Taking on a mortgage and dealing with all of the legal and administrative responsibilities that go with it can be daunting, while the burden of repaying a mortgage, maintaining a property and managing finances can feel overwhelming.
If you’re in the process of buying your first home, moving or remortgaging, we can help you find the perfect deal and help you with all the paperwork.
Common types of mortgage
- Variable rate - Your monthly payment fluctuates in line with a Standard Variable Rate (SVR) of interest, set by the lender. You probably won’t get penalised if you decide to change lenders and you may be able to repay additional amounts without penalty too. Many lenders won’t offer their standard variable rate to new borrowers.
- Tracker rate - Your monthly payment fluctuates in line with a rate that’s equal to, higher, or lower than a chosen Base Rate (usually the Bank of England Base Rate). The rate charged on the mortgage ‘tracks’ that rate, usually for a set period of two to three years. You may have to pay a penalty to leave your lender, especially during the tracker period. A tracker may suit you if you can afford to pay more when interest rates go up – and you’ll benefit when they go down. It’s not a good choice if your budget won’t stretch to higher monthly payments.
- Fixed rate - The rate stays the same, so your payments are set at a certain level for an agreed period. At the end of that period, the lender will usually switch you onto its SVR (see Variable rate). You may have to pay a penalty to leave your lender, especially during the fixed rate period. A fixed rate mortgage makes budgeting much easier because your payments will stay the same - even if interest rates go up. However, it also means you won’t benefit if rates go down.
- Discounted rate - Like a variable rate mortgage, your monthly payments can go up or down. However, you’ll get a discount on the lender’s SVR for a set period of time, after which you’ll usually switch to the full SVR. Discounted rate mortgages can give you a gentler start to your mortgage, at a time when money may be tight. However, you must be confident you can afford the payments when the discount ends and the rate increases
- Offset Mortgages – An offset mortgage enables you to use your savings to reduce your mortgage balance and the interest you pay on it. For example if you borrowed £200,000 but had £100,000 in savings, you could offset your savings against your mortgage and only pay interest on £100,000.
Deposit for first purchase or moving
The most important thing that you’ll need when approaching a mortgage provider is a deposit. Though the amount you’ll need will vary depending on how much you want to borrow, in general, most lenders will offer a maximum of 95% of the value of the property, so you’ll need to have at least 5% of your target purchase price. You will need to provide proof of this deposit, and it can come from a range of sources, including equity in your current home that you are selling, savings, gift from family or close friends.
This means that, if you’re planning on buying a home for £200,000, you’ll need at least £10,000 in your savings. However, if you can save more than 5% lenders will most likely give a better interest rate on your mortgage.
Once you’ve saved up your deposit, you need to sit down and think about how much you can afford to pay back each month.
Mortgage terms vary considerably from just a few years to 25, 30 years or even longer. The longer your term is, the cheaper your monthly repayments will be. However, if you find it affordable to pay off your mortgage over a shorter term this could save you money on the amount of interest you pay.
The potential lender will take account of your personal credit rating. If you have any unpaid debts, County Court Judgements, or you have failed to make previous or existing loan repayments on time, many lenders will decline your application, however, if you are honest and tell your adviser from the outset about previous problems then the correct mortgage can be sourced for you.
Mortgages available to first time buyers
There are a number of different types of mortgage available to first time buyers; the most common are fixed rate, variable rate and tracker.
If you take out a fixed rate mortgage, you’ll agree a fixed rate of interest with your lender that will stay the same for a set period of time. This type of mortgage is good for buyers who want to plan their finances and who want to know exactly how much they’ll be spending each month.
Repayments on variable rate mortgages can go up or down as they are dependent on interest rates set by your lender. Tracker mortgages can also go up and down, however they are often linked to interest rates set by the Bank of England.
A lot of lenders will ask you to pay a fee to set your mortgage up. This varies from lender to lender with some providers offering better long term deals to borrowers who pay a higher fee.
What is a ‘mortgage in principle’
Once you’ve given your mortgage provider all of your financial information, they’ll decide whether or not they are willing to lend to you and, if so, how much they will offer.
This is called a ‘mortgage in principle’ and is also known as a ‘mortgage promise’ or an ‘agreement in principle’ or ‘decision in principle’.