First time buyer mortgage choices
First time buyer mortgage choices
With over 4,000
mortgages out there, it can be difficult to work out where to start. But a
bit of knowledge will point you in the right direction, says Ben Wilkie
They’re relatively straightforward things, mortgages. But you wouldn’t know that
from the language used and the range of different options out there. And without
knowing what’s available, how will you know what’s right for you?
Here, we explain the different mortgage types on offer, and explain the benefits
of each. Remember though, that if you are still unsure, you must seek
professional advice - this is one of the largest financial decisions you are
likely to make in life and paying an expert to make sure it’s a decision
well-made is undoubtedly money well-spent.
Firstly, though, the majority of mortgages listed -
fixed,
discount, stepped and so on are
known as mortgage ‘deals’. They are special offers designed to entice you to
that particular lender, who will then hope you stay with it for many years
beyond the deal period.
In the past, that wouldn’t have been much of a problem. Your parents, likely as
not, stayed with the same lender for as long as they owned their home. Nowadays,
however, it’s much easier to move to a better deal and borrowers have cottoned
on to the fact that remortgaging can save them thousands.
To combat this, lenders have redemption penalties attached to many of their
deals. This means that if you pay off your
mortgage
within a specified period you will have to pay a penalty - a sum that can run
into thousands. These tie-ins, as they are known, usually run for the length of
the deal rate period, but some will run beyond that - known as overhangs. So if
you took out a two year fixed rate mortgage, for example, you may be tied in to
the lender for five years - often on an uncompetitive rate. The vast majority of
independent financial advisers strongly recommend against taking a loan where
the tie-in lasts longer than the deal period.
SVR
A lender’s standard variable rate (SVR) is its basic rate, from which the
majority of its deals are calculated. It’s also what you will expect to pay once
your deal period ends. As the name suggests, the rate is variable, which means
it can go up and down, usually in line with the Bank of England base rate.
This isn’t always the case, though. The lender has no obligation to set its
rates
according to what the Bank of England does - indeed it can set it at whatever
level it likes. It’s basically only competition that will keep the rate in line
with other lenders. So if the base rate rises, the lender can choose not to
raise its SVR, but the same applies if it falls.
Fixed rate
A fixed rate mortgage sets the interest rate you pay back for a certain amount
of time - usually between one and five years, although it can be for longer.
When the fixed rate period expires, you will be transferred on to the lender’s
standard variable rate (SVR). But while you are on the fixed rate, regardless of
whether the lender’s SVR changes, your repayments will not.
A fixed rate is a small gamble. If interest rates fall, you will not see any
benefit in your repayments. However, if they rise, you can rest assured that you
won’t pay any more either.
Fixed rates are amongst the most popular type of deal for first time buyers, who
are looking for the certainty such deals offer. By allowing you to know exactly
what your payments are for a specified amount of time, you can budget more
effectively.
The last couple of years has seen the Bank of England base rate - upon which
most mortgages are calculated - remain stable at four to five per cent. While
the deals available on fixed rates have likewise not changed too much, they do
fluctuate a bit more. This is because lenders calculate their rates on what they
predict the base rate will do - if they think it will rise, their rates go up,
while if a fall is on the cards, the fixes they offer may do likewise.
Discount rate
If you’re looking for the cheapest possible start to your mortgage experience,
then a discount rate may be the one for you. A discount rate mortgage entitles
the borrower to a certain amount off the lender’s SVR for a set amount of time.
The more generous your discount, the greater the risk for the lender and so the
less time it will apply for - or, perhaps, the greater the chance of overhanging
tie-ins.
Remember though, that discount rates are variable, so they can go up and down.
While your payments may be the lowest possible when you take out the loan, if
rates start to rocket, they could end up looking like a false economy.
Stepped rate
Stepped rate mortgages are like discount rate deals, in that they give you a
reduction on the lender’s SVR at the start of the loan. But the amount of the
discount changes - at the beginning it’s quite high, but it reduces quickly as
time goes on.
A stepped rate is good news if you want to keep your payments as low as possible
at the beginning, but remember your payments will rise quickly. Make sure you
know what you will be paying - and can afford it - in six or 12 months time.
Capped rate
A capped rate mortgage is when a ceiling is put on the amount that you will pay.
This means that when the lender’s SVR rises above your capped rate, it won’t
apply to you. The highest rate you will ever pay is that of the cap. If you
calculate your affordability on this then, you can’t go too far wrong. Again,
the longer you want the security of this cap, the higher the cap will be.
Base rate tracker
A base rate tracker mortgage tracks the Bank of England’s interest or ‘base’
rate. The difference between your repayment rate and the base rate depends on
the lender and the product but around one per cent above base rate is a good
example. Unless you have a temporary discount offer - the mortgage will always
track the base rate from above rather than from below.
When interest rates are cut having a base rate tracker is good news - the lender
has no choice but to pass on the cut immediately. But on the other hand, if and
when interest rates go up, then, automatically, so will your interest rate.
