Buying Your First Home: Mortgages & Help to Buy Schemes
When it comes to buying your first home, we believe that knowledge is power. Equipped with applicable information, we believe that your buying experience will be smooth and manageable. This week in our ‘Buying Your First Home’ series, we delve into mortgages and briefly touch on help to buy schemes for first time buyers (we'll come back to government schemes in more detail in later posts). A mortgage is defined as ‘a legal agreement by which a bank, building society, etc. lends money at interest in exchange for taking title of the debtor's property, with the condition that the conveyance of title becomes void upon the payment of the debt’. In layman’s terms, a mortgage is a loan used to buy a property. Subsequent to paying a deposit for a property, a mortgage, plus interest, is paid back to the bank or building society in monthly instalments across a set number of years.
As previously mentioned in our Saving for a Deposit blog, a deposit ranges from 5% to 20% of the full price of the property. This is dependent on the property’s location and the most current lending rates. To have a greater chance of receiving a better mortgage, a 10%-20% deposit would be preferable. This means that the long-term amount you pay back decreases and it also provides a wider range of cheaper mortgages in the short-term.
How much you can borrow will be determined by three key details: your salary, your expenditure and your credit history. Your expenditure includes the amount of dependents (e.g. children) you have as well as (but not limited to) bills, outstanding loans and insurance. These outgoings are evaluated alongside your salary to calculate the amount you are capable of repaying monthly. Lenders will also take alternative incomes, such as investments and earnings that are not within your primary salary, into account.
Credit checks will be completed to assess your credit history. Lenders particularly look out for debts, payment arrears and bankruptcy to determine your repayment ability. These factors, if found, will reduce the likelihood of receiving a loan.
Mortgage lenders will also carry out a stress test on your finances to determine whether or not you’d be able to keep up with repayments in the event of changes such as increased interest rates or altered personal situations.
All of these factors when combined will determine how much lenders will be willing to let you borrow.
Choosing either a fixed or a variable rate of interest will determine the way in which your mortgage rates are calculated. Typically, first time buyers opt for fixed rate mortgages due to increased security, as they are not sensitive to the volatility of interest rates. However, the rate of interest is generally less competitive than the variable rate of interest. The majority of lenders will provide fixed rate mortgages for a term of 2 to 5 years, with some lenders offering terms of 10+ years. The pitfall of a fixed rate mortgage is that they often carry an Early Repayment Charge in the event of leaving your mortgage prior to the end of your term.
Alternatively, two main types of variable rate mortgages are available. The first is directly connected to the Bank of England base rate and moves according to the movement of that rate. Due to the current base rate being particularly low, this mortgage can be incredibly attractive to first time buyers, however, abrupt fluctuations in rates could have detrimental implications on repayments in future. Hence, this type of variable rate mortgage should be considered with caution. The second type of variable rate mortgage is a Discount mortgage, where the rate is set by the lender. This rate is termed the Standard Variable Rate or the SVR. A Discount mortgage tends to be less favoured by first time buyers due to their tendency to change at any point, regardless of changes made by the Bank of England.
Mortgage fees - Some mortgages are subject to a product or arrangement fee, which can range from a few hundred pounds to 1% of the mortgage which is a significant amount of money. Some lenders require the payment upfront, whereas others add the fee to the mortgage.
Help to Buy Mortgages and Schemes
Many lenders provide mortgages intended to aid first time buyers. Some of these mortgages involve getting help from a family member to act as a guarantor for loan repayments if you are unable to make the payments yourself. This will increase the likelihood of a lender accepting your application. These types of mortgages may come with conditions, for example, the Barclays Springboard mortgage requires the guarantor to open a savings account and keep a determined amount of money in the account for a certain period of time.
The government provides various schemes to help first time buyers get onto the property ladder, these include Help to Buy schemes and Shared Ownership schemes. Both types of schemes have advantages and disadvantages.
The government will lend up to 20% of the value of a property in an equity loan for Help to Buy schemes. A Help to Buy scheme requires you to make up a 5% deposit and secure a mortgage to cover the remaining 75% of the cost of the property.
Shared Ownership consists of buying part of the house and renting the other part. as time progresses, you will be able to buy more of the property until you have full ownership.
In addition, the government offers a Lifetime ISA which is a savings account specifically created to support first time buyers in saving for a deposit or to put towards a pension. A Lifetime ISA allows you to earn a 25% bonus on your savings.
To summarise, mortgages can often seem like an alien concept, something we are expected to know about with little to no explanation. However, many mortgage options are available to first time buyers. There are also various schemes available to first time buyers to make securing a mortgage completely attainable.
Our next blog post will cover Help to Buy schemes in much more depth, explaining the ins and outs of the schemes the government has to offer to help you find the one for you.