First time buyers Right first time
There is never a perfect time for some things in life and buying your first
home is one of them. So do your homework, hold your nose…and jump!
Rarely has a
first
time buyer faced a housing market of such variables. Whereas traditionally,
the group accounted for between 25 and 33 per cent of all house sales, this
figure has been up and down like a yo-yo according to statistics from the
National Association of Estate Agents (NAEA).
The market
A little over a year ago, the numbers of first time buyers was at an all-time
low - less than 10 per cent of the market was made up of buyers looking for
their first homes. It’s got a little better since, but the proportion is still
far from healthy
There are a number of reasons for this, but the most important one is that quite
simply property is so expensive, particularly in relation to earnings. With the
average property costing at least six times the average earnings, fewer people
are able to take their first steps on to the ladder.
In the short term this is bad enough - home ownership is one of the key factors
in the country’s economic success over the past couple of decades - it’s the
long term that has the experts worried. If there aren’t any first time buyers,
there won’t be any second timers or home movers. In a worst case scenario this
could mean that house prices fall, leaving millions in negative equity.
That’s unlikely to happen however, mainly thanks to the raft of initiatives
lenders and authorities are coming up with to help first timers. Chief among
them are a range of excellent value
mortgages that
mean you can borrow more and pay less than you would have done a few years ago.
Remember it’s never been easy buying your first home, it’s always been a
struggle. But with so much choice out there, your options have never been better
Getting the right mortgage
So you’ve decided that the time is right to buy and chosen the property of your
dreams. But the most taxing decision will be with what type of
mortgage you
choose to fund your new home. Initially, the selection looks daunting but the
estimated 4,000 mortgage products available on the market can be broken down
into finite categories. And the one you opt for will depend on your individual
situation.
FIXED RATE MORTGAGES
What are they? A fixed rate mortgage means that the interest you pay on your
loan will stay the same for a set period - usually between two and five years.
Whatever happens to the Bank of England base rate or, in turn, your lender’s
Standard Variable Rate (SVR), you have the peace of mind that your own rate of
interest will stay the same. However you will pay for this peace of mind as
fixed rates tend to be
set higher than on other mortgage types. An arrangement fee, which could be in
the region of £300 to £400, can also be payable to the lender for fixing the
cost of your funds.
Who are they good for? These mortgages are suited to borrowers that value a
strict monthly budget. In fact this will take priority even over the possibility
of your rate, and therefore your monthly repayment, going down. Fixed rate
mortgages are often popular with first-time buyers who have not yet reached
their full earning potential and may have other outgoings such as university
debt.
Who should avoid them? If you are simply looking for the cheapest headline rate,
there may be more suitable alternatives. Also, as fixed rates will come with a
tie-in for the length of the deal, borrowers who want freedom to leave their
mortgage should look elsewhere.
What is a good one? Leeds Building Society has just come up with a three-year
fix at 5.39 per cent, and you’ll only need a five per cent deposit. Fees come in
at £595, but you can opt for paying a higher rate without having to cough up any
charges.
Monthly payment on a 25-year repayment mortgage of £120,000 = £728
DISCOUNT MORTGAGES
What are they? As the name suggests, discount mortgages provide the borrower
with a certain amount off the lender’s SVR for a set period of time – again this
is usually between two and five years. Although the margin off the SVR will
remain fixed, the SVR itself could change as it is priced in accordance with the
Bank of England base rate. And bear in mind that lenders’ SVRs are always priced
higher than the base rate in order for them to make a profit. Currently a
typical SVR sits in
the region of 6.75 per cent.
Who are they good for? Borrowers that are looking for the lowest rates in the
short-term future and are prepared to take a risk of their monthly repayments
rising.
Who should avoid them? Anyone who is on a tight budget and cannot factor in a
rise in repayments. And again, anyone who does not want to be tied into the
mortgage for the term of the initial deal.
What is a good one? Yorkshire Building Society has a two-year deal at 4.90 per
cent, which is 1.5 per cent off the lender’s standard variable rate. Borrowers
also get free mortgage payment insurance
(MPPI) for six months. Redemption penalties do apply during the deal period. You
also get 0.6 per cent of the mortgage back to help you with your moving costs.
Monthly payment on a 25-year repayment mortgage of £120,000 = £694
STEPPED DISCOUNT MORTGAGES
What are they? These are a simple variation on a discount mortgage. In this case
though the discount that applies will decrease year-on-year for the period of
the discount term.
Who are they good for? Those borrowers who are guaranteed a pay rise each year
or who are safe in the knowledge that other existing debts will decrease. In the
mean time they will also have to factor in the possibility of a rise in monthly
payments as the products are still variable.
