Taking out your first mortgage is a big step – you've probably never consulted a mortgage broker and you certainly won't ever have had such a big loan outstanding!
Ten years ago you would know 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.
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. Thus was born what is currently known as a ‘first time buyer mortgage'.
These days there are hundreds of lenders offering thousands of mortgages – all competing for first time buyer 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. You can compare any number of details about mortgages and try and find the right one for you.
There are an enormous number of variables to consider. For that reason, consulting a mortgage broker or advisor can offer significant benefits.
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 primary 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 which are reviewed every month.
Looking at the basis of loan repayment, there are two 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.
On the other hand, 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.
Now that the property market has become so hard for first time buyers, the lenders have launched a number of mortgages designed to help out. They often mean considering unconventional ownership options which will become more widely used as time goes by.
Here is a small selection of the type of mortgages aimed at first time buyers:
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.
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 130% of the value of the property, meaning you start with negative equity but all your costs will be covered. These mortgages are only available to the rare few - if at all.
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.
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.
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.
There are now so many options, the best thing to do is to seek mortgage advice.
Useful websites: