A guide to mortgages for first time buyers
Mortgages, deposits, interest rates – if you’re buying a home as a first time buyer, it can be hard to know where to start. Read on for an explanation in simple terms, from a new build mortgage expert.
Matt Halder, of new build mortgage specialists Threshold Mortgages, gave us the lowdown on securing a mortgage as a first time buyer, and what you’ll need to know about interest rates.
Firstly, what is a mortgage?
A mortgage is a type of loan used to buy or refinance a property, normally available from banks, building societies, and other financial institutions.
This type of loan is generally repaid over a longer term, typically 25 – 40 years, which spreads out the cost.
The mortgage lender will secure or guarantee the repayment, interest, and fees by placing a “charge” on the title to the home. This would allow them to sell the home if you were not able to pay your monthly payments.
Applying for your first mortgage
So you're thinking about buying your first home. Before you put an offer in (or reserve, if you’re buying a new build), you’ll need an Agreement in Principle, and then to contact your broker or lender about applying for a mortgage.
To find out how to do this and what you’ll need, take a look at our tips for applying for a mortgage.
What are interest rates?
An Interest Rate is charged by the lender on the amount of money you have borrowed (or have outstanding if you are refinancing).
You can choose an interest rate that is fixed or variable. A fixed rate will typically fix your rate, and therefore your monthly payment for 2, 3 or 5 years, with some lenders offering longer terms.
A variable rate, as the name suggests, will move up and down. A good example of this is a tracker rate that is often set at a percentage above or below the Bank of England Base Rate. As the base rate changes, so does your monthly payment.
Lenders also have a Standard Variable Rate. Often this is a higher rate than the rate you are on, and you’ll default to this at the end of your agreed rate term, if you don’t opt for a new 2, 3 or 5-year rate.
Most mortgages are arranged on a Capital and Interest basis (a repayment mortgage). With this, you’ll be paying interest on the loan outstanding, and repaying capital as part of your monthly payment.
In the early years of your mortgage the proportion of interest is higher each month, whereas later into your term the proportion of capital repayment will be higher.
Ready to start your search?
Find your new home
Knowing how much deposit you’ll need
Mortgages are based on something referred to as Loan to Value. In simple terms, this is the percentage of loan against the value of the home.
Mortgages deals are available typically up to 95% loan to value, therefore as a minimum you would require a 5% deposit.
You’ll get a lower mortgage rate the more deposit you put down, as lenders have different rates for different tiers of lending. The lower the loan to value, so the risk of you defaulting on the loan reduces.
Your deposit can come from savings, a gift, or the sale proceeds (equity) of another property.
Mortgage expiration dates
Will your mortgage have an expiration date? In a word – yes. You’ll only have a set period of time (usually 6 – 12 months) in which your offer is valid, so you’ll need to complete on your home purchase within this window.
Once the offer expires, it might be possible for the offer to be extended or you’ll have to reapply. If your financial circumstances have changed, you may not be able to secure the sum you were originally offered.
For more advice on first time buyer mortgages, contact Threshold today, or get in touch with the sales team at your nearest Persimmon development.
