First Time Buyer Mortgage Advice

Different Types of Mortgages

When shopping for a mortgage, there are three different types of mortgage products and two types of repayment rates that you will come across. We explain each below:

MORTGAGE PRODUCTS

Fixed rate Mortgages

Fixed rate mortgages mean the interest rate is fixed for a set period of time. These types of mortgage deals are:

• Most commonly 2 or 5 years but some mortgage lenders may offer slightly different lengths, after this the mortgage reverts to the lenders Standard Variable Rate (SVR) which is considerably higher
• Highly popular as they provide stability in monthly mortgage repayments which is a priority for a lot of people
• Typically come with ‘Early Repayment Charges’ for the period of time the fixed rate is given, these are usually a percentage of the mortgage balance at the time the mortgage is cleared
• Widely available with the majority of lenders offering fixed rates

Tracked Rate Mortgages

Tracked rate mortgages, also referred to as tracker mortgages, mean that the mortgage interest rate ‘tracks’ an interest rate, usually the Bank of England Base Rate. These types of mortgages are:

• Variable, and monthly payments/interest rates payable vary depending on market conditions.
• For example if the base rate is 5.25% and your tracker mortgage is 0.50% above base rate, your actual rate of interest payable is 5.75%.
• Sometimes these types of products may come with no ‘Early Repayment Charges’ so although they’re variable, they can be flexible for those who are looking to clear large lump sums / clear their mortgage balance early

Discount Variable Rate

Discount variable rate mortgages mean that the mortgage lender offers a discount from their standard variable rate of a set amount for a set period of time. Typically mortgage lenders Standard Variable Rates are high, which is why they issue a discount. These types of mortgages are:

• Variable rate mortgages, meaning your interest rate can change with the lenders Standard variable rate which the lender is in charge with. For example, if the lenders Standard Variable Rate (SVR) is 9.00% and they offer a discount of 3.50% for a period of two years, the rate of interest you actually pay is 5.50%.
• Sometimes these types of mortgage products also come with no ‘Early Repayment Charges’ so although they’re variable, they can be flexible for those who are looking to clear large lump sums or pay off their mortgage balance early
• Not widely available and only a minority of lenders offer this type of mortgage

MORTGAGE REPAYMENT TYPES

Capital and Interest (Repayment)

• Commonly seen on residential mortgages, capital and interest mortgage repayments essentially mean that part of the mortgage payment is interest and the other part is repaying your capital/balance
• These mortgages are ideal for those looking to clear their mortgage at some point
• All lenders will offer Capital and Repayment Mortgages
• After the mortgage term expires, there will be no balance remaining on mortgage and property is owned outright
• The longer the mortgage term, the cheaper the monthly payments are – however the amount of interest increases as you’re paying the mortgage back over a longer period of time

Interest Only Mortgage

In interest only mortgages, the monthly mortgage payment will consist of just interest, therefore the mortgage balance does not reduce throughout the term of the mortgage. These types of repayments are:

• Cheaper on a monthly basis as it’s only interest being paid
• Viewed as higher risk as if no overpayments are made, the full mortgage balance will be outstanding at the end of the term so it’s important to have a suitable repayment vehicle in place to ensure there are means of repaying the mortgage
• Not widely available in the residential mortgage market as lenders have additional criteria making them harder to get
• A repayment vehicle is required in order to clear the mortgage balance at the end of the mortgage term, commonly it will be selling the property
• Usually available at lower loan to values, such as 50%

Below are some of our useful tips to getting your first mortgage.

Research the area you wish to buy

Our recommended first step is to identify the area you wish to purchase, or shortlist a few. Property prices could vary massively depending on the area in which you wish to purchase, which will then determine how much deposit is going to be required and ultimately, how much your mortgage will be. Figuring out what type of property you wish to buy is also important, again this will determine how much is going to be required.

For instance, for some first time buyer mortgages, some areas will have cheaper flats than houses. In addition, some estate agents and house sellers might want you to have an AIP (Agreement in Principle) in place before you view a property to ensure that you will be able to potentially buy the property later on. Agreement In Principle’s are quotes from mortgage lenders that give you an idea of how much you are able to borrow before applying for your mortgage.

