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First Time Buyers: A Guide to Mortgages

 
27/03/2020

To be able to afford a new home, many people require a mortgage. It is especially useful as a first-time buyer to take out a mortgage because the likelihood is that you won’t have enough to cover the cost of a new property. While mortgages are there to support us financially, they can be tricky to understand, so we have created this handy little guide to help!

 

What is a Mortgage?

 

A mortgage is simply a loan from a bank or building society that lets you purchase a property. You then pay back what you have borrowed in smaller amounts plus interest. The usual period for this is 25 years, although you can take them out over longer or shorter periods of time.

 

When you get a mortgage, it is secured against the property until you have paid it off in full. If you fail to meet the mortgage repayments, then the lender can repossess your home.

 

Depending on your living situation, you can take a mortgage out on your own or with one or more people. If you are considering buying a property with friends, take a look at our previous blog to help you decide if it is the best option for you.

 

How Much Do I Need for the Deposit?

 

You are required to pay for part of the property upfront, and this is called the deposit. It is shown as a percentage of the property’s value, so for example, if you bought a house for £200,000, then a 10% deposit would total to £20,000.

 

Loan to Value

 

The lender will then provide you with the rest, and this is referred to as the loan to value. In the example we used above, which is a 90% loan to value mortgage, the lender would cover the remaining £180,000 (this is the total you will owe without interest).

 

The Bigger the Deposit, the Better!

 

As a general rule, the more deposit you have to put down the better. If you can put a more substantial sum into the property from the offset, then the amount you will be required to pay back will be less. Also, if you have a more significant deposit, chances are, your interest rate could be lower.

 

What Type of Mortgage Do I Need?

 

For your first-ever property, you will want to get a first-time buyer mortgage. If you only have a small sum of money for a deposit, then this is a great mortgage option for you. You can get first-time buyer mortgages with a loan to value of up to 95%, meaning you will only need to contribute 5%.

 

Types of First-Time Buyer Mortgages

 

There are two main types of first-time buyer mortgages:

 

Guarantor Mortgages

These mortgages offer high loan-to-value (LTV), with some requiring no deposit at all. The mortgage works by having a family member or friend agree to be named on the mortgage to cover any repayments should you miss them.

 

The guarantor will have to guarantee the mortgage repayments with either their own property or savings. So, if you were to miss a payment, then the lender could repossess the guarantor’s home or withhold their savings.

Help to Buy Mortgages

Help to Buy is a government scheme that is in place to try and help people purchase their first home. It requires a small deposit, and the government uses equity loans which means you can get the money on loan to help towards your deposit and then repay it later.

 

The mortgages are interest-free for five years and can cover 20% of the purchase price or 40% if you are in London. All that you will be required to contribute is 5% of the deposit.

 

How Much Will a Mortgage Cost?

 

The amount you will pay in total will depend on the deal you get with the mortgage and how much the property costs.

 

Interest Rate

 

The interest rate you pay will affect how much you have to pay for your mortgage overall, as well as the cost of your monthly repayments. The amount is accrued across the time period chosen for the mortgage and is charged as a percentage on the amount that you owe. Below is an example to help explain:

 

If you take out a mortgage worth £200,000 and the interest rate is 4% over 25 years, then you would pay interest of about £116,702 and then the total you repay would be £316,702.

 

Monthly Mortgage Repayments

 

Again, how much you pay each month will depend on the mortgage deal you get and also the cost of the property.

 

If we take the example above, then the monthly repayments would total to around £1,056 (with an interest rate of 4%).

 

Fixed or Variable Mortgage?

 

Whether you choose a fixed-rate or variable mortgage, both will come with an element of risk.

 

A fixed-rate mortgage guarantees that the interest rate will not change for a set period (usually between one to five years). The risk that comes with this is that the fluctuations of the interest rate that is in line with the Bank of England base rate could offer you a better price.

 

A variable mortgage can change the interest rate at any point, but commonly rise and fall in line with the Bank of England base rate. The risk with this mortgage is that it could become quite pricey if the base rate increases.

 

How to Get a Mortgage? 

 

We have broken down the process of getting a mortgage into some short steps.

 

1. Save for a deposit.

 

2. Find the property – take a look at our guide on questions to ask when viewing a property to ensure it is the right one for you!

 

3. Find a mortgage either through a comparison website or use a mortgage broker.

 

4. Ensure you can afford the mortgage you choose.

 

5. Get a mortgage in principle – this will let you know roughly how much you could borrow.

 

6. Put an offer in on the property.

 

7. If your mortgage is accepted, take it out and buy the property!

 

We hope that you have found this guide to mortgages useful. Here at Godfrey, Short and Squire, we are a Dartmoor estate agent and can help you find your dream home. If you are interested in viewing some properties in West Devon or would like some advice before making the decision to buy a home, feel free to get in contact with our friendly team. Give us a call on 01837 54504 or visit our contact page

 

 
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