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First Time Buyer Mortgages
There hasn’t always been a specific mortgage aimed at first time buyers. However, as property prices have risen dramatically over the last five years, mortgage lenders have had to come up with some new and creative ways of lending to help people onto the first rung of the property ladder.
Ten years ago, it used to be possible to see how much you could borrow simply by multiplying your annual salary by two and a half. These days it’s quite a bit more complicated than that.
Now there are hundreds of lenders offering thousands of mortgages – all vying for your business.
If you have time and are fairly numerate, it’s possible to research the offering in magazines and on-line. You can compare promotional offers, costs, interest rates, fees, pay-back terms and how much the lenders might lend.
There are an enormous number of variables to consider. For that reason, consulting a mortgage broker or advisor can offer significant benefits.
Mortgage brokers or advisors that are independent will have access to all the mortgages on the market. They will not only know the differences between the lenders – how responsive they are, how flexible, how generous, but they will be up to date with the rates and offers. They will probably also be able to sell you other relevant ancillary products like household and life insurance should you need them.
Some mortgage advisors and brokers offer a free consultation, taking their earnings from the commission they earn when they sell a mortgage. Others will charge, sometimes up to £750 for a consultation. You always have the right to know how they are being paid.
Mortgage information is readily available. If you want your broker to advise on a particular range of products that they feel suit your circumstances you will need to actively approve this. Offering mortgage advice is governed by the Financial Services Act and has to be carried out according to very strict guidelines.
The main differences between mortgages are how much they cost and how you are charged.
The main way the mortgage lender charges you for the loan is through interest payments. The interest charged is based around the interest rates set by the Bank of England.
There are two main types of mortgages. A repayment mortgage is one where you pay off part of the loan as well as interest every month. At the end of the term of the mortgage, usually between 25 and 35 years, you will have paid off the interest on the loan and you will have paid off the loan. The property will be yours.
With an interest only mortgage, you only pay the interest each month on the loan. Thus you are paying less out each month for your mortgage. However, at the end of the term, whilst you might have paid off the interest on the mortgage, you will still owe all the money to the value of the mortgage. With an interest only mortgage you will need to find some other way (typically some sort of policy) to pay off the mortgage if you want to own your home at the end of the term.
With the crisis for first time buyers, the lenders have launched a number of mortgages designed to help out. They often mean unconventional ownership options which will become more widely used as time goes by.
Here is a selection of mortgage types targeted at first time buyers:
Cash-back mortgages: when you purchase the house, you receive a lump sum from the lender to pay some costs like stamp duty, and to help with furniture and furnishings.
Mortgages based on parents’ residual borrowing capacity: where you can borrow more because your parents can help you with the payments.
Guarantor mortgages: where your parents will pay your mortgage payments if you can’t.
Family offset: where your family’s savings interest is offset against your mortgage interest.
Graduate and professional mortgages: higher amounts lent to those who are judged to have careers, meaning they will increase their earnings significantly.
High Loan-to Value: lenders might lend up to 100% of the value of the property, meaning you start with no equity in the property adn could possibly face negative equity if property values decrease. These mortgages are only available to the rare few.
Joint mortgages: where you team up with a friend or family member to borrow more, share the costs but have joint mortgage payment liability.
Shared ownership: you own part of a property, pay rent to the co-owner (usually a housing association) and get a mortgage out for the part you are buying.
Renting a room: if there’s a spare room in the house, the rental income is taken into account when deciding how much to lend to you/how easy it is for you to pay it back.
Rent to Buy: where how much you’ve been paying for rent is taken as the amount you can afford to pay back with a mortgage. It demonstrates affordability.
Extended terms: when you start out with a repayment term of up to 40 years. It makes the monthly payments more affordable but you would pay a lot more interest overall if you didn’t shorten the term at some point.
Shared Equity: where in exchange for a mortgage and a top up loan with which to buy a first home, you would have to forfeit some of the increase in value of your property to the lender when you sell it.
Useful websites:
www.housingcorp.gov.uk – for more information about housing associations and where to find your local HomeBuy agent
www.FirstRungNow.com - for further information on all options available to first time buyers.
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