Mortgages for first-time buyers – what are your options?
Posted 14 January 2016 by Keith Osborne
With literally hundreds of mortgages to choose from, where do you begin? Much depends on what deposit you can put together: the higher the deposit, the better the interest rate you’ll find, as a general rule. However, for many first-timers, the deposit is likely to be small, especially considering the other costs you’ll be paying, such as legal fees, stamp duty and furniture.
The government-backed Help to Buy scheme was introduced to allow first-time buyers (and other purchasers) to lay down a deposit of as little as 5% on a new home, half what they may usually be expected to provide. Buyers have two options with this scheme – to take a 95% Help to Buy mortgage or to accept a 20% equity loan from the government and find a mortgage for 75%. The latter option is the most popular, as the equity loan is interest-free for five years and doesn’t need to be repaid until the property is sold, and the 75% mortgage is like to have a much more competitive rate than a 95% one. Read more about Help to Buy.
Another government scheme is Shared Ownership, where first-time buyers who can’t afford to a property at full market price can buy a shared (initially 25% to 75%) of a home and pay a subsidised rent on the remainder. The buyer only requires a mortgage on the part they buy – so the loan is smaller, and so is the deposit. There are eligibility criteria for this scheme but it can be an affordable lift onto the property ladder for those on a modest income. Read more about Shared Ownership.
Types of mortgages
These are some of the main types of mortgage that you can consider:
- Variable rate. You won't be locked into a deal but run the risk of your rate being raised - many people found themselves paying hugely increased mortgages in the 1990s.
- Fixed rate. This can be useful if you prefer the certainty of knowing what your monthly repayments will be, but you will be locked into the deal for a fixed term. If interest rates fall, you could be paying more than on a variable rate - but equally you are protected in the short term if interest rates rise. Read more about fixed-rate mortgages.
- Tracker. This is linked to the Bank of England base rate. Rates are often lower than on fixed rate mortgages, but your mortgage will go up if the base rate is increased.
- Discount. This is linked to your lender's standard variable rate. Again, rates tend to be lower, but the lender can change its standard rate at any point, thus increasing your payments. Read more about discounted variable-rate mortgages.
- Offset. This takes the interest you would earn on your savings and applies it to your mortgage. It can save you a lot in interest over the term, and also has tax advantages. However, rates can be higher. Read more about offset mortgages.
Today, under tough lending criteria, almost all mortgages are repayment loans, ie every monthly payment includes an element of the capital borrowed as well as the interest on it. Interest-only mortgages are rarely available now, as although the monthly payments are lower and more affordable, the capital still has to be paid off at the end of the term, which has left many buyers in major difficulties as they had no means of paying off their capital once the loan had expired..
Some points to bear in mind
You should consider the following when applying for mortgages – and it’s always best to seek the advice of a professional (such as an independent financial adviser) before committing to a loan, to ensure you get the best deal to suit your circumstances:
- Affordability. Can you comfortably afford the monthly repayments, even if they rise?
- Commitment. How long are you locked into the deal?
- Deposit. A higher deposit means you can access more favourable rates, and you are also given some protection against a fall in house values.
- Overpaying. Does the lender allow you to overpay the mortgage? This can save you thousands in interest over the term.
- Fees. What are the costs of setting up the mortgage, and if you want to change lender or repay early?