What is a Mortgage? – A First Time Buyer's Guide

A lot of people that we speak with don't fully know what a mortgage is - only that they need one to buy a home. This guide explains the basics and helps you understand your options.

What is a Mortgage?

A mortgage is essentially a long-term loan used to purchase land or property. The loan is ‘secured’ against the property itself so if you don’t keep up with the repayments the lender has the authority to take the house off you and sell it in order to pay off the debt. Most first time buyers will take a mortgage out over a 35-year term, as it helps to keep monthly payments manageable, but you can have a mortgage over a maximum of 40-years or a minimum of 2-years. The longer the term the lower the monthly payments but the more interest you will pay over the duration of the loan and the shorter the term the higher the monthly payments, but you will clear the loan quicker.

What Deposit will I Need?

Most lenders will require you to put down a deposit of a minimum of 5% of the value of the property, they will then lend you the remaining 95% which would be the classification of the Loan to Value or LTV. At 95% LTV you have the worst rates on the market, as it poses the highest level of risk to the lender. At this level the amount that you can borrow will also be restricted and the credit check is the most stringent. Once you get to a 10% deposit, or 90% LTV, the rates of interest and affordability calculator improve and the credit check requirements are relaxed a little more, this is because you are reducing the level of risk for the lender. Anything between two thresholds would take the criteria of the higher LTV, i.e a 7% deposit would still run as a 95% LTV product, but the monthly repayment would be lower as you are borrowing less. Lenders change their products at 95%, 90%, 85%, 75% and 60% LTV, some lenders may have products at other levels in between but not all.

A deposit can come from a variety of different sources; there are strict rules that govern what is an acceptable source and what isn’t. Most first time buyers receive help in the from of a gifted deposit, this is absolutely fine but there may be some additional checks and documents needed from both the lender and the conveyancer. Other acceptable sources of deposit can include savings, inheritance, new build gifted deposits or sales of some assets. You are not allowed to borrow to borrow, so funds from credit cards or loans would be unacceptable, or cash that’s origin doesn’t have an audit trail.

What Mortgage Should I Take?

There are a number of different options, but the two main products that first time buyers tend to look at are either fixing their rate or taking a tracker or variable deal. A fixed rate does exactly what it says on the tin, the rate of interest will stay exactly the same for a given period of time, often 2, 3 or 5-years, regardless of what is happening in the external market. A lot of first-time buyers prefer to go for a fixed deal as it will help you budget as you know exactly what your mortgage payment will be. The main alternative is a tracker mortgage which is variable as it tracks an external rate. Most trackers will vary depending on the Bank of England base rate but some will be linked to a lenders standard variable rate instead. Essentially, if the base rate reduces then your mortgage interest rate will reduce by the same amount which, if the economy is improving and the base rate is reducing, could save you money on your mortgage. However, there is an inherent risk linked to the tracker as there is no guarantee that the base rate will fall and could even rise, which would increase your monthly payments. In all instances, once your fixed period or tracker period ends, we can help you to secure a new rate or move lender via a product transfer or remortgage. It is important to check the date that your initial period ends as it doesn’t always line up exactly when it starts.

How Much Can I Borrow?

There are three things that affect your overall buying power. Income - what you have coming in, commitments -what you already pay out each month and deposit - how much you're putting down. Lenders will use a calculator to decide how much you can borrow, which is called your mortgage affordability. This can vary from lender to lender and often internally with each lender based on your deposit level. i.e the more deposit you put down, the more you can borrow. Your main source of income will be used to calculate income with the ability to add on overtime, bonuses or 2^nd jobs. Some people receive financial support via universal credit or a number of other government benefits; most lenders will allow us to use this too. Commitments such as credit cards and loans (including car loans) are the main credit commitments, but there are other things to consider such as cost of children and childcare or maintenance payments which will also affect your overall affordability.

There are also some specialist schemes with certain lenders that will allow you to borrow more if you are a first-time buyer, pop us a call and we can explain these in more detail.

What can I do to improve my Chances?

Lenders will look at a lot of factors when deciding on whether or not they would like to lend. If you have a good credit score, this will improve your chances considerably, if you have a poor score then you can look to make changes to improve your chances. Your credit file will update monthly and is held on a rolling 6-year period, with recent history holding a little more weight. If you have credit cards it’s important to make sure that they aren’t maxed out and, if possible, are cleared monthly. Loans and other monthly commitments should always be paid on time as missed or late payments can negatively impact your file. We would always advise against short term lending or buy now, pay later, as they can also bring your overall score down. CCJ’s, defaults and bankruptcies are trickier to work with but not impossible, speak to us if you have any questions as we can often help with adverse lending situations.

Not everything here will be applicable to your situation, but we hope it helps you star to understand how things work. There is nothing that beats personalised advice to suit you.