Mortgages for first-time buyers
7th March, 2015
First-time buyers have a large range of options available to them when it comes to mortgages.
First-time buyers may be shocked to discover the range of mortgage options open to them when they start looking for their new home.
One of the first things to consider is the size of the deposit that a buyer can afford. The very best mortgage deals are usually reserved for those with at least a 40% deposit, although there are now an increasing number of mortgage deals available for buyers with only a 5% deposit.
Buyers will also be eligible for the best mortgage deals only if they have a good credit rating, so you should ensure that your money is in order and you keep on top of any payments due, such as credit card bills.
Mortgage lenders now focus on affordability calculations rather than on a salary multiple lending criteria so mortgage applications will look at a buyer’s essential spending, alongside their income.
To calculate affordability, mortgage lenders will look at what a buyer is earning each month and what their spending encompasses, so buyers will be asked how much they spend on things such as food, loans, mobile phones and gym memberships. The difference between the income and outgoings is then used to calculate an affordable mortgage payment.
The next consideration is how the mortgage can be repaid. Mortgages can be interest only, so that monthly payments only cover the interest accruing on the loan and the loan amount remains outstanding at the end of the term, or capital repayment, so that payments cover both the interest and the capital and the loan is repaid at the end of the term.
Buyers can also choose different types of mortgage. With a fixed rate the interest rate and the monthly payments will be set for a period of time. This could be for 2, 3, 5 or even up to 10 years. With a variable rate the interest rate and monthly payments will be subject to change.
Tracker mortgages mirror the movements of the Bank of England base rate and payments will increase or fall in line with changes in the base rate. Standard variable rates are set by mortgage lenders. Each lender has its own rate which is usually influenced by the base rate. When a fixed rate on a mortgage comes to an end, a borrower would typically move on to the lender’s standard variable rate.
The Government’s Help to Buy scheme should also be considered. Help to Buy comes in two parts, the first being a loan of up to 20% of a property’s value for buyers purchasing a newly built home where the buyer puts down at least a 5% deposit.
The loan is interest free for the first five years and thereafter a low rate of interest starting at 1.75% is charged, rising annually by any increase in the Retail Price Index plus 1%. When the property is sold, the buyer repays the equivalent share of the property’s sale value as the initial loan, for example if the initial loan was for 20% of the purchase price then 20% of the sale price must be repaid.
The second part of Help to Buy offers banks and building societies a guarantee against losses on up to 20% of a property’s value where again the buyer puts down at least a 5% deposit. This helps lenders to offer more and better rates of interest on high loan to value mortgages (80-95%).
Please note that this briefing is designed to be informative, not advisory and represents our understanding of English law and practice as at the date indicated. We would always recommend that you should seek specific guidance on any particular legal issue.
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