Buying your first home is a real adventure – you can expect highs, lows, worries, excitement, but in the end holding those keys in your hand is a very special moment.
You’ll feel a bit like you’re back at school as well – there’s a lot to learn and think about, from understanding first time buyer mortgages to choosing a home, making an offer and working with solicitors to do all the paperwork.
comparethemarket.com is here to help you, though. This page explains all about mortgages, how they work, the different types and how to find one to suit you.
Let’s start with the basics about what a mortgage is and how they work.
A mortgage is a special kind of loan taken out to buy property or land. They often run for 25 years, with you making monthly payments, but the term can be shorter or longer. The bank or building society you’re borrowing from (your lender) will ‘secure’ the mortgage against the value of your home until you’ve paid it off. It means they can repossess your home if you can’t keep up with your payments; they sell the house to get their money back.
As with any loan, you have to pay it back with interest on top. The rates of interest can vary a lot, which is why it’s so important to compare mortgage rates.
The first step when you’re thinking about moving home is to ask yourself a question about the mortgage: “how much can I borrow?” You’ll also need to pay a deposit - a chunk of money that goes towards the cost of the property you’re buying. The more deposit you have, the better, because you’ll have less to borrow and so should lower the monthly payments.
Loan to value ratio
When looking at mortgages, you might hear the term “Loan to Value” (LTV). It’s the amount of your money you’re borrowing compared to the overall value of the house. So, if you have a £20,000 deposit towards a £200,000 property, your deposit is worth 10% of the price of the property: the LTV is the remaining 90%. As a general rule, the lower your LTV, the better mortgage deals you’ll find. The cheapest rates are often available for people with a 60% LTV.
To get a better idea of what your new home might cost, look online for a mortgage calculator. There are two kinds. With the first, you put in your salary, deposit and monthly outgoings to get an idea of the total loan you might get. Or, with the other kind, you enter the value of the home you’re interested in, your deposit and how long the mortgage would run, and it will show you roughly how much the monthly repayments could be.
Those repayments are important. Remember you need to be able to afford them comfortably every month, along with all the running costs of owning a home like repairs, household bills, council tax and insurance.
Repayment and interest-only mortgages
Once you have found a house that you’re interested in, it’s time to do a mortgage comparison. Butfirst you need to decide if you want a repayment mortgage or an interest only mortgage. With repayment mortgages you pay off the interest and some of the overall cost of the house every month. At the end, typically after 25 years, you should have managed to pay for the whole house and the interest - you will own your home outright.
With interest-only mortgages, you pay only the interest on the loan and nothing off the capital (the amount you borrowed). So after 25 years the mortgage will be outstanding.
Interest-only mortgages offer lower monthly payments, but you will need to show from the start that you have plans for how you will pay off the loan at the end of the term.
Fixed and variable mortgages
So those are two categories of mortgage. You can then think about whether you need a a fixed rate mortgage or one with a variable rate.
Variable rate mortgages could either be ‘trackers’ where the interest rate is above, below or the same rate as the Bank of England base rate, or fully variable, where your lender decides on a rate and can change this at any time (within the conditions of the product). Other kinds of variable are available too, like capped or collared mortgages where there might be upper and lower interest rate limits.
With any of these your mortgage payments could go up or down as interest rates change. If you choose a fixed rate, your interest rate and your monthly payments are set at a certain level for an agreed length of time. These are often 2 or 3 year deals, but you can also get a 5 or 10 year fixed rate mortgage. At the end of the deal you are automatically switched to another rate, usually a variable one.
Whether you have a fixed or variable mortgage, it can be a good ideato shop around a little before your mortgage deal ends, and move to another one if it will save you money.
Time to compare
So that’s a summary of how mortgages work. Now it’s time to use our mortgage finder. Just enter the details of the house, your deposit and length of loan and we will give you a list of first time buyer mortgages from a wide range of providers. They will be in price order, based on monthly repayments. It’s easy to look at the different details of each offer to narrow down your options. But always read every detail before signing up – this is one of the most important financial decisions you’re ever going to make. No pressure, then…