Purchasing your home is almost certainly the most important decision you will ever make, so it’s important to take some time and get it right. That’s where we come in. For all of us who are on the first rung of the mortgage ladder, it can be a stressful and daunting situation. Here at Leap Finance our expert, experienced advisers will hold your hand every step of the way, helping you with any questions you may have regarding first time buyer mortgages. Your assigned specialist will ensure they keep you informed and take care of all aspects from mortgage jargon to paperwork, guiding you and communicating with you from start to finish. So why not take advantage of our free no obligation consultation service today?
HOW MUCH DEPOSIT WILL I NEED?
In the current economic climate, a 10% deposit towards your first time home buyer mortgage can put you in a healthy position to be considered for a mortgage by your new lender. Not sure what’s affordable? Don’t worry – this is what our experts are here for. Your Leap Finance specialist will explore and explain the different mortgage types and offers available to you. They will complete an affordability calculation with you and plan accordingly to your budgets, ensuring you are comfortable with your commitments. Finally, because we have access to the whole of the mortgage market, you can have peace of mind that we will be able to compare the whole range of mortgage products available at that time. You can rest assured you’re not expected to do all the legwork speaking to lender after lender on your own.
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WHAT IS A MORTGAGE?
A mortgage is a loan to buy a property, but it has two special characteristics: It takes a long time to repay. The loan is ‘secured’ on your home.
It’s designed to be paid back with interest over a long period, typically 25 years. That means while interest is applied slowly over time, you still pay a lot of it. Unlike a bank loan or a credit card debt, a mortgage is what’s called ‘secured’. That means in return for lending you money, the bank uses the property as security for the mortgage. While ‘security’ may sound good, it’s the lender not you that gets the security, as it means if you get into problems and can’t repay, it has the right to repossess your home and sell it to recoup the money borrowed.
TYPES OF MORTGAGE
There are two main types of first time home buyer mortgages;
A repayment mortgage consists of paying of the mortgage in a given time as the monthly payments are built up of capital repayments and interest. This means the borrower at the end of the mortgage term, e.g. 25 years, no longer owes the lender any money.
With an interest only mortgage, your monthly payment does not chip away at your actual debt – it just covers the cost of borrowing the money. After 25 years of paying the interest on a £100,000 loan, you would still owe £100,000. With this type of mortgage, each mortgage payment is only used to pay off interest. At the same time, the borrower takes out an alternative ‘repayment vehicle’ (method of paying off the mortgage) such as an ISA, pension plan or endowment policy. The most important fact about an interest only mortgage is that the monthly repayments do not repay any of the outstanding capital balance. As a consequence it is important that the payments are maintained into the repayment vehicle; otherwise it will not be possible to pay off the mortgage at the end of the term.
WHAT IS A FIXED RATE MORTGAGE?
With a fixed rate mortgage, the amount you repay the lender each month can be at a fixed interest rate for a specified period of time, regardless of changes to interest rate in the market place. It is common for lenders to offer rates fixed for a period of 2 to 5 years, but shorter and longer periods can be found on the market. At the end of the fixed rate (or ‘benefit’) period the rate will normally convert to the lenders Standard Variable Rate (SVR). You’re effectively taking out an insurance policy against interest rates going up. Yet of course, if rates tumble your payments will not fall. It is sometimes possible to fix for 10 or even 15 years but such long term security is expensive.
It is normal for lenders to charge up-front fees in the form of booking and/or arrangement fees. In addition lenders frequently apply what is called an Early Repayment Charge (ERC) for fixed rate mortgages. This acts as a ‘lock-in’, making an often heavy charge for borrowers paying off their mortgage early. Watch out, as the ERC can sometimes last longer than the fixed rate period, e.g. a 3 year fixed rate with a 5 year ERC.
WHAT IS A STANDARD RATE VARIABLE MORTGAGE?
Borrowers paying the standard variable rate (SVR) will have their payments increase or decrease as the lender adjusts their rate in accordance with market conditions. Sometimes this may be the simplest and most straightforward option, though it’s not always available to new customers.
However, many introductory fixes or trackers revert to the SVR on expiry, so it’s important to understand it. Each lender offers an SVR (or rate with a similar name) which tends to roughly follow Bank of England base rate. SVRs are generally two or more percentage points above base. As the base rate shifts up and down so lenders traditionally move their SVRs, although not always by the same amount. For example, they may only drop rates by 0.2% when the base rate drops by 0.25%, meaning they increase their profits.
WHAT IS A TRACKER RATE MORTGAGE?
This is a variable rate that is linked to the movement of a prevailing rate such as Bank of England Base Rate or London Interbank Offered Rate (LIBOR). The pay rate will be a set percentage amount above the relevant base rate for a specified period of time. For example if the tracker mortgage is set at 1% above the Bank of England Base Rate for 5 years and the base rate is currently 4.75%, the pay rate will work out at 5.75%.
As their name suggests the rates of tracker mortgages ‘track’ changes in the base rate to which they are linked. So if the base rate increases by 1%, the pay rate will increase accordingly. Also if the base rate is reduced, borrowers will benefit from a lower pay rate.