First Time Buyers

One of the most difficult decisions for first-time buyers is deciding which type of mortgage to go for. When choosing a mortgage, it’s important not to just focus on the interest rate and the fees you’ll be charged, but also the repayment structure. There are two different mortgage categories:

• Fixed rate – The interest you’re charged on the mortgage remains the same for between two and five years, depending on your particular deal.
• Variable rate – The interest you pay can go up and down depending on different factors.

Fixed rate mortgages, which you’ll commonly see advertised as ‘two-year fixed’ or ‘five-year fixed’, give you the peace of mind that your monthly payments will stay the same for that period of time. However, the rate does tend to be slightly higher than a variable rate mortgage.

Once the fixed rate period nears an end, you’ll have to find a new mortgage deal or risk being moved onto the lender’s standard variable rate, which will very likely be much higher. There can also be charges if you leave a fixed deal early.

Variable rate mortgages can change at any time, so it’s best if you have some savings available to help you make the repayments if the rates were to rise. There are a number of different variable rate mortgages available. These include:

• Tracker mortgages – Your mortgage repayments go up and down in line with the Bank of England base rate. If interest rates rise by 1 percent, so will the cost of your mortgage.
• Discount mortgages – This type of mortgage provides a discount off the lender’s standard variable rate for a limited period of time, typically two or three years. Standard variable rates change from lender to lender, so you should always shop around.

When you apply for a first-time buyer’s mortgage, the lender will want to assess whether they think you will be able to make the repayments if interest rates were to rise or your circumstances change.

To do this, you will need to prove your income by producing payslips and bank statements, and provide details of your outgoings, such as household bills, credit card payments, personal loans and other living costs. The lender will use this information to make a decision about how much money you can borrow given the size of your deposit.

The lender will also run a credit search with a credit reference agency to take a closer look at your financial history and see how much of a risk the mortgage might be.

When it comes to the repayment of the mortgage, there are three options available to you. You can repay just the interest; the interest and some of the capital; or opt for a combination of the two.

• Repayment mortgages – This is the most widely available mortgage repayment option. You make monthly payments for an agreed period of time until you’ve paid back the capital (the initial loan sum) and the interest that accumulates each month.
• Interest-only mortgages – You only pay the interest due on the amount you have borrowed. So, although you pay less than on a repayment mortgage, the capital amount will not reduce in size. Lenders will expect you to have a strategy in place to repay the balance at the end of the mortgage. This is mainly available to those with larger deposits (typically 25 to 50 percent) and higher income levels (between £50,000 to £100,000 per annum).
• A combination of the two – Some lenders also offer a part-repayment and part-interest-only plan. This means some of the loan’s capital will be repaid during the mortgage, along with the interest, but there will also be some capital to repay at the end of the term.