First Time Buyer Mortgage
Going through the process of buying your first home is very exciting, but working out how you can get onto the first step of the property ladder can be rather daunting.
With this in mind, here’s what you need to know about buying your first home.
A recent history of first-time buyer mortgages
The financial crisis of 2008 left many more people in the position of needing to rent a property. However, since then new financing options have provided more help and getting a first-time buyer mortgage is now not so fraught with challenges. In addition to a regular first-time buyer mortgage, there are also some government-backed schemes to help you with your first property buy.
The lending packages that banks and building societies offer often includes incentives. These might be in the form of discounts, low fees, legal fee contributions or even cash back.
First steps for first-time buyer mortgage
Before you go house hunting, it’s a good idea to work out a rough idea of how much you can borrow. Visiting a house and deciding it’s the one for you without confirming that it’s within your financial reach can lead to great disappointment.
The traditional way to calculate what you can borrow is to use a multiple of your salary as the basis. Typically, you are offered a mortgage that is three times your gross annual salary.
These days most banks and buildings societies use an ‘affordability’ calculation where your incomings and outgoings are used. Future interest rates will be used also.
You can discover what your financial boundaries are by using our mortgage calculator.
Generally, this is a very good time for applying for mortgages. There was a large increase in the number of loans offered to first time buyers in the 2016-2017 period. They were also offered higher sums than in previous years.
To determine whether you can have a mortgage, it’s not only affordability that is considered. Another factor considered is your credit score. If you have any bad debts, this may lead to your mortgage application being refused, or you could be given a higher rate of interest to mitigate the risk.
Saving your deposit is very important
Something that will benefit you in many ways is to save a deposit. The bigger your deposit, the better mortgage you will be offered.
Not every first-time buyer mortgage offers a loan for 100% of the property’s value. The deals that do will carry a higher rate of interest. When you see LTV or ‘loan to value’, this is what is being referred to.
Many banks and building societies offer a loan of up to 95% of the value of a property – known as a 95% LTV. For this, you will need a minimum of 5% deposit.
Putting down a deposit of 10% will give you a broader choice of mortgage deals. However, those borrowers who have saved a large deposit will likely be offered a lower interest rate. Having savings of 40% of the value of a property is one of the best places to be.
Therefore, saving a large deposit will put you in the best possible place for access to a wider range of mortgage products and more competitive rates. Most first-time buyers save deposits that are significantly lower than what those who are already on the property ladder may have.
Fixing your mortgage rate
There are many different mortgage deal packages available to you, but they mostly fall into the category of variable rate and fixed rate. Most first time buyers prefer to take fixed-rate mortgages so that they know exactly what they will need to pay out each month. Any interest rate fluctuations will not change the payment amount.
The fixed rate mortgage is typically offered over two, three or five years. Some lenders may offer longer-term fixes of ten years or more.
Think about how long you’ll be happy to be locked into it for prior to committing to a mortgage. Most lenders charge an early repayment charge for those who move out of the arrangement before the end of the fixed term. Most first time buyers decide not to agree to a longer-term arrangement as circumstances can change in ten or even five years.
When the fixed term comes to an end, you’ll need to ask for a good deal from your lender or look around for a more appealing offer.
Fixed rate interest rates are typically more than those on variable rate deals as you are paying for the convenience and peace of mind. You are essentially being charged extra to cover the loan in case rates rise.
Although variable rates can change at any time, they will usually do so if the Bank of England chooses to increase the base rate. Variable rates usually rise whilst the fixed rate stays the same.
Opting for a variable rate mortgage
Variable rate mortgages are available in three different types.
Standard variable rates (SVR). Rates can fluctuate at the discretion of the lender. It is the lender who decides if they go up or down and by how much. Changes to the Bank of England base rate are reflected in this.
Tracker mortgage. The rate you pay is most likely to be something along the lines of 3% in addition to the Bank of England base rate. If the base rate increases by .5%, your mortgage will rise by the same amount.
Discounted rate. Linked to the standard variable rate (SVR) of the lender rather than the Bank of England base rate.
It’s key that you understand how your mortgage operates so that you do not pay more for something that you don’t need.
How can the Government help first-time buyers?
The UK Government has announced a new incentive to attempt to kick-start the stagnating UK housing market and at its core is a new idea to subsidise first-time buyers deposits by underwriting the deposit from its own public purse. The idea being that first-time buyers will only need to find a 5% deposit as opposed to the 20% now demanded by the banks.
It was only a few years ago that the Government injected massive amounts of public money into the UK banking system to prop them up and keep the economy fluid, however it seems that the banks have not kept their promise to continue lending and instead have simply stabilised their own businesses instead of the established lending system that has been in operation for as long as anyone can remember and worked well for first time buyers with only 5% deposits saved.
So once again the Government is stepping in to try and help the first time buyer, the ailing housing market and all the jobs that depend on it.
The banks are capable of lending to first-time buyers with only a 5% deposit. Indemnity insurers that underwrite them prevent this from happening. The new first-time buyer scheme announced by the UK Government aims to sidestep this problem by indemnifying the banks from its own public funds.
Some might say that it is an example of nationalising the indemnity industry, but as it only applies to first time buyers it can hardly be called that.
First-time buyers are the lifeblood of the housing market
First-time buyers are the lifeblood of the housing market because without them entering at the bottom level the existing owners cannot move up the ladder or relocate to similar housing for other reasons like job moves or family relocations.
Historically a first-time buyer had to save a deposit with a building society, and when the local manager deemed them “worthy” qualified to be a borrower. Then the banks stepped in and competed with the building societies. The first time buyers now had more choice and more say in where to get their mortgage. Joining the banks, insurance companies went on a free for all spree. Hundreds of mortgage choices swamped the first time buyer. The “mortgage books” became valuable “tradable” assets and the banks were quick to sell their “mortgage books” on to raise more money to lend.
Mortgage books took over
However, once the system of selling “mortgage books” became established and accepted, the banks started to lend to non-credit worthy borrowers and sell those “books” on as well. Before long the buyers became aware that they had some bad assets on their hands. The result was that they lost trust in the banks and their decision makers.
The losers in all this were the first time buyers. They had come to depend on the banks and building societies for their first mortgage. The UK taxpayer had to bail out the failing disreputable banks.
The Government’s announcement to underwrite first-time buyer mortgages, and take the responsibility away from the banks, is a testament to their mistrust in the banking system to do the job it declares it is capable of, yet by its own actions, proves it is not.
The new Government first time buyer scheme, allowing the return of the 95% mortgage for first time buyers, could be the beginning of the long-awaited for recovery of the UK housing market and the revival of the first time buyer mortgage sector that so many in the housing and property industry depend upon, as well as the children of yesterday to start a new life.