- How Much Do I Need? LTV & Deposits.
- How Much Will it Cost? Interest & Fees.
- Which Mortgage Type Suits Me Best?
- What Help is Available?
How Much Do I Need? LTV & Deposits
The days of easily-achievable 100% mortgages may be behind us for now, but there’s no harm in a system that ensures you can afford the loan you are applying for. (See our calculator: how much can I borrow?) To establish which mortgage product you may be looking for, a useful first step is calculating the loan-to-value (LTV) that you are eligible for.
LTV represents the size of the loan relative to the value of the property. So, if you have a deposit of £20,000 on a property worth £200,000 (10%), you will need to borrow the remaining £180,000, which constitutes a minimum LTV of 90%. It's likely that you'll need to factor in stamp duty as well.
How Much Will It Cost? Interest & Fees
Typically, first-time buyers will require a high loan-to-value mortgage when they enter the market for the first time. It’s been well documented how high private sector rental costs have made it difficult for prospective buyers to accumulate a deposit. In August 2013, the Council of Mortgage Lenders revealed that the typical first-time buyer in London needs a deposit of over £64,000.
Unfortunately, higher loan-to-value mortgages tend to be more expensive because of the greater risk for the lender. And lenders are proving stricter about the income you need to service this loan each month. But several are willing to help out in other ways for new buyers, such as offering free valuations and arrangement fees.
The larger the deposit you are able to build as a percentage of the property value, the greater choice of mortgages you will find. The greater competition for lower risk loans inevitably means better rates for customers.
It is also worth taking into account the standard variable rate (SVR), to which mortgage products revert once the introductory period (typically two to five years) has elapsed.
This can go down as well as up. After five years of payments, you pose less risk to a lender, which gives them an incentive to retain your custom. The SVR becomes significant if you are not planning to remortgage the property and switch lender after the intro period has passed.
The majority of lenders charge a mortgage ‘arrangement’ or ‘administration’ fee, which can reach thousands of pounds.
Mercifully, fees tend to be much lower for first-time buyers, and are sometimes waived altogether. Some lenders may offer concessions for mortgage customers that have a current account with them.
Fees are important because they can turn an attractive interest rate into a less competitive deal depending on the amount that you are borrowing (see our guide to mortgage arrangement fees for more details).
It’s also a good idea to check for an early redemption fee. If you decide to cancel a fixed-rate mortgage before the end of the term, there could be a hefty penalty charge.
Which Mortgage Type Suits Me Best?
There are several types of mortgage available to first-time buyers. A fixed-rate mortgage typically fixes the interest rate for a period of between two and five years before adjusting to the standard variable rate.
The rate on a tracker mortgage is normally linked to the Bank of England base rate. The Bank does not expect this rate to change until at least 2016. However, since first-time buyers already pay higher interest rates on their loans, it is important to determine whether or not you could afford an increase if the base rate were to rise.
There are also a number of offset mortgages available for first-time buyers. If you’re able to build up your savings from disposable income, an offset mortgage will allow you to use these savings to reduce the proportion of the loan on which you pay interest.
This may be of interest to a first-time buyer because the amount of interest repayable on the mortgage is likely to far exceed the amount that could be generated through standard savings accounts. So, by offsetting these savings against the mortgage repayment, you could be making them work much harder for you.
What Help is Available?
From the Government?
The Government’s new Help to Buy Scheme aims to help first-time buyers by providing an equity loan worth 20% of the property value, thus reducing the risk for a lender. The loan is also interest free for five years.
My family wish to help.
There are a number of creatively designed mortgages – often known as intergenerational mortgages – that allow family to boost a new buyer’s equity stake without losing out themselves.
One example is Barclays’ ‘Springboard’ mortgage. Once the buyer has placed down a 5% deposit, the family then places 10% of the property value into a linked account, and receives 2% interest on that equity stake after a three-year term (see our review here).
Summary: The Essential First Steps to a First-Time Buyer Mortgage
- Calculate the loan-to-value you will need.
- Determine which mortgage type you think is best for your needs.
- Compare and contrast the mortgages available for those criteria.
- Factor in fees and other variables to help develop your shortlist.