Guide For First Time Buyers

A guide for first time buyers...

What is a mortgage?

A mortgage is a long term secured loan taken out to buy a residential property. A mortgage is guaranteed by the property, so the lender can sell your house if you don't pay the loan.

Where can I get a mortgage?

Mortgage lenders tend to be banks, building societies and other specialist finance companies. They work directly and through a range of intermediaries such as agents or brokers.

What’s the difference between bank mortgages and building society mortgages?

Traditionally, building societies have been experts in the mortgage market, and were founded with the purpose of providing a mortgage service. But with so many other businesses, including supermarkets and insurance companies now offering competitive mortgage deals, it really depends on what sort of mortgage deal you are looking for as to who is the best lender.

What do I need to qualify for a mortgage?

Property buyers will need a certified or self-certified source of income, or the potential for income. A deposit of some sort can be important but is not always essential (see below). A good credit history can also help obtain favourable terms, conditions and interest rates in comparison to those without, but there are still plenty of lenders that offer bad credit mortgages.

Is a deposit required for a mortgage?

Not all mortgages require capital deposits. However, the large majority do, and you will normally need to save a deposit of at least 10 per cent of the amount you wish to borrow. Generally, it is worth saving the biggest deposit you can because this can bring the mortgage interest rate down and reduce the chances of negative equity.

What is a Loan-to-Value (LTV) ratio?

The Loan-to-Value ratio of a mortgage refers to the difference between the amount of capital borrowed and the total value of the property being mortgaged. It is usually expressed as a percentage. For example, someone borrowing £80,000 to buy a property worth £100,000 would have an 80% Loan-to-Value ratio (£80,000 is 80% of £100,000). Someone borrowing £50,000 to buy a property worth £100,000 would have a Loan-to-Value ratio of 50%.

How much can I borrow?

Mortgage lenders advertise maximum borrowing amounts on the basis of an income multiplier. These are usually values set between 2.5 and 5. Multiply your yearly income by the income multiplier to find out the maximum amount of borrowing the lender is likely to allow. The joint income of a couple can also be used for borrowing, with a separate multiplier for joint incomes.

What fees are charged?

Fees will vary depending on the mortgage lender and can be charged at specific times, due to circumstances or as a regular management cost on the mortgage. Some of the more common types include:

• Arrangement fee
• Early repayment charge – comes into effect if a mortgage is repaid before a specified period.
• Final repayment charge – an addition fee applied on the last payment before the mortgage is completely repaid.

How do mortgage repayments work?

Mortgage repayments are split into two different parts:

• Capital repayments
• Interest repayments

The capital is the amount of money you have borrowed from, the bank to buy your home, and the interest is the lender's 'fee' for lending you the money. The interest you pay depends on the size of the mortgage and the repayment period i.e. the longer the term, the more you will end up paying in interest. Most people choose to pay back the capital and the interest each month - a repayment mortgage, but you can choose an interest only mortgage - either for a fixed period or for the full term. If you choose an interest only mortgage for the full term, you will need provision put aside to pay off the loan at the end of the term. This may be something like an ISA plan or an endowment, but, as with all investments there is an associated risk that the sum provided on maturity may not meet the liability.

How do I work out the total cost of my mortgage?

The total cost of a mortgage is the product of interest repayments, total capital borrowing and any management fees charged by the mortgage lender. Interest payments can be worked out using the mortgage calculator available on the Fair Investment website, while management fees over a certain period will require querying the mortgage lender themselves. The total cost of a mortgage will increase the longer the repayment period and the larger the amount of borrowed capital. A larger deposit or early overpayments can significantly decrease the overall cost of a mortgage over its lifetime.