A First Time Buyer's guide to Mortgages
Updated: 4th Sep, 2024
Author: Charlotte Burton
As a first time home buyer navigating the complex world of mortgages can be overwhelming! In this guide we will explain how mortgages work so you can make informed decisions going forward.
A mortgage is a loan from a lender (normally a bank or building society) to purchase a property. This loan is “secured” by the property, which means if you cannot keep up with payments, then the lender can repossess and sell the property.
How much you can borrow
Firstly, it’s good to get an idea of what will affect how much you personally are able to borrow. A good rule of thumb is that a lender will offer you about 4.5 times your household income. However, this is not an exact number and will depend on your circumstances.
The lender will calculate how much they are willing to lend you based on a number of factors, including:
- Income and Affordability: Lenders typically look at your income and spending to assess how much you can afford to repay.
- Credit Score: A good credit score may allow you to borrow more, sometimes at better interest rates.
- Deposit Size: The size of your deposit affects how much you can borrow. You generally need at least a 5-10% deposit to get a mortgage. A deposit of over 10% means a lower Loan to Value (LTV) ratio, which gets you better interest rates.
- Property Type: Lenders may lend as little as 75% of the property value for new builds, and will generally lend lower percentages for leasehold properties than freehold ones.
How to choose a mortgage
The key things to think about when choosing a mortgage are how long it’s paid back over, the interest rate, whether it is a fixed or variable rate mortgage and any upfront fees. We explain what all these terms mean and the impact of different choices below:
- Mortgages are paid off over a number of years. In the UK they typically range from 25 to 30 years, but they can be shorter.
- Shorter-term mortgages typically have higher monthly payments but less total interest paid, while longer-term mortgages have lower monthly payments but more total interest paid over the life of the loan.
- Lenders make money by charging interest on mortgages, which can be a substantial cost over the length of the mortgage.
- For example, if a £250,000 mortgage paid off over 25 years has a 5% interest rate, the total amount paid over the 25 years will be nearly £440,000 (£190,000 of which is interest).
- This interest rate affects the monthly repayment amount; a higher rate means higher monthly payments.
- For example, taking the same mortgage as above, the monthly repayments would be approximately £1,460. If the interest rate halved to 2.5%, the monthly repayments would be approximately £1,120.
- Remember, you need to consider mortgage fees as well as interest rates. The lowest interest rate mortgages often have the highest fees, so in total you may end up paying the same or even more than for higher interest mortgages.
- Many lenders charge fees to organise your mortgage, but some will charge zero fees.
- The lowest interest rate mortgages often have high fees to compensate, so make sure you read the terms carefully!
- These fees can include arrangement fees, booking fees, valuation fees, and other fees.
- The average fees are about £1,000, but can vary from £0 to £2,500+
- Mortgages can have fixed rates (where the interest rate remains constant throughout a set period) or variable rates (which can change, often in relation to the Bank of England's base rate).
- Fixed rates tend to be lower than variable rates at the point of mortgage application.
- You can typically fix a mortgage for 1-10 years, after which you will either need to remortgage, or move onto a variable rate mortgage.
- Choosing a fixed period length depends on whether you think interest rates they will go up or down, and how long you intend to stay in the property (see our section on Portability for more information).
Other things to look for in a mortgage
Alongside the length, interest rate, fees, and fixed period, there are other things that you should look at when you are researching deals to make sure the mortgage is best for you.
Here are some things to consider:
- There are different types of mortgages like interest-only, repayment, and offset mortgages.
- If you are considering one of these different mortgage types, or want to know what schemes might be available to you, we would recommend talking to a mortgage broker who will be able to explain your options.
- You may end up needing to sell your home before the end of the fixed-rate or introductory period of your mortgage.
- Paying off a mortgage early can incur charges, particularly if it's during a fixed-rate period.
- These early repayment charges can be up to 5% of the outstanding loan, so can be very large. Make sure you check what these charges are.
- Even outside the fixed-rate period, some mortgages have additional exit fees of £75-300 (sometimes called deeds release fees), so check for those.
- If you buy another property before you have paid off your mortgage, you may want to transfer your mortgage to that property. This process is called porting.
- Not all mortgages are portable, so it’s worth checking the terms when you are looking at mortgages if you think it would be valuable to you.
- There are also instances where a mortgage can’t be ported. Examples of this are if you are buying or selling a Shared Ownership property or if you are adding a partner to the mortgage. If these apply to you, and you try to move during your fixed period, you may incur early repayment charges.
Other Considerations
Finally, there are a few other things that might be useful for you to be aware of:
- Government Schemes: There are schemes that can assist first-time buyers or those with smaller deposits. For example, the government's Mortgage Guarantee Scheme enables some first time buyers to get a mortgage with a 5% deposit.
- Overpayments: Some lenders allow you to pay more than the required monthly payment (typically up to 10% per year). This will mean you pay less interest in the long run as you will pay off your mortgage earlier. However, you should consider whether the interest you save doing this is better than investing your money somewhere else e.g. a high interest savings account.
- Remortgaging: This involves switching your mortgage to a new deal, possibly with a different lender, often to save money after an initial deal fixed period ends.
- Insurance: You might be required to purchase life insurance or building insurance as part of your mortgage agreement.
It's sensible to seek independent financial advice, for example by talking to a mortgage broker, to find the best mortgage option for your specific situation. Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
SPF Mortgage Brokers
SPF can help you understand what mortgage would be best for you, and often have mortgages with lower interest rates than those you can find online.
