First-time buyer mortgages
Getting a mortgage can be daunting, especially if it’s your first one. But there’s no need to be anxious - we’ve put together information on what to consider and how to find the best one for you.
What is a mortgage?
A mortgage is a loan taken out to buy land or property. The amount you borrow, plus interest, is secured against the value of your property and is typically paid pack over 25 years (the term of the mortgage). As with any other type of loan, you pay it back every month with interest until the amount has been paid back in full.
What is loan to value ratio (LTV)?
When you search for mortgages, loan to value ratio (LTV) is the amount you’re borrowing compared to the overall cost of the property. So, for example, if you have a £20,000 deposit for a £200,000 home, then your LTV is 90%. As a general rule, the lower the LTV, the lower the level of interest you might be offered.
What is a first-time buyer mortgage?
A first-time buyer mortgage is aimed specifically at first-time buyers. This type of mortgage often include deals and incentives, such as cashback or a higher LTV (which means your deposit will be lower), with the aim of helping you get your first home).
First-time buyer mortgages tend to share all the other features of a typical mortgage, so you’ll have a loan to value ratio, a mortgage term (the length of the mortgage), and you’ll need to pay back your mortgage every month.
What’s the difference between repayment and interest-only mortgages?
A repayment mortgage is where you pay back both the capital (the amount you initially borrowed) and the interest. It means that by the time your mortgage ends, you should have paid off the total loan. An interest-only mortgage is where you only pay off the interest each month and the capital sum remains untouched.
So, at the end of your mortgage term, you still owe the provider the original cost of the property and you’ll need to show how you intend to pay that back. Since the financial crash of 2008, interest-only mortgages are rarely offered.
What’s the difference between a fixed and variable rate mortgage?
A fixed-rate mortgage is when the interest rate payable on your mortgage will be fixed for an agreed length of time. This is typically for two or three years, but you can find fixed rate mortgages for five or ten years. Variable rate mortgages have interest rates that can fluctuate.
When a fixed-rate term comes to an end, you’ll normally move to the bank’s standard variable rate (see below). These tend to be higher interest rates than those available on other products so it’s better to comparethemarket and search for a re-mortgage deal.
Variable rate mortgages include:
1. Standard variable rate mortgage (SVR) this is a provider’s basic rate of interest. SVRs don’t come with discounts or reduced interest rates, and the provider can change this interest rate. This tends to be the rate you roll onto once a fixed deal is over.
2. Tracker mortgages have variable interest rates but they track an external rate, normally Bank of England base rate, at a certain percentage above or below this rate. Tracker rate can track this external rate for a fixed term or can track for the entire mortgage term.
3. A discount rate mortgage track (at a lower level) a lender’s SVR by a set amount. For example, if the SVR is 4% and the discount is 1%, you’ll be charged an interest rate of 3%. Discount rate mortgages are still subject to change though as the SVR can move – it’s just the discount amount that is fixed – so if the SVR increases to 5%, you’ll pay 4%.
4. A capped mortgage is also linked to the lender’s SVR but it won’t go above a set level, while a collared mortgage is where interest rate won’t fall below a set limit. These are much less common but do exist.
Should I consider a longer-term mortgage?
Many first-time buyers are opting for a longer-term mortgage because it lowers the amount you need to pay each month, spreading the cost over a longer period of time.
While the standard length (or term) of a mortgage is 25 years, an increasing number of mortgage providers are offering longer-term mortgage – some up to 35 years in length.
If you’re considering taking out a longer-term mortgage, be aware that while your monthly repayments will be lower, you’ll be paying back a lot more in interest. And think about how old you’ll be when your mortgage term comes to an end. Will you be happy paying off a mortgage at that age? And are you likely to still be working and have enough income to afford the monthly payment?
It’s worth checking whether a mortgage deal allows you to overpay without incurring penalties. This will give you the flexibility to pay extra each month should you have a pay rise, or even pay off a lump sum if you come into some money. This could help you to shorten the length of the mortgage and save on interest.
How much can I borrow as a first-time buyer?
As with any other form of borrowing, that amount that a first-time buyer can borrow depends on a number of factors.
Lenders will take into account your credit rating and history, your income and outgoings, how much you have as a deposit, as well as how much you can afford to pay back each month.
They’ll also need to factor in other influences, such as how an increase in interest rates might affect your ability to pay back your mortgage. A mortgage provider will consider all these factors when deciding whether they want to offer you a mortgage and, if so, how much you can borrow.
What mortgage is right for me as a first-time buyer?
The right mortgage for a first-time buyer will depend on your individual circumstances. A fixed rate mortgage can offer stability because the interest rate remains static.
Tracker mortgages, for example, typically have the lowest interest rates available, but the rates can fluctuate and increase, impacting your monthly payments, which may not be the right option for you if you’re working to a set budget each month.
Choosing a first-time buyer mortgage
We’ve tried to make searching for a mortgage as easy as possible. Compare mortgages with us and we’ll ask whether you want a repayment or interest-only mortgage, how much the property costs and how much deposit you have. We’ll do all the searching for you and give you a list of results in ascending order of interest rate.
If you prefer to talk about your options, then call the experts at **moneyQuest Mortgage Brokers on 0141 243 5633 – they’ll be more than happy to help.
**About our broker partner service
Advice is provided by moneyQuest Mortgage Brokers Ltd (moneyQuest) who are an appointed representative of Stonebridge Mortgage Solutions Ltd. moneyQuest are not part of the BGL Group Limited of which Compare The Market Limited forms part.
comparethemarket.com may receive an introducer’s fee from moneyQuest for customers who use this service. All applications are subject to lending and eligibility criteria. moneyQuest may charge you a £395 broker fee should you decide to proceed with a mortgage.