Independent financial expert Harvey Jones
answers a reader’s query about mortgages available for first-time buyers
Buying your first home is hugely exciting, but you need to get the finances in place to do so – and with thousands of mortgages to choose from, the choice of deals can seem bewildering.
In the current climate, you’ll need to have a big deposit.
The days of being offered mortgages worth up to 125% of your property’s value – enabling you to borrow the entire value of the house plus enough to furnish it, without having saved any money first – are long gone.
Lenders now often restrict their best deals to buyers with a deposit of 25% of their property’s value, and they expect you to have a squeaky clean credit record as well (see our previous article on how to find out what your credit rating is).
However, it’s still possible to get a competitive mortgage with a deposit of 10-15% although you may have to pay a higher interest rate and a larger arrangement fee.
If you are getting financial backing from your family, you could consider a type of deal known as a guarantor mortgage.
This allows a parent or close relative to guarantee your mortgage payments.
The extra security this gives your lender may mean you can borrow money at a more competitive rate.
The guarantor doesn’t usually have to part with any money – but they would have to meet any shortfall if you fell behind on repayments.
You’ll need to decide whether to take a variable rate or a fixed-rate mortgage.
This is a very personal decision that depends on the importance you attach to being able to predict your future outgoings, as well as what you expect to happen to interest rates.
Base rates are currently at an all-time low, so the best variable or tracker rates are really low too. You can find deals ranging from 2.5% to 5%, depending on your deposit.
The interest rate on a tracker mortgage is guaranteed to rise and fall in line with the Bank of England base rate. If base rates rise by 0.25%, for example, your mortgage rate will rise by exactly the same amount.
With a variable mortgage, the lender is free to choose when it changes your repayment rate, and by how much.
If the base rate falls by 0.25%, for example, your lender may not cut your rate by that full amount – but equally, if the base rate rises by 0.25%, your rate may not increase by that full amount either.
So a variable mortgage gives you less certainty than a tracker – sometimes you’ll gain and sometimes you’ll lose.
At some point, however, the Bank of England will raise interest rates, and monthly repayments on either of these types of mortgages will rise too. Whichever mortgage you chose, you’d need to make sure you could continue to afford your repayments when interest rates rise.
If you’d prefer the certainty of knowing exactly what your repayments will be, you would be best placed to choose a fixed-rate mortgage.
You would pay a premium for this while interest rates remain low, though – current rates range from 3% to 6%.
Another factor when choosing a fixed-rate mortgage is deciding the length of your deal.
Traditionally, two-year fixed rates have been the most popular, but these are risky right now because your fixed period could end as interest rates start rising, giving you a big payment shock.
You could consider overcoming this by fixing your rate for longer – say, five or even ten years.
This could be beneficial because if inflation rises, as many people suspect it will, interest rates will surely follow. Higher interest rates aren’t a problem if you have a fixed-rate mortgage as your monthly repayment will stay exactly the same, meaning it’s easy to plan your finances.
With many workers seeing their pay frozen or even cut, or having to take a part-time job while seeking full-time employment, the knowledge that mortgage repayments won’t suddenly spiral could give some comfort.
Before fixing your rate for this long, however, check that you would be able to transfer your mortgage to a new property if you moved.
If you have any savings left over after putting down your deposit, another option would be to take out an offset mortgage. This would allow you to reduce your monthly interest repayments by offsetting any savings you have against the debt.
The most flexible type of deal is a current account mortgage, which allows you to overpay your home loan and borrow back money whenever you want, up to a pre-agreed limit – great if your cash flow varies, for example, if you’re self-employed.
This can be a great way of paying down your debt, but you have to be disciplined in order to make sure you keep on track with your repayments.
Whichever type of mortgage you decide on, you should compare the different deals available to make sure you get the one that’s best for you.
Arrangement fees, for example, vary from £99 to as high as £1,999. Do your sums carefully as sometimes it can be worth paying a higher arrangement fee in return for a lower interest rate.
You might also want to make sure that a mortgage gives you the flexibility to make overpayments when you have cash to spare, enabling you to clear your mortgage faster.
You could use a mortgage calculator such as the one on mortgagecalculator.org.uk, to find out which mortgage would suit you most. If you're in any doubt I recommend you take advice from a professional mortgage broker.
- Harvey Jones is a freelance personal finance journalist who writes regularly for the Daily and Sunday Express, Motley Fool and lovemoney.com
- If you have a general financial query or dilemma unrelated to a specific financial services provider, email Harvey at email@example.com
- Harvey regrets that he cannot answer your questions individually. These are his personal views and not those of Virgin Money. Nothing in the article constitutes legal, financial or other professional advice.
- If you have a specific financial concern, you should always seek your own professional financial advice. All details given are correct as of 10 January 2010.
Read previous Ask the Expert articles answering readers’ queries on:
- The impact of the VAT increase
- The cost of starting a family
- What to do with monthly savings of £200
- Comparing the tax breaks available from pensions and ISAs
- Why 30 isn’t too early to start a pension
- How to review the value of a pension fund spread over a number of different providers
- How to find out how credit ratings work – and what yours is