Who do I speak to?
There are literally hundreds of mortgage deals on the market and it's quite a task in itself to know where to start. You can shop around yourself, as you now are by finding our site or alternatively you can go through a mortgage broker or speak directly to a lender. Lenders of course will only be recommending from their own mortgage range but still may have a good number to choose from. If you decide to speak to a mortgage broker then you must ensure they have been authorised by the Financial Standards Authority or be an agent for an authorised firm. The FSA is the UK's regulator that ensures firms, amongst other things, are giving financially sound advice.
Raising a deposit
The biggest stumbling block to buying your first home can often be the deposit. Mortgage lenders usually keep their most attractive deals for the borrowers that have a large deposit to lay down against their property and sadly, this is not typically the first time buyer. So, in the meantime, whilst saving for your new property you really have to make your savings work as harder for you. This does involve shopping around.
- If you're still a couple of years away from buying your first home then consider a fixed term savings account to house your money.
- If you're needing to get in to the habit of saving for the deposit then take a look at some of the popular accounts for savers available.
- If you've been saving for a while then make sure the interest you're receiving is competitive in today's market and if it's not - make the switch!
How much should I borrow?
The real question is not actually how much should I borrow but really how much can I afford. Lenders will check this as part of the mortgage process but for your own peace of mind, it's something that you should also be doing. Part of being regulated by the Financial Services Authority - lenders need to lend responsibly so consideration needs to be given as to whether you will be able to keep up with the repayments throughout the term of the mortgage. Nowadays more and more lenders are making a comprehensive affordability assessment when calculating how much they are prepared to lend you. Each lender has their own method but can be based on all or a combination of; your income, financial commitments such as credit cards/loans, expected expenditure for general household bills, the property value and your credit history.
Your income
Historically lenders offered to lend simply based on a multiple of your salary (before tax) but with the onus being more on affordability they now also take heed of other factors. Do bear in mind that if you have money coming in, such as bonuses, overtime or commission, lenders may take account of only half of this because it isn't what they term 'guaranteed income'.
Financial commitments
Any affordability assessment should take a look at the number of financial credit agreements / loans etc you have currently outstanding. The lender normally completes a credit check which will give you an individual scoring. Different lenders accept different scores and the scoring itself can be made up of how much credit you currently have and how well you are managing to keep up with the repayments of those. You can always look at your own credit file. Experian and Equifax are two of the main companies that mortgage lenders may use.
Expected expenditure
As you are looking to purchase your first property you'll need to take in to account bills that you may not necessarily have had to pay before such as;
- Council Tax (in England and Wales)
- Water rates (in England and Wales)
- Ground rent, if the property is leasehold
- Service charges, if the property is a leasehold flat
- Insurance costs, including life insurance, buildings and contents insurance
- Heating bills
Property value
The lender you decide to go with will arrange a valuation to check how much the property is worth. They may also limit the amount they'll lend on certain types of property such as timber framed.
Credit history
Any reputable lender will check your credit history and also they will ask previous lenders or landlords for references. If your record shows you've had problems with loans or rent payments in the past, it may affect how much you can borrow. Don't let this put you off if one lender refuses you a mortgage or offers you an expensive deal - it's still worth shopping around because other lenders still may offer you a deal that you are happy with.
What type of mortgage should I get?
Again, another minefield for you to navigate through as a first time buyer is the kind of mortgage that you will need. Taking it down to its simplest level - there are really only two types of mortgage;
Repayment mortgage
With a repayment mortgage you make monthly repayments over an agreed period and when you come to the end of the term you've paid back the whole of the loan and all of the interest on the loan.
Interest only mortgage
As above with this mortgage you make monthly repayments over an agreed period but with this mortgage type you are only actually paying back the interest of the loan. The loan itself will still need to be paid at the end of the term of the mortgage and you would typically do this by paying into another savings or investment plan which you would then have to monitor to ensure the plan held enough money to repay the loan at the end of term.
Repayment and Interest only mortgages are offered with an array of different features. To get a better understanding of these and to discover which would best suit you then click here.
Length of mortgage?
How long a mortgage lasts depends on what you agree with your lender. There is no right length (term) to a mortgage but a typical term is around twenty five years which generally stretches throughout your working lifetime. Because of the large sum involved when borrowing money to buy your first home - spreading the payments over a long period, such as twenty-five years makes your monthly payments more manageable. However, you can choose a different term if it suits you and the lender agrees that you can afford it. For example, if you are buying your first property later in life then you may want to have a mortgage term for twenty years. Do bear in mind that a shorter term will probably mean higher monthly payments but the bonus is normally that you will pay less in total. It's always best, where possible, not to make financial commitments that go past the age you retire.
