With so much talk in the press about mortgages, house prices and “getting on the property ladder”, we’re cutting through the noise to bring you the essential information you need right now if you’re looking to get your first mortgage.
Is now a good time to get a mortgage?
Of course, this depends largely on your circumstances. A mortgage is possibly the biggest financial commitment you’ll ever make, so it’s important that you don’t rush into it. Make sure you’ve worked out how much you can afford in monthly repayments, and the loan to value you need to purchase the property that you have your eye on.
You might want to try our mortgage calculator to get you started and give you an idea of the mortgage rates that may be available to you.
What is loan to value?
Simply put, the loan to value (LTV) is the size of loan you need compared to the cost of the property, and this is usually expressed as a percentage. So, for example if you purchase a property that costs £100,000 and you have £20,000 to put down as a deposit you will need an £80,000 loan from your mortgage lender- or a 80% LTV mortgage.
In general, the more you can afford to put down as a deposit, the better the interest rates you will be offered on your mortgage loan.
If you’re confident that you are ready for a mortgage, rates are in general fairly favourable at the moment for first time buyers compared to certain points over the last few years, as increased competition between lenders in the market drives some rates down.
It may also be worth noting that we are now in the tail end of the Funding for Lending Scheme. This is a Bank of England scheme which is designed to encourage lenders to offer lower rates to customers. From January the scheme will no longer apply to mortgage lending which could mean that rates are likely to rise slightly next month.
Another scheme that you should be aware of if you’re planning on buying is the government’s Help to Buy scheme, which enables lenders to offer mortgages at 90-95% LTV. The scheme is designed to benefit those who can only afford a small deposit. Even though not all lenders are participating in the scheme, competition seems to be driving some other lenders to offer higher LTV (requiring a lower deposit) mortgages too.
What types of mortgage are there?
There are four main types of mortgage:
- Fixed rate: the rate of interest that you pay is fixed for a set period, so for that time you know exactly how much your repayments will be each month
- Tracker: interest rates are linked with the Bank of England base rate, so if this goes up, so will your interest. The rates on leading tracker mortgages can tend to be lower than fixed rate mortgages
- Discount: instead of being linked to the Bank of England base rate, your interest rate is linked to the lender’s standard variable rate (SVR). The lender can change this rate at any time, meaning that your repayments could go up or down
- Offset: if you have a substantial amount of savings, you can offset your mortgage against your savings. For example if you took out a £100,000 mortgage and you had £30,000 in savings, you would only pay interest on £70,000, reducing the term of your mortgage.
Are there any hidden costs to watch out for?
When you’re concentrating on building up your deposit and taking out a mortgage with repayments that you can afford, it can be easy to neglect the other costs that you will have to meet:
- When you’re looking for somewhere to buy, remember that if the price is over £125,000 you will have to pay stamp duty on top of the purchase price
- Low mortgage rates that seem too good to be true often come with heavy setup charges, so make sure you are aware of any fees you will have to pay
- It is likely that you will have to pay for a solicitor to carry out the purchase for you
- If you go through a mortgage broker, make sure you know exactly what services you are getting and whether there is a fee
- If you enter a fixed rate deal and want to leave it early, there may be exit fees to pay
Finally, make sure that you fully understand the terms of the mortgage you are taking out. For example, if you’re taking out a fixed rate mortgage, make sure you know exactly when your fixed rate expires. “Fixed for three years” can mean either “fixed for three years from the day you move in” or “fixed for three years from a date set by the lender” - make sure you know the details as this will affect when you need to start shopping around for rates again.
If you take the time to raise a substantial deposit, shop around and budget carefully, you can take advantage of market conditions and get the mortgage that’s best for you.