Having an idea on what you’re looking for, and the budget required, will help us give you accurate information, but also will give you a set goal to work towards.

Determine your deposit amount

Working out what deposit you have / are aiming to have is important when you’re taking your first step onto the property ladder. In some cases, this may be savings. Working out exactly what your goal is will help massively, we can help you with that. Ideally most lenders require at least a 5% deposit, however there are some products out there which may allow less than 5% or even £0 deposit (subject to eligibility).

In some cases you may be expecting a gift from a family member, this is perfectly acceptable subject to additional documentation required to evidence the gifted monies. Even with a gift, it’s important to work out what deposit you’re looking to contribute – as this will then determine the mortgage amount required.

Check your credit score

Checking your credit score is one of the first steps we’d recommend when thinking about applying for a mortgage for your first home. Credit scoring is an integral part of the application process and although every lender will carry out their own credit searches as part of the application process, it’s important to know upfront whether there could be any potential issues. It’s likely we’ll ask for a copy of your credit history so we can check this thoroughly. The main things we are looking out for are below:

Missed mortgage payments

If there are missed monthly mortgage payments on your credit report this could cause issues when the lender comes to credit score you. Depending on when the missed payment was, how many there are and the background behind it can all influence whether you’ll pass the lenders credit score or not.

Defaults OR CCJ’s

These are more serious than missed payments showing on your file. Defaults or CCJ’s are usually a result of consecutive missed payments resulting that particular account or commitment to going into default. This may result in a lender declining your application due to misconduct on your credit file.

High credit usage

In other words whether you have used the majority of your available balance on credit cards or not. If you have used a high percentage of your ‘available’ balance, this may cause your credit score to dip.

If any of the above is found on your credit file, it doesn’t necessarily mean you won’t get a mortgage. We will thoroughly review your credit profile and start our research accordingly, as some lenders are far more flexible with credit issues / blips than others.

Prepare your documents

Being prepared for your mortgage application is important, there are some documents that will be required to apply for a mortgage. The main ones being:

1. ID (scan of passport or driving license)
2. Proof of income (payslips / self employed documentation)
3. Proof of deposit (if gifted then will need a written letter confirming this is a gift and not a loan)
4. Your last three months bank statements

There may be other documents required throughout the application process, we will of course advise accordingly.

Understand Costs

There are typical costs included when attaining a mortgage. Costs to watch out for include:

Stamp Duty:

• A tax paid when purchasing a property, can be the largest cost involved in a purchase
• Not always applicable as First Time Buyers benefit from reduced or exemptions from stamp duty, this will be determined by the property purchase price.
• You pay stamp duty on completion to the solicitor

Lenders Arrangement Fees:

• Sometimes a fee the lender will apply to secure a better interest rate
• These can vary depending on lender / product being applied for
• Typically range between £999-£1999 for a residential mortgage
• Can be paid upfront or added to the loan (accepting interest is payable on the fee added)
• If paid upfront, lender will require this on file when application is submitted

Lenders Valuation Fees:

• Payable in some cases depending on lender / product being applied for
• Majority of high-street lenders don’t charge for valuations anymore
• If applicable, needs to be paid upfront at the time of applying for mortgage
• Price can vary depending on property purchase price
• Cannot be added to mortgage amount
• Valuation fees are to cover the cost for the lender to send a valuer to property to confirm it meets their criteria and the property is in a suitable state

Building / Structural Survey

• Not required by lender, but sometimes recommended for peace of mind
• Price can vary depending on purchase price and the firm carrying out the survey
• A detailed report that gives the buyer a detailed professional opinion on the property being purchased

Mortgage Broker Fees:

• Depending on broker, mortgage fees may be applicable
• We charge £495 at the time of application, fully refundable if we’re unsuccessful in getting a mortgage offer (with us anyway)
• Cannot be added to mortgage amount (with particular brokers)

Solicitor Fees:

• Will vary depending on solicitor
• Often vary depending on purchase price
• Normally payable on completion, however they may request some funds upfront to carry out searches on the new property

There may be other fees payable as part of the process, but we will always illustrate these prior to proceeding with mortgage application.

