Getting on to the property ladder is a big decision. First-time buyers face a lot of stress and work, from meeting with banks, brokers and advisers and working out the true costs of buying a house to viewing properties and enduring sleepless nights as they wait to hear whether their offer has been accepted.
But perhaps the most important task is finding the right deal out of the many first-time buyer mortgages available. The market is slightly less competitive these days thanks to the double-dip recession and credit crunch, but there are some great offers to be found. The trick lies in working out which one is right for your circumstances.
To get you started here are the 10 key things you need to know about mortgages before you take that first step on the bottom rung of the property ladder.
1. Mortgage rate options
There are three main rates on mortgages: fixed, tracker and variable.
A fixed-rate will stay the same for the duration of the deal and this can be ideal if you need to keep tight control over your finances each month.
Tracker and variable rates change over time. Trackers are set at a defined point above the Bank of England base rate (currently 0.5%). Variable rates change in line with how much it costs the bank to lend you the money.
2. Don’t forget the fees
Most mortgages have additional fees and these can be substantial. But those with lower fees often have higher interest rates. It can be a no-win situation so look at all the figures very carefully.
3. Early repayment charges
Early redemption charges (ERC) usually apply. This means that if you want to pay off a big chunk of your mortgage there will be an additional fee to pay. This can be thousands of pounds.
4. Deposits matter
How much you can pay up-front as a deposit on the property can make a big difference to your mortgage options. The most competitive deals are offered to those with cash of 25% of the value to put down as a deposit. Smaller deposits generally mean a higher interest rate. It can be worth saving for an extra year or two in order to get a bigger deposit together.
5. Repayment options
There are two main repayment plans: interest-only and capital.
On an interest-only mortgage your monthly payments only cover the interest, so at the end of the deal you have to find the money to pay off the capital or re-mortgage.
Capital repayment mortgages cost more each month but you have the security of paying off some of the loan value as well as interest.
6. Overpayments
Overpayments are allowed on most mortgage deals but there is usually a cap. The maximum you can pay off each year is often around 10% of the capital. Having this option means that if your finances are in good shape you can start to reduce your mortgage early.
7. Repayment problems
If at any time you struggle to pay your mortgage each month you must speak to your lender. Repossession is only a last resort and banks will work with you to provide help, such as payment holidays or a reduction in monthly payments.
8. Lock-in periods
Mortgages are usually offered as two-, three- or five-year deals. At the end of the term you will have to reassess your situation and find a new mortgage. For the ultimate peace of mind a five-year fixed deal is the best option, but such offers are not always readily available.
Think carefully about how long you want to be tied to your mortgage and what your options are likely to be at the end of it.
9. Consider the extra costs
There are many additional charges and fees that you face when buying a house. Some can be added on to the capital loan of your mortgage. Others you will have to pay upfront. Look at every single charge when you compare mortgage deals.
10. Be prepared
Buying a house can take months, so be prepared for a long wait before you finally get the keys. Do all you can to get your paperwork in order and try not to get too stressed as the process drags on. Keep your cool and remember that it will all be worthwhile in the end.
Anything to add?
30 year fixed is one of the more popular choices, but don’t discount the 15 year fixed rate loan. Your payments might be a little higher, but your rates will be lower, and the amount of money you save in interest is pretty amazing.
Bryan… I wish we were able to get a deal close to what you guys on the other side of the pond can get. When I was in Houston the week before last, one of my colleagues was doing a re-fi – fixed 15 year deal at 2.something percent.. incredible. We can only get a fixed deal for up to 5 years here (unless it is through a credit union or something special)
Yikes! Yea, did a refi at 2.95 (15 yr) after everything was said and done. On the flip side, our savings rates are total @#$%. A 2 year CD rate might get you 1-2%.
The most important thing looking at fees is to look at the APR which has all the fees added in. Sometimes people think they are getting a low rate, but when all the fees are added in, they get shocked.
Absolutely agree – probably one of the best things about comparison sites that include the overall cost for comparison! 🙂
Agreed! My rate went from 2.65 to 2.95 after every thing was added in.
the banks often have a “sale” once a year or so where you can switch mortgage at no fee. I always keep an eye to see if there is a better deal available. I look for tracker mortgages since they don’t have overpayment penalties and you can leave at any time.
What are your thoughts on overpayments versus refinancing?
You will have to do the math. It all depends on how much your loan is, what your rates are, costs of closing, and how much time you have left on your loan. I was going from a 30 year (with 25 years left) to a 15 year. Rate change was 6% down to 2.95%. My closing costs were only $400 though (same bank so no appraisal or anything was needed). So it made sense for me to do a refi.