First Time Buyer Mortgages

In a Nutshell...

• Find out from the lenders which deals are available for first-time buyers, and which will best suit your needs.
• Building societies, banks, specialist lenders, intermediaries and others such as supermarkets all offer mortgages.
• You should take into consideration the lender's interest rate as well as fees, penalties, and reputation.
• It is always useful to calculate your budget. You should also allow for other charges such as arrangement fees, stamp duty and others within the home-buying process.
• There are two ways to repay your mortgage - repayment or interest-only.

What are they?

There are plenty of specific first-time buyer mortgages out there these days, including shared ownership, guarantor mortgages and 100% (or no-deposit) deals. Mortgages are also available for Key Workers, and in some instances you can buy with a Housing Association.

Because the market is competitive, some lenders offer special incentives to get first-time buyers' business. They might pay for your valuation and / or legal fees, or waive the arrangement fee, for example. Find out from the lenders which deals are available for first-time buyers, and which will best suit your needs. Most lenders offer a range of fixed and capped rates, discounts and flexible mortgages. Some offer base rate tracker mortgages, and some will give cash-back.

How much should I borrow?

Before you start house hunting, it's sensible to calculate your budget. The mortgages available will largely depend on your income. Typically, mortgages will be based on 3.25 times the income of the main borrower. For joint borrowers, the maximum loan is likely to be 3.25 times the first income, plus one times the second income, or 2.5 times joint income.

Ask several lenders how much they will lend you and request written confirmation. This will let the seller of the property know that you're interested and that you're a serious buyer, which may help to speed up the sale.

To set the top price you can afford to pay for a home, add on the cash you have available for a deposit. The size of the loan expressed as the percentage of the purchase price or valuation of the home is called the Loan To Value (LTV). If you have no deposit you will need to look at a 100% mortgage but you may have to pay a fee called a higher lending charge (HLC) to cover the lender's increased risk of lending 100% of the purchase price.

Are there any other costs involved?

• You cannot use all of your spare money as a deposit. You will need to take into account all the additional upfront costs involved in purchasing a property. The legal aspects of purchase can't be ignored - stamp duty kicks in at 1% of the purchase price on properties costing more than &£120,000 to £250,000. Properties costing more than £250,000 and up to £500,000 are charged 3% stamp duty, while properties costing more than £500,000 are charged 4%. And you'll have to pay solicitors fees.
• You may have to pay an application fee for a special mortgage deal plus, perhaps, an arrangement or completion fee when you finally take the loan. And watch out for Mortgage Indemnity Guarantee (MIG) charges - a form of insurance that protects the lender, but is paid for by the borrower. If there is a charge for this, it may be added to the loan, or could be payable over the early years of the loan.
• Don't forget to budget for valuation and survey fees. Finally, it is worth finding out what refunds or cash-back lump sums are available from the lender and look out for lenders who keep fees to a minimum.

How to repay

There are two ways to repay your mortgage - repayment or interest-only - however, inventive mortgage lenders will now allow you to combine the two if it suits your circumstances.

• Repayment mortgage: This is the option most people go for. Part of your monthly payment covers the interest on the loan while the remainder covers a small part of your debt. As your overall debt decreases, the interest charged falls too, so more of your payments go towards paying off the debt as time passes. If you make all the payments as agreed, you are guaranteed to pay off your mortgage in full at the end of the term - usually a period of 25 years.
• Interest-only mortgage: With an interest-only mortgage, your monthly repayments cover only the interest, not the outstanding debt. You need to make a separate payment each month into an investment vehicle to pay off what you originally borrowed and hopefully generate a lump sum surplus when your mortgage ends.
• Endowment policy: This is an investment product designed to generate enough money to pay back the whole loan. It combines a savings policy and life assurance to cover your debt should you die before the end of the mortgage term. The disadvantage of an endowment is that its final value may not be enough to cover your mortgage so you would have to increase your premiums to make up the shortfall.
• ISA: Individual savings accounts (ISAs) are a form of savings where all interest and bonuses generated are tax-free. Growth is not guaranteed and life assurance isn't automatically included but some providers now offer all-inclusive mortgage packages.
• Pension plans: By linking your pension to your mortgage, part (up to 25%) of the tax-free lump sum generated at the end of the term can be used to pay off the outstanding debt. The remainder must be used to purchase an annuity (where you hand over a lump sum in return for a guaranteed income). You can only access the money when you reach 50 but this is a tax-efficient form of investment.

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