First-time buyer mortgages
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Stepping onto the property ladder for the first time can be a daunting process. There is a wide range of different mortgages available and understanding which one is the most appropriate can become difficult. The good news is that both house prices and mortgage rates have fallen, whilst there has been a growth in earnings.
Deposits and loan-to-value basics
Deposits are the main reason first-time buyers struggle to get a foothold on the market. Managing to build up capital to secure a mortgage can be a stumbling point for many. Knowing how much to save requires understanding how mortgages work. Mortgages are assessed on a loan-to-value basis. This basically means that the loan is calculated on how much deposit you have paid. For example if you had to borrow £160,000 for a £200,000 house then you will be taking out an 80 per cent loan-to-value mortgage after paying 20 per cent of your own money.
There was a time when you could buy a house with a 100 per cent mortgage which meant that you borrow all of the money without any deposit: this changed as mortgage companies became more cautious following the house price crash in 2007. The reason for this is negative equity, which is when house prices fall and the borrower defaults. As a result the lender is exposed, as selling the house will not repay the debt. Nowadays the minimal, which can still be difficult to obtain, is a 95 per cent mortgage. The interest rate is variable to the amount of deposit you have secured the house against. Therefore if you opted for a 95 per cent mortgage, the interest rate would be higher than that of a 90 per cent and so on and so forth. As mortgage companies take into account a person’s affordability, if you are on a low salary with a high interest rate then they may refuse the mortgage – even if you can afford the deposit.
Higher deposits can be beneficial in some instances. Not only do they help reduce interest rates, they can reduce the impact of negative equity if you become trapped in the property.
Fixed, tracker and variable
It is worth understanding the most appropriate mortgage product for your individual circumstances. Often the ones that may seem cheaper could incur higher fees or less flexibility.
Fixed rates are simple and straightforward. There will be an agreed repayment cost, set over a certain period of time. The time period often ranges between two and five years and helps provide peace of mind, not having to worry about fluctuating interest rates. The downside to fixed rate mortgages is that they often come with tie-in penalties, such as not being able to pay any additional money off without incurring a charge.
Tracker and variable mortgages mean that the rate can change throughout, from decisions made by the Bank of England or your provider. The tracker mortgage is the most popular variable scheme and follows the Bank of England base rate over time. This will generally charge a higher deposit alongside a lower interest rate. The cost of repayments will then fluctuate as the Bank rate changes. For more advice on the most appropriate mortgage for the current market, read this article on the BBC.