Other fees & costs to consider
What is often the biggest surprise when buying your first home is all the additional charges that can be incurred. Not every item on the list below is going to apply to every first time buyer but the list is worth using as a prompt to check against;
- Mortgage Account Fee: A single fee that can be charged by the lender when you take out your mortgage to cover set up, maintenance and closing down costs. You won't have to pay a separate exit administration fee when you repay your mortgage if you're charged for this from the outset. Typically the fee is £100 - £300 but can be up to £1000 fees. It's worth checking whether you are paying the single 'account fee' or separate fees for things such as arrangement, close down/exit costs.
- The mortgage booking / arrangement fee: This is a fee charged by the lender, usually to reserve your mortgage funds or to cover the administration costs of processing your mortgage. For some lenders, the fee may also be linked to special deals with a lower initial interest-rate. These vary, and can be significantly higher if linked to a special deal. You can often incorporate the fee in to the loan but do bear in mind that you would then be paying interest on it and this will substantially increase the overall cost of the original arrangement fee.
- Valuation fees: The fee a lender charges for a valuation of the property you wish to purchase to assess whether it is appropriate security for the mortgage. The cost of this can vary from lender to lender, and on the actual value of the property.
- Mortgage broker fees: The broker may charge you a fee for giving you advice - some brokers do not charge at all but if they do then they must tell you.
- Higher lending charge: If you're borrowing a high percentage of the value of the property, the lender may charge a fee to take out insurance cover. This protects them in case you can't pay back your loan and they have to sell your house at a loss. This will depend on how much you borrow, and how much you're contributing as a deposit.
- Telegraphic transfer fee: A possible charge from your lender if you need them to transfer the mortgage funds to your solicitor on the same day typically this will be £40-£50.
- Re-inspection fee: Sometimes a lender will need to re-inspect the property after the original valuation, usually to check if you've made agreed repairs. Typically this will be £50-£100.
- Stamp duty land tax: This is a tax on the purchase price of land and buildings. As a first-time buyer the threshold for when you start to pay SDLT is £250,000. This is only if you have never owned a house or flat in the UK or anywhere else in the world. If you are buying with someone else they must never have owned property before either.
- Land registry fee: The Land Registry Fee is a fee payable to the Land Registry for updating the register of title for the property upon completion of purchase of your new property. The fee is collected by your solicitors and the cost is calculated by a scale fee set by the Land Registry which relates to the purchase price of the property.
- Local authority searches: When you are buying your house, your solicitor will make a search of the Council's records to ensure there are no hidden surprises, such as motorways at the bottom of your garden or outstanding Notices requiring you to take action to remedy an earlier wrong doing.
Do also be conscious that if the purchase of your new property falls through and you have already paid for a valuation of a survey then you may not be able to get this money back. Likewise, if the solicitor that you have instructed has also worked on your purchase you may also have to pay for the work completed to the point of sale falling through.
The application process
Once you have narrowed down your search for the right mortgage, the next step would be to begin your application. Understanding the process can help speed things up - simply by knowing what is required.
- Agreement in principle: The lender may give you an agreement in principle, this lays out what they will probably lend you and can be useful in showing the prospective seller when you are ready to make an offer on your first property.
- Selecting a solicitor or conveyancer: Do make sure that you have phoned around to find a competitive conveyancing solicitor or licensed conveyancer. You may know someone that can recommend a solicitor to you. The solicitor / conveyancer will carry out the legal work, do the local searches, draw up the contracts etc for you.
- The full mortgage application: you will have to complete the lenders full application form. They will want to see evidence of your income (recent payslips), your identity (latest passport and/or driving licence), your current address (recent utility bills)
- Reference checks: your lender may get a reference from a previous lender or landlord. They may also want a written reference from your employer and bank (or accountant if you're self-employed). The lender will also run a credit check to ensure that you don't have problems paying debts off.
- Valuation of the new property: The lender will have the property valued to ensure that it's worth the price that you have agreed to pay for it. If it isn't worth the price they may want to adjust the amount they are willing to lend to you. It's always worth getting your own survey completed or upgrading to a more detailed survey than the lender's basic one.
- The mortgage offer: Once the lender is comfortable with the valuation and the other checks they will make you a formal offer which is typically sent to you and to your instructed solicitor. Once you sign and return this, there is a formal commitment between yourself and the lender.
- Exchange and Completion: After receipt of the formal offer, your solicitor will agree a date to exchange contracts with the seller's solicitor. This is the time that you will pay a percentage of the purchase price as a non-refundable deposit and make a commitment to pay the rest on completion of the contracts.
Firms selling mortgages generally have to be regulated by the Financial Services Authority (FSA) or be the agent of a regulated firm. Regulated firms and their agents have to meet certain standards and you can take comfort in knowing that by choosing a company that is regulated you will have access to complaints and compensation procedures if things do go wrong.
To compare the latest mortgage rates from leading UK lenders click here.
Author: KYM Editor
knowyourmoney - company information