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What first time buyers should know about mortgages

Buying your first house or flat is an exciting time. It means you will finally be able to call a place ‘home’ soon. There is a lot of information about the subject out there, which can make things a little confusing.

Here are the five most important things you need to know about mortgages before embarking on this thrilling new adventure.

Choosing the right mortgage

There are four types of mortgages – fixed rate, tracker, discount, and standard variable rate. Each of them has its pros and cons.

Fixed rate mortgages will give you stability, as you’ll pay the same sum every month for a set period of time. On the other hand, should interest rates drop, you wouldn’t benefit from it.

With tracker mortgages, the lender will track the Bank Of England base rate and then set the margin you pay back above or below it. This means that you can secure very low interest rates and even overpay on your mortgage when possible. However, if the base rate increases, your interest rate will too.

Discount mortgages are another type of variable rate mortgage. The interest rate is set under the lender’s standard variable rate for a certain period of time, which means you’ll always have a ‘discount’ on your mortgage. This means that this kind of loan doesn’t offer much stability and could leave you in a vulnerable position when the deal ends.

When a fixed, tracker or discount mortgage deal ends, you will be transferred on a standard variable rate mortgage, which means you’ll pay the lender’s standard rate. This rate can be increased or decreased at any point in time by the lender, giving you no control over it.

Choose carefully and weigh all the benefits and drawbacks. As a rule of thumb, if you have a small budget, it is usually best to go with a fixed rate mortgage.

The deposit

When getting a mortgage, you need to provide a deposit. Usually, to secure the loan you need to pay up a minimum of 5% of the value of the property. However, the bigger advance payment you make, the smaller your monthly repayments will be. Also, the bigger your monthly repayments, the shorter it’ll take to pay up the mortgage. For this reason, it is worth saving up as much as you can before applying.

If you’re struggling to put aside more than the required 5% or you can’t wait any longer, you should consider the Help to Buy scheme, which is available for properties priced up to £600,000. This scheme doesn’t cost you a thing – you’ll only need to pay up to the cost of the property.

Some lucky people can also use gifted deposits. That is when your family or friends decide to give you or lend you some or most of the sum needed for a deposit. As the name suggests, this is a gift, so there won’t be any hidden expenses linked to it.

If you’re buying a home that costs less than £250,000 (or £450,000 in London), you can apply for a Help to Buy: ISA. The government will boost the savings you store in this ISA by 25%, up to a total of £3,000.

Boosting your eligibility

Not everyone is eligible for a mortgage and these days the criteria are quite strict. For this reason, it’s a good idea to try and boost your eligibility months in advance.

Try these tricks: get on the electoral roll, check your credit file for any mistakes, avoid applying for any kind of insurance in the month before signing up for a mortgage, use your credit card to prove you can pay it back on time each month, don’t use payday loans, and avoid using your overdraft. All these tricks will help you build a better credit score, which is fundamental when applying for a mortgage.

Shared Ownership

If you aren’t confident you can buy a property outright, you can apply for a shared ownership scheme with a housing association. How does it work? You buy a stake of the property (between 25% and 75%) through a mortgage and then pay rent on the remaining share. You will then have a chance to increase your stake over time or buy the whole home by buying it off the housing association.

Other expenses

Although the price of the property you choose is definitely the biggest expense you’ll commit to, there are many other hidden expenses you’ll need to settle before you even start to pay your mortgage.

Most mortgages come with arrangement fees and other charges. You can add this sum to your mortgage, although you will have to pay interest on it. Other costs associated with mortgages are valuation surveys, HomeBuyer Reports, building surveys, legal expenses, stamp duty and the Land Registry Fee. These can amount to up to £6,600.

Finally, you will also need to purchase home insurance – it’s a requirement for all mortgages.
We hope this post will help you plan for your mortgage efficiently. At LPC, we believe in helping to build strong communities through affordable housing solutions. If you’d like to discover more, read more about our exciting developments across the country.