Insurances

When taking out a mortgage, there are additional insurances to consider in order to protect yourself, your mortgage, and your property. These usually take the form of:

Buildings Insurance:

Buildings insurance is an insurance that covers the property in event of fire, flooding, damage etc. The key things you should know about it include:

• Required by every lender and you are unable to purchase a property without it
• Price varies depending on property price, area, type of property etc
• Required to be in place by exchange of contracts
• Contents insurance is recommended, but not required. Usually this is coupled with the buildings insurance, contents just covers the items inside the home for loss or sometimes repair – for instance if the house was burgled and items stolen

Life Insurance:

One of the most commonly known types of insurances, it is an insurance that pays out in the event of death and is typically used to clear the mortgage balance, leaving with the surviving family with no mortgage debt. Other key facts to know about life insurance include:

• Not required by lender, but certainly recommended
• Price varies depending on person being insured, things such as age, health, smoker status and lifestyle can influence price
• Usually the cheapest insurance as chances of dying are slim compared to other insurances

Critical Illness Insurance:

Similar to life insurance but less well known, critical illness insurance is an insurance that pays out in the event of diagnosis of a specified critical or life-threatening condition. It is typically used to provide a lump sum of money and can be used to clear mortgage balance, but this is dependent on mitigating factors. Other notable points to note about critical illness insurance include:

• It is not required by lender, but is recommended.
• It’s typically a more expensive type of insurance as the chances of developing a critical illness are higher
• The price varies depending on person being insured and things such as age, health, smoker status and lifestyle can influence price
• It’s important to note that not all illnesses / conditions are covered and these will be specified by the provider as to what they cover at the time of application

Income Protection:

Income Protection insurance is an insurance that pays out in the event of being unable to work for a sustained period. Unlike other insurances it is paid monthly rather than lump sum and helps with monthly bills if out of work due to sickness or injury.

Income Protection insurance is not required by mortgage lenders, but is recommended depending on a personal circumstance, such as if a person works in a tumultuous industry.

Again, the price will vary depending on the person being insured and factors like age, health, smoker status and lifestyle will influence the monthly payment price.

Find out more about income protection insurance in our quick run-down guide.

FAQs

What is the best mortgage type for first-time buyers?

There is no definitive answer to this as everyone’s circumstances are different, which is why we are qualified to provide advice and make a recommendation as to what’s best suited to the clients needs.

Is it difficult for first-time buyers to get a mortgage?

Getting a mortgage as a first time buyer is no different to getting a mortgage as a next time buyer, but it may seem difficult and daunting for first-time buyers as there are so many lenders and different products available. We work closely with our clients and provide as much information, advice and re-assurance throughout the process as possible.

What if I have a poor credit score?

We recommend checking your credit score before enquiring about a mortgage as we can then provide as accurate advice as possible. It’s likely we’ll ask you for a credit report for us to assess this to ensure that if there are any issues/adverse credit we can deal with it accordingly. Just because you have a poor credit score, it doesn’t mean getting a mortgage is impossible. Every lender has different criteria and some are more lenient that others. If there are significant issues noted on the credit report, it may mean having to go down a more specialist route meaning the interest rates may be higher and deposit amount require may be more. It’s all based on how much of a risk the lender deems the applicant to be.

Speak to us

Speaking to a mortgage broker is vital when considering purchasing your first home. We are fully qualified to provide advice and guidance to getting a mortgage, which the majority of us are going to need to purchase a first home! We are here to take you from the very start, guiding you through the mortgage advice and application process. We will establish what mortgage amount you’d be eligible for as well as provide advice on what type of mortgage deal is best suited to your needs and circumstances.

If you are looking for further information on getting your first mortgage visit our first time buyer page or contact us to find out more.