Who should avoid them? Borrowers who cannot see their financial situation
improving over the deal term or who need security of payments.
What is a good one? Skipton Building Society has a three-year deal - in the
first year you pay 3.99 per cent (variable), which is a discount of 1.9 per cent
of the lender’s SVR. For the next two years, you pay 5.49 per cent, which is a
discount of 0.4 per cent. Early redemption penalties do apply during the deal
period. Monthly payment on a 25-year repayment mortgage of £120,000 = £632 in
year one and £735 in years two and three
CAPPED RATE MORTGAGES
What are they? The rate you pay with these products is set by the lender and
will rise and fall usually in accordance with its SVR. However in this case, the
lender imposes a cap or ‘ceiling’, which is a point that your rate cannot
exceed.
Who are they good for? Anyone what wants security of payment but also wants to
benefit from a potential fall in rates. If you know you will always be able to
afford the interest rate at which the cap is set, this will be the most you will
ever pay.
Who should avoid them? Anyone looking for the cheapest rate possible. Remember
that nine times of 10, you will at least start off paying the rate of the cap,
which may not be the cheapest option on the market. The products will also tie
you in for the length of the capped rate deal in return for the security they
offer.
What is a good one? Kent Reliance Building Society has a five year deal where
the rate is guaranteed not to rise over 5.48 per cent. Administration fees do
apply and if you want to borrow more than 90 per cent of the value of the
property you’ll need to pay a mortgage indemnity guarantee (MIG)
Monthly payment on a 25-year repayment mortgage of £120,000 =£735 - this is the
maximum amount you will pay during the deal period
BASE RATE TRACKER MORTGAGES
What are they? As the name suggests, these products will track the Bank of
England base rate usually by a certain percentage above. The base rate is
reviewed every month by the nine members of the Monetary Policy Committee (MPC)
so this is the time frame on which you will have to be prepared for your rate to
change. However, as most industry experts are currently predicting a fall in
interest rates
the change could well be for the better.
Who are they good for? Because they are variable and not without some risk, base
rate trackers tend to come with no tie-ins or redemption penalties, so you can
leave the mortgage at any time. In this case, they are best suited to people who
are always on the look out to better their deal – otherwise known as ‘rate
tarts’. Alternatively you may just be at a time in your life when you don’t know
what you will be doing from week-to-week let alone year-to-year. In this case a
base rate tracker may provide some welcome flexibility.
Who should avoid them? Anyone looking for dirt-cheap upfront deal (offered by
some discount mortgages) to see them through the first couple of years of
repayments. It’s important to bear in mind that the value of a base rate tracker
is spread out over the longer term.
What is a good one? Coventry Building Society has a deal where you pay the Bank
of England base rate (currently 4.5 per cent) until September 2008 followed by
base rate plus 0.75 per cent.
Monthly payment on a 25-year repayment mortgage of £120,000 = Currently £666
FLEXIBLE MORTGAGES
What are they? Flexibility is not so much a type of mortgage but a ‘seasoning’
that can be added onto an existing mortgage. Basically a truly flexible mortgage
will mean you are not tied into the deal for any length of time – in which case
redemption penalties (what you pay to leave your mortgage) will also not apply.
The interest on a flexible loan will be calculated on a daily basis. This means
that as soon as your reduction in capital kicks in from your monthly repayment,
you will pay interest on the new amount straight away, rather than having to
wait until the end of the year as used to be the case. You will also be able to
make unlimited overpayments to your mortgage at no cost. And as long as you are
within your repayment schedule, you will be able to make underpayments and even
take payment holidays.
Who are they good for? Absolutely everyone!
Who should avoid them? Theoretically no one – although refer to the box to learn
the dangers of taking flexibility too far with a current account mortgage. Aside
from that, the world of mortgages is your oyster!
Current account mortgage warning!
Current account mortgages offer extreme flexibility to borrowers and should
probably be avoided by first-time buyers. They work in exactly the same way as
an offset mortgage but allow negative as well as credit balances to be offset.
And, rather than being kept separate, balances are poured into just one big pot.
So if you had a £120,000 mortgage, £10,000 in savings and credit card debt of
£2,000, you would see a balance of £112,000 overdrawn when you put your card
into the ATM (£120,000 plus £2,000 minus a credit balance of £10,000). As well
as providing what is in effect, an overdraft facility, current account mortgages
allow you to re-borrow back what you have already paid – all by simply drawing
cash out of the wall. Therefore they are designed for more experienced
mortgage-holders who are usually very astute with their finances.
Published July 2006
This article has appeared in Mortgage Magazine which is available in all good
newsagents. Copyright MSM International Ltd
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