Mortgages explained for first-time buyers

As rents continue to increase and governmental schemes mean first-time buyers can purchase a property with a deposit of as little as 5%, more renters are looking to get on the property ladder. Annual first-time buyer numbers are up 75% since the 2008 financial crisis and continuing to rise.

Getting on the ladder for the first time is both exciting and daunting in equal measure. Taking out a mortgage is a major undertaking, with so many products on the market it can be difficult to choose the right one for you. Getting a good understanding of how mortgages work and the different types on offer will strengthen your position when you meet with your lender, and ensure you are asking the right questions.

FIXED MORTGAGES

Fixed rate mortgages have a defined interest rate which remains the same for a set period of time. Each month, the homeowner makes the same regular payment for the duration of the fixed rate period. The fixed rate interest period is usually between two and five years, however, it can be longer.

At the end of the fixed-rate period, the interest rate of a fixed mortgage will transfer to your lender’s standard variable rate (SVR). This is the default interest rate your lender offers, without any discounts. The lender can decrease or increase its SVR at any time. Lender’s SVRs are often between 2% and 5% above the base rate dictated by the Bank of England.

TRACKER MORTGAGES

Tracker mortgages have a variable interest rate. The interest rate is linked to the Bank of England base rate and will remain at a fixed amount above or below it. For example, if the mortgage product is set at 1.5% above the Bank of England base rate, and the base rate is 0.5%, the interest rate of the tracker mortgage will be 2%.

Some tracker mortgage products include a clause which caps the amount the rate can rise to. Some will also allow you to repay more than the agreed amount without any penalties.

CAPITAL AND INTEREST MORTGAGES VS INTEREST-ONLY

Both fixed mortgages and tracker mortgages can come with two different repayment options. Capital and interest mortgages work in the same way as a bank loan. You make payments on both the interest and the capital of the loan. This means that if the homeowner makes all the payments, at the end of the mortgage term, the whole loan will have been repaid.

The interest-only repayment option means the homeowner makes payments against the interest part of the mortgage, but not the capital. At the end of the mortgage term, unless the homeowner has made additional payments, they will still have the capital to repay.

FEES

Most mortgage lenders will charge an arrangement fee for brokering your mortgage product. This could be upwards of £1000. There may also be a booking fee of several hundred pounds.

WHAT YOU NEED

Mortgage lenders will need to see evidence that you will be able to make payments on the mortgage and signs that you are a reliable borrower. You will need to be on the electoral roll at your current residence, have a strong credit rating, three months of pay slips, your last three months of bank statements, evidence of any loans or credit card debts you have, your last P60 form or three years of accounts, and your address history for the last three years. It may seem like a lot of paperwork, but it will greatly speed up the process if you have this ready when you begin meeting with mortgage lenders.

A mortgage is a long-term financial commitment. First-time buyers would benefit from exploring all the options available and selecting the most appropriate product for their needs. It may be helpful to find a mortgage adviser to help navigate through the mortgage minefield and ensure you are getting the best deal possible.