First-time buyer mortgages
Choosing a mortgage is daunting, especially if it’s your first one. But there’s no need to be anxious - we’ve put together advice on what to consider and how to find the best one for you.
A mortgage is a loan taken out to buy land or property, and the amount you borrow, plus interest, is typically paid pack over 25 years (this is the term of the mortgage) – although it can be shorter or longer. As with any other type of loan, you pay it back every month with interest until the amount has been paid back in full.
When you search for mortgages, a phrase that will crop up is ‘loan to value ratio’ (LTV) – this 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 better the mortgage deal you might be offered.
What is a first-time buyer mortgage?
Many lenders have mortgages aimed specifically at first-time buyers. They 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 to get on the housing ladder (and to tempt you to do it with them).
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 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, this type of mortgage is rarely offered.
What’s the difference between a fixed and variable rate mortgage?
You’ll also need to decide whether or not you want a fixed or variable rate mortgage.
- A fixed-rate mortgage is as it sounds: 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. When your fixed rate term comes to an end, you will normally move to the bank’s standard variable rate (SVR) but, often, the better option is to search for another mortgage deal.
- Variable rate mortgages, on the other hand, have interest rates that fluctuate.
- Standard variable rate mortgages (often shortened to SVR) is a provider’s basic rate of interest – they don’t come with discounts or reduced interest rates, and the provider can change the interest rate. As mentioned previously, this tends to be the rate you roll onto once a fixed deal is over.
- Tracker mortgages offer variable interest rates using the Bank of England base rate and ‘track’ a certain percentage above or below the base rate Tracker rates can be for a fixed term or you can have a lifetime tracker, where the rate will be tracked for the entire mortgage term.
- A discount rate mortgage (another type of variable mortgage) reduces 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 – it’s just the discount amount that is fixed – so if the SVR increases to 5%, you’ll pay 4%.
- With a capped mortgage, the interest rate is 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?
While the standard length (or term) of a mortgage is 25 years, it can be longer or shorter. Because of the rise in house prices, an increasing number of mortgage providers are offering longer-term mortgages, some up to 35 years in length. And many first-time buyers are opting for these because it lowers the amount you need to pay each month, spreading the cost over a longer period of time
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, it depends on a number of factors. Lenders will take into account your credit rating and history, your income and outgoings, and how much you have as a deposit.
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?
There are pros and cons for all types of mortgages; the right one for you depends on your circumstances.
Tracker mortgages, for example, typically have the lowest interest rates available, but the rates can fluctuate and increase, impacting your monthly payments, which probably isn’t the right option for you if you’re working to a set budget each month.
On the other hand, a fixed rate mortgage will give you stability because the interest rate remains static. However, if the base rate does go down (meaning monthly mortgage payments could come down if you’re on a tracker), you won’t benefit from any reductions as you might with a variable mortgage.
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.