Flexibility
Flexibility in a mortgage can be regarded almost like a seasoning - and it can
be applied to any of the above mortgage types. Having a flexible mortgage means
that you can take direct control of your loan in the form of making
overpayments, underpayments, taking payment holidays and borrowing back from the
mortgage. You are also guaranteed daily interest calculation and no redemption
penalties or tie-ins beyond the deal period.
Current affairs
What mortgage you choose from the above should come down firstly to your needs
and your lifestyle - look at our hypothetical case studies for some examples.
But what makes the best financial sense given the economic situation should also
be taken into account. At the moment, interest rates at 4.5 per cent have
remained consistently low for the past years and house price rises are not as
huge as they used to be.
Final verdict
The decision of which mortgage to take ultimately lies with you but if you
require further help before taking the plunge, you can always seek independent
financial advice. If you think this sounds expensive, it doesn’t have to be.
Throughout Mortgage Magazine you’ll find the details of mortgage advisers and
they’ll help you work out the best deal for you.
Case studies
Case: Miss Broke earns £20,000 a year and - minus small possible annual rises
-is at the maximum of her earning power. She has £5,000 to use as a deposit on
the £70,000 property she wants. However, times are very hard and Miss Broke
needs has no spare cash at the end of the month. Options: Even though an upfront
discount might seem appealing to Miss Broke, it would mean she would be on a
variable mortgage. Therefore there is no guarantee of the monthly rate she would
pay. A fixed rate mortgage, even though it might cost slightly over the odds
during a five-year period, at least gives Miss Broke the security of knowing she
can afford her mortgage repayments. Alternatively, if Miss Broke can find a
mortgage with a capped rate that she can afford, this might be a better option
as if interest rates go down, she has the chance of paying less.
Recommendation: Direct Line has a great new range of fixed deals, with a
two-year mortgage priced at 4.49 per cent. There’s also a three-year at 4.84 per
cent and a five-year at 4.89 per cent. Direct Line borrowers will also benefit
from discounted home insurance, which could be a lifeline when you’re just
starting out.
Case: Mr Bright is just about to qualify as an accountant. His salary, currently
£18,000 is due to more than double at this time but at the moment things are
really tight. Mr Bright’s a lucky man, however. His parents have agreed to lend
him £40,000 to help him on his way. He’ll have to pay this back, but only when
he can afford it. They have also agreed to help him financially should he get
into difficulty in the time up to when he qualifies. Mr Bright wants to get as
big a mortgage as possible, on the basis he will find it easy to make his
repayments fairly soon.
Options: A discount mortgage is certainly the most suited to Mr. Bright. And if
he takes one for just two years, it will be quite a significant discount while
money is at its’ tightest. After the two years is up, Mr Bright can afford to
either look at other options or go onto the lender’s variable rate. The fact
that the discount period is variable is not a problem as in the unlikely event
that rates do go up, his parents can put up the extra.
Recommendation: There are some generous
discount mortgages in the
market at the moment. Norwich & Peterborough Building Society has a two-year
deal at an unbelievable 3.3 per cent, although you’ll be tied in for three years
after the rate ends. Mr Bright could also borrow four times his salary. If he
didn’t want to be tied in beyond the end of the deal period, Mr Bright could do
worse than try the Portman Building Society, whose two-year deal is at 4.24 per
cent.
Alternatively, he could opt for a guarantor mortgage, the likes of which are
offered by Newcastle Building Society and Scottish Widows. The rates are higher,
but by taking his parents’ income into account he could borrow considerably more
and then transfer the mortgage once his salary increases.
Case: Mr Busy has three jobs. He works full time in an insurance office earning
£24,00 a year but also earns money teaching music in the evenings and making
garden furniture. He doesn’t want to self-certify his two extra jobs as his
income multiples are easily in line with the £75,000 flat he wants to buy -he is
also putting down a 20 per cent deposit. However, Mr Busy still wants to put the
extra cash to some use and he is also thinking of selling up and moving in with
his partner in the next couple of years.
Options: Mr Busy is well within his affordability even just taking into account
his main job. Therefore, he can afford to risk a variable mortgage. However, as
he is not sure how long he wants to stay in the property, getting a discount
mortgage with tie-ins might be restrictive. So with interest rates so low, Mr
Busy would be suited to a base rate tracker. This should come with no tie-ins
and a very reasonable rate of interest.
Mr Busy should also look for flexibility in his mortgage so that he can overpay
at no penalty when he wants to with any income from his extra jobs.
Recommendation: Egg has a tracker at 3.99 per cent for the first six months,
then 5.49 per cent (variable) afterwards. There are no tie-ins, and all of Egg’s
mortgages come with flexible features.
This article has appeared in Mortgage Magazine which is available in all good
newsagents. Copyright MSM International Ltd
Bookmark with:
Facebook
Delicious
Digg
Reddit
Stumbleupon