Welcome to the first instalment of simplifying the process for first-time buyers.
In this four part series we’ll walk you through the essentials of how to get a mortgage for your first home. In this article you will:
- Understand mortgages: Learn the basics of mortgages, how they work, and the various mortgage types available to first-time buyers in the UK.
Buying your first home is exciting! There’s no feeling quite like holding the keys to your own place in your hands. However, at LDN Finance we understand that the mortgage application process can seem daunting at first. But there is no need to panic.
This first-time buyer guide has been created with you in mind, to help you navigate the mortgage minefield. You will find helpful tips and insights throughout as we take you through every step of the mortgage application process. This will make it easier for you to apply for a mortgage and bring ownership of your first home one step closer.
Understanding Mortgages for First-Time Buyers
For many people purchasing their first home, mortgages can seem complex; and encountering the specific terminology can sometimes feel like learning a new language! However, knowing the basics is the key to success.
What Is a Mortgage and How Does It Work?
In simple terms, a mortgage is a loan provided by a lender that is secured against a property.
The majority of mortgages are setup on a Capital and Interest basis, which is more commonly known as a ‘repayment mortgage.’ As part of your agreement, you pay back some of the loan each month along with some of the interest, until the whole mortgage is repaid in full. You get to choose over what period you pay this, which is called the mortgage term. If you borrow over a longer period your monthly mortgage payments will be lower, but you will incur more interest to the lender, whereas if you repay the mortgage over a shorter period you will pay less interest, but your monthly payments will be higher. A mortgage adviser will help you budget for your payments and determine the best mortgage term, as you will also have other related monthly costs to consider.
As you continue to make your payments, you gain equity in your home. Equity is the part of the property’s value that you truly own. Using a mortgage calculator can help to indicate how much your repayments could be on a monthly basis, estimated by your deposit amount.
It is possible to arrange some, or all, of your mortgage on an Interest Only basis. As the name suggests, you only pay the interest to the lender, and do not pay any of the capital back, which reduces the monthly payments. Interest Only mortgages are only available to borrowers with a larger deposit, and there must be feasible ‘repayment vehicle’ in place, such as savings or investments which will enable you to pay back the outstanding loan to the lender at the end of the mortgage term.
Your property serves as a guarantee for the loan for as long as you have it. If you are unable to make the monthly repayments, the lender has the right to repossess your property.
By knowing how mortgages work, you can look into different types. This helps you find the one that best fits your money needs and dreams of owning a home.
Types of Mortgages Available
The UK mortgage market has many mortgage products to choose from, and a good mortgage adviser will help you navigate these. Based upon your circumstances and your preferences, they will then make a recommendation for the best option. The two common types to consider are:
Fixed rate mortgages: These have a set interest rate for a specific time. This means your payments stay the same for your agreed fixed rate term, typically 2, 3 or 5 years, although longer fixed rates are available. The benefit is that you will know your monthly payment, which can make it easier to budget in your monthly income, however the majority of fixed rates will see you ‘tied in’ to that product for the length of the fixed term, with a penalty equivalent to a percentage of your outstanding balance to pay to the lender if you repay the mortgage within the fixed rate period.
Variable rate mortgages: With variable rate mortgages, the interest rate can change based on market conditions. A tracker rate is one type of variable rate mortgage, where your interest rate will increase or decrease only when there is a change to the Bank of England Base Rate. Variable rate mortgages therefore have the potential to see your mortgage payments reduce, but your payments could go up if economic changes cause the interest rates to increase.
It’s important to look at the good and bad sides of each mortgage type. This way, you can make your choice based on your affordability, risk willingness and your long-term money goals.
Preparing to Apply for Your First Mortgage
Before starting a first-time buyer mortgage application, it’s important to collate information that a lender will need to support your application. With careful planning and by being prepared, you can boost your chances of getting approved and achieving better mortgage conditions.
Assessing Your Financial Health
Evaluating your financial health is key for a successful mortgage application. Start by looking closely at your income, spending and current debts, such as car loans or credit card repayments. This will help you to understand how much you can afford to pay each month.
If necessary, think about reducing unnecessary spending and paying down outstanding debts to make your application stronger. Reducing the amount of money you commit to servicing debts may also increase how much you can borrow.
The Importance of Credit Reports in Mortgage Applications
In the mortgage world, your credit score is very important, however there are many myths out there when it comes to credit scoring. For example, there is no centralised credit score that exists, so each lender will perform their own score based upon the information provided on the mortgage application and what they can see on your credit report. Your credit report acts like a report card for lenders by showing how well you handle debt and other financial commitments.
A good credit report can get you better interest rates, helping you save a lot of money over your mortgage time. On the other hand, a report which shows missed payments, defaults or use of payday loans might reduce your choices, result in higher rates or prevent you from being able to get a mortgage.
Before you apply, look at your credit report via Credit Referencing Agencies such as Equifax or Experian. These will typically provide you with a free trial for a month before then charging you a monthly subscription fee, however often you only need to have a quick glance and then you can cancel within the trial period.
Most credit reports will point out both the good and the bad, and will give you useful pointers on how you can fix any mistakes and look to improve your credit habits if they are not already healthy. Building and keeping good credit can really help you to buy your first home.
It’s very important to be named on the Electoral (Voters) Roll at your current address. Some lenders will decline your application if this information isn’t up to date, so make sure this is done with plenty of time to spare.
Keen to learn more? Be sure to check out Part 2 – preparing financially – for the next instalment in our series. Get in touch today to find out more about how to get a mortgage.