First Time Buyers Mortgages - Getting on the Ladder

Hazel Cottrell
hazel.cottrell@consumerchoices.co.uk

Despite recent panic there are still a variety of mortgage products on the market for first time buyers, but to get the best deal you have to do your research...

Buying a house is one of the biggest and most important purchases you will make in your life and the prospect of securing your first home can be very daunting. Previously, it has been ever increasing house prices which have made it so difficult to step on the property ladder. Now, it’s the bubbling fears of recession and the recent media hype about banks being reluctant to lend which leave first time buyers feeling like there is no hope.

But don’t despair! There are still mortgages available for first time buyers. If you have a regular income, a clean credit history and can put up a sizeable deposit you are likely to remain attractive to banks despite the current economic climate. Even if you are lacking on these fronts, there are plenty of options which could aid your quest for a mortgage.

There are many things to think about when choosing a mortgage - the differences between deals can be worth thousands of pounds in the long run, so it’s essential that you look at all the options and shop around for the deal that best suits you.

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How much can I borrow?

The amount that you can borrow depends on three factors:

How much you earn – The lender will offer you a mortgage amount as a multiple of your income. Some lenders offer increased income multiples, sometimes as much as five times your annual income, but borrowing too much is dangerous and buyers should beware of becoming financially overstretched. The FSA recommends that single people should borrow no more than three times' salary and couples no more than two and a half times' their combined salary.
How much the property is worth – Some lenders have offered mortgages for 100% of the property’s value however these mortgages are a dying breed and are being rapidly withdrawn from the market. Most lenders will loan you up to 75% of the value of the property and some still offer 90% but the higher the loan to value ratio (LTR) the higher the interest rate you are likely to be charged.
Your unique circumstances – To ensure you will be able to keep up payments, most lenders will want to assess your average outgoings, for example household bills, outstanding debts and cost of dependents. As a first time buyer it will help if you can show that you have been making regular rent payments of an amount similar to that of your proposed mortgage.

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How long will my mortgage last?

The “mortgage term” or length of the mortgage agreement typically lasts between 20 and 30 years but can be any agreed length. Longer term mortgages will result in lower monthly payments however you will be paying interest for a longer period of time, so the total cost will be greater overall. You should be realistic about how long it will take you to repay the lender.

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How much will I have to put down as a deposit?

Following the death of 100% mortgages, most lenders now require at least a 10% deposit. The more that you can scrape together though, the better deal you are likely to get as you will be seen as “lower risk”. It would definitely be worth seeing if you can get help from your family or taking out a low-cost personal loan to bolster your deposit as a larger deposit also helps you avoid higher lending charges.

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Interest rates

Interest rates are crucial to the cost of a mortgage and must be assessed carefully when choosing a deal.

“Fixed Rate” mortgages guarantee that your interest rate will remain the same for a set period of time. These are relatively low risk and enable you to plan your budget more accurately, however if the Bank of England Base Rate drops, you could end up paying above the average interest rate.

Interest on “Tracker” mortgages rises and falls with the Base Rate so are higher risk. If the Base Rate falls you will get a very competitive rate, but if it rises you will find your monthly payments become significantly higher. For example on a mortgage of £115,000 with a repayment period of 25 years, if your interest rate rises from 6% to 8%, your monthly repayments will rise dramatically from £750 to £898.

Many lenders will offer a period of discounted interest (usually two to five years) but it is important to consider the subsequent rate as well. If you plan to move your mortgage after the discount ends you should check what kinds of fees your lender charges to release you from their contract.

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Interest-only vs. Repayment

For first time buyers this is a particularly important decision. Taking out an interest-only mortgages means that you will only pay the interest on the amount borrowed so your monthly charges are significantly lower. They can be a good way for first time buyers to get on to the property ladder (switching to a repayment mortgage when they can afford it). However, whilst you are on an interest-only mortgage you are not actually making any progress on paying off the mortgage itself. If house prices fall, you may find yourself in financial difficulties when the time comes to repay the capital sum through selling the property.

Most first-time buyers will take out a repayment mortgage (or “capital mortgage”) which allows you to make a dent in the capital owed and results in you actually owning your property at the end of the term. The monthly payments will be higher and in the early stages of the mortgage you will be paying off interest predominantly, but as the capital is gradually paid off, you pay less interest and more capital.

To illustrate the differences between these mortgages, let’s look at Betty and Pedro, who both have mortgages of £115,000 at 6% with a mortgage term of 25 years:

Type of mortgage	Monthly payments	First year cost	Capital paid off
Interest- only (Betty)	£575	£6900	£0
Repayment (Pedro)	£750	£9000	£2100

Betty’s interest-only mortgage leaves her with more cash left over each month to spend on shoes, but at the end of the year she is no closer to owning her house. Pedro scrapes together £175 extra each month and at the end of the year he has knocked £2100 off his mortgage.

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Graduate mortgages

Graduate mortgages are a growing sector of the mortgage market and are generally available to people who have graduated in the last seven years and have been working for at least 12 months. Many banks (for example HSBC) offer special deals for those who hold a graduate account with them, so it’s worth checking these out.

They often offer low set up fees, good income multiples, flexible features and most importantly, a high LTV ratio which does not require you to put down a hefty deposit. However, borrowers should be wary of taking out mortgages with a LTV ratio above 90% as they will often be forced to pay higher lending charges.

