broker’s job is to do all they can to provide you with the best deal possible.
They might save you a lot of money because they have access to various mortgage options available on the market. That, paired with their unique knowledge of your individual situation could save you a pretty penny in the long run.
A mortgage broker will take into account variables such as rates and fees in order to offer helpful recommendations on the steps you should take next.
Mortgage brokers offer a type of financial advice in a sense which is why they’re regulated by the Financial Conduct Authority.
This means any mortgage broker you work with should let you know what their charges are in writing and from your first meeting with them. They should also inform you of any limits they might have.
Keep in mind that some mortgage brokers make extra cash by collecting commissions from some of their products. Others charge an hourly rate or flat fee, while some are even willing to take a % of the mortgage amount offer you get.
However, this requires that the mortgage broker adds their own charges to the total mortgage amount. All of this can’t happen without your express knowledge and consent and you should be aware of the fact that you’ll be expected to pay interest until you’ve completely paid off the mortgage amount.
What If You Don’t Pay Your Mortgage?
Most banks have a similar written policy that sets out terms and conditions around repayments.
The first thing they need to do is get in touch with you so you can agree on your mortgage terms.
It’s important that you’re able to repay the shortfall over a certain period of time, which is better than going straight in with repossession. It’s better to be honest with your mortgage right from the start so you can reach an amicable solution and agreement.
Your lender might provide you with a long-term repayment or even a whole new mortgage with short-term deferment of interest. Or, they might just offer you a deal where the shortfall is seen as an extension of the overall mortgage.
This means they’ll add your shortfall to the total amount. So, you have options in case you ever find yourself in this situation.
Repossession can be on the cards if you fail to reach a mutually beneficial agreement with your lender. The lender will try and take measures to try and get you to pay if your mortgage falls into arrears twice in the span of 12 months.
If the worst happens and the bank actually repossesses your house, then you still have options. You can opt to take the matter to court or surrender it peacefully. If you take things to court, then you’ll end up paying more because of the legal fees involved.
In the end, the bank will be forced to sell the house, usually through an auction. This is to ensure that they recover the outstanding amount and you’ll get the excess if there’s any.
Mortgages can be complicated if you’re not familiar with the language that’s used in the process. But, as soon as you educate yourself things will fall into place.
Pretty much anyone can purchase a new home. All it takes is some hard work and focus. If you save up enough for a hefty deposit then you can look forward to really reasonable repayment rates and terms.
You should also be careful about the homes you look at and check out properties that meet your needs, financial and otherwise.
There are benefits to buying new developments just as old homes come with their own advantages. It all depends on the mortgage offered with each option.
So, make sure you do your research on the local real estate market carefully before deciding to go through with a mortgage. This is especially important if you’re a first-time buyer.