Often a parent or guardian must act as a guarantor for the graduate borrower, securing the mortgage against their own home and assets for the percentage above their child’s earnings. The guarantor is released when the borrower earns enough to cover repayments on the entire loan.

Banks will often look closely at your student debt and any other outstanding debt to ensure that you will be able to afford the repayments.

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Part-ownership mortgages

A part-ownership mortgage will see you teamed up with an independent property co-buyer. Part-ownership mortgages significantly reduce monthly repayments and they half the initial deposit required.

However, part-ownership has the potential for financial disaster if the individual circumstances or plans of your co-buyer or yourself change. You must take measures to protect yourself and your investment and ensure all eventualities are discussed and prepared for in advance.

Experts emphasise the need to find a co-buyer that you trust completely. They advise that you should not go into property with a minority stake and must make sure all agreements have been set down in writing.

You can search for and contact potential property co-buyers and co-investors online at GoHalves (www.gohalves.co.uk).

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Buying with a friend

In the current property climate, shared ownership and group mortgages are becoming more and more popular, particularly in areas like London with low levels of affordable housing. A group mortgage is normally held by two to four people and offers a solution to first-time buyers who cannot afford to buy a property on their own.

This route certainly has its advantages, allowing you to escape the rent trap early and get your first foot on the property ladder. Buying as a group allows you to pool you resources, giving you a larger budget to spend on a house, whilst you personally will have to stump up just a percentage of the deposit.

However, the decision should not be taken lightly - buying a house together is very different to renting one and you must be sure that you can feasibly live with the people you choose for a considerable amount of time. Mortgages last a lot longer than a short-hold tenancy agreement!

You should discuss how financial decisions will be made in the house, ensure you have a tight legal structure and protect yourselves with a ‘Declaration of Trust’ document, with all agreements are set down in writing. Share to Buy (www.sharetobuy.com) specialise in arranging shared mortgages and offer a wealth of useful information and advice on their website.

Another alternative is to take in a lodger. Their rent will slice a nice chunk off your mortgage payments, but you can stay in control and if you don’t get on, you can always ask them to move out.

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Government assisted mortgages

There are a variety of government assisted mortgages, or “HomeBuy Schemes” which provide assistance for those whose earnings do not allow them to qualify for a mortgage in the traditional way. These mortgages are available to tenants of a council or housing association, people on the housing register, key workers (such as teachers, nurses and police officer) and first-time buyers who are unable to afford property. The details of the schemes vary, but they generally work in two different ways:

Buy and rent - You buy an affordable share of a flat or house. Instead of having to fork out for the entire property, you get a mortgage to fund the part you’re buying and pay rent on the remaining portion.
Extra loan – The government provides access to additional low-cost funding which runs alongside your mortgage and makes repayments more affordable.

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Hidden costs

Many potential charges will never be pointed out to you when a lender sells you a mortgage. Taking on a mortgage is a huge responsibility and it is absolutely crucial that you read the small print. Some important things to watch out for are:

Exit fees / Redemption penalties – Mortgage lenders will often charge you penalties if you later decide that you want to move your mortgage elsewhere. These charges very but can be up to 5% of the amount owed if you pull out early so it’s worth checking them before you sign up.
Watch out for the MIG - If you only have a low deposit, many lenders will force you to take out a Mortgage Indemnity Guarantee, often referred to as a higher lending charge. This has no benefit to you, it simply protects the bank if you have problems making repayments. To avoid paying one, ensure your deposit is above the MIG threshold, typically 10%, or search for a lender that doesn’t apply it.
Buildings Insurance – All mortgage lenders will insist on you having buildings insurance, but you do not necessarily have to take it out from the lender – shop around to get a better deal.
Payment Protection Insurance – This ensures your repayments will be covered should you fall ill or have an accident. There has been a media frenzy recently about banks overcharging for PPI and charging you for it automatically. Just remember that you DO NOT have to take out PPI from your lender, it’s often much cheaper to buy it elsewhere.
Life Assurance - Although not compulsory, it is definitely something you should consider when taking out a mortgage, especially if you have dependents. A life assurance policy will ensure the remaining debt on your mortgage will be paid off should you die. Again, it’s often best to buy this separately from your mortgage as lenders will often try to flog an overpriced package.
Additional costs of taking out a mortgage - With any mortgage you will be required to pay stamp duty, conveyancing, valuation and survey costs (these are unavoidable). Over the last few months, the number of mortgage lenders charging ‘booking fees’ or ‘arrangement fees’ has increased dramatically. The costs can run to £1,500, so make sure you find out what your mortgage lender charges.

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Recommendations

Be realistic when you are working out what kind of mortgage will suit you - take into account all your outgoings as well as your income and work out what you can afford before house-hunting. Ensure you will be able to meet the repayments and borrow sensibly.

If you are struggling to find a large deposit – Halifax are currently offering first-time buyers mortgages with a 97% LTV ratio.
If you want peace of mind about interest rates – For a deposit of 10%, Nationwide are offering a 25 year fixed rate mortgage at 6.8%.
If you want to start on a discount rate – For a deposit of 10% the “Mortgage Special” from HSBC offers a rate of 5.43% for two years followed by a variable rate of 6.25%.

Find the best mortgage for you with our Mortgage Comparision Service, or calculate your monthly repayments with our Mortgage Calculator.

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