How to take out a mortgage

Ready to buy your first home? Discover all you need to know about getting the mortgage that’ll mean you finally have a place of your own

Small red houses balanced on top of pound coins

There’s nothing like buying a home rather than renting from a landlord – and that’s pretty much certain to mean taking out a mortgage to help pay for your purchase. Need to get the lowdown on what the process entails? Our guide has all you need.

What to consider when you’re taking out a mortgage as a first-time buyer:

  • It’s essential to think about how much you can set aside to pay as a deposit and look at what you are able to borrow before you go house-hunting. However, it’s also vital to think about the affordability of paying for your home and daily life. 
  • Monthly mortgage repayments to your lender are just one aspect of the cost of owning a home – they’re accompanied by the council tax and utility bills you may be used to from renting, but also by buildings insurance, and upkeep and maintenance of the property. Add in what you spend on transport, food and entertainment each month for an overview of the likely spend. 
  • It’s true that lenders take these factors into account when you apply for a mortgage, but you need to consider them, too, so the costs are right for your personal circumstances.

Saving for a deposit

In general, banks and building societies will lend you up to 95 per cent of a property’s value (the so-called loan to value or LTV). This means you need a deposit of at least 5 per cent of the property’s value.

Put down 10 per cent, however, and you’ll be able to get a better mortgage rate, and if you can find even more, you’ll have a wider choice of mortgages and the best available rates.

If you aren’t able to save for a deposit at all, there are some mortgages available without. These include guarantor mortgages where your guarantor (for example, a family member) agrees to make the payments if you fall behind. They would need to agree to a charge on their own property or to open a savings account with the lender which can’t be withdrawn for a period or until you have paid off a sufficient amount of the loan.

Are there other mortgage costs?

You’ll need to budget for fees on top of the mortgage. Most lenders have an arrangement fee, and some also charge a booking fee.

How much can a first-time buyer borrow?

Lenders will look at both your income and outgoings to see if you can afford the repayments on the loan. They’ll also consider what would happen if interest rates were to rise, and the mortgage costs increased. 

As a rough guide, with standard outgoings, you might be looking at a loan that’s around four times your annual income. Remember, though, that it’s actually more complicated than this, so you’ll need to be prepared with details about what you pay out each month in any loan repayments, to cover bills, for food shopping, going out, and so on.

A single buyer can apply for a mortgage, but buying with a partner or another person can mean you can borrow more.

It’s worth getting an agreement in principle from a lender that shows how much you can borrow. An estate agent may ask to see this to check that you are a serious buyer. Be aware that this isn’t the same as a mortgage offer, which you would receive once you’d formally applied for a mortgage on a property and checks and a valuation had been carried out.

Find the right mortgage as a first-time buyer

Both banks and building societies offer mortgages. You can look at best buy tables and online comparison sites where you’ll be able to put in how much you want to borrow, the size of your deposit, and look at both fixed and variable rate deals (see below).

It’s also worth talking to a mortgage broker. Go for someone who can advise on the whole market rather than being tied to a provider. 

Mortgage types available to first-time buyers

Mortgages can be repayment, interest only or a mixture of the two. Most first-time buyers won’t be considering interest-only mortgages as they demand much higher LTVs. They aren’t widely on offer either.

A repayment mortgage means each month you’ll be paying off the amount you owe and some of the interest on the loan. In the first years, it’ll be mostly the interest you’re paying off, so it will take time for the statements to show the amount of the loan decreasing.

If you made the repayments throughout the life of the mortgage, you would clear the debt and you would own the property outright. 

In reality, it’s more likely you might swap to a different mortgage deal at some point or move and then what you owe would be recalculated.

An interest-only mortgage means monthly payments are just paying off the interest on the loan. The payments are lower than with a repayment mortgage but the total cost of the mortgage over its lifetime will be higher because the loan isn’t reducing.

At the end of an interest-only mortgage term you still owe the lender the money. Bear in mind that you would need to show how you are going to pay off the lump sum when you take out the loan.

Mortgage terms available to first-time buyers

The length of the mortgage term will affect how much you pay overall over its lifetime as well as how much you pay each month. Longer terms equal lower monthly payments on a repayment mortgage but you will have spent more overall because you will have paid more interest.

What’s the difference between a fixed and variable rate mortgage?

Mortgages can be either variable or fixed rate. With a fixed rate mortgage you’ll know how much you will be paying each month over the set period of the fixed rate applying to the mortgage. On the downside, if interest rates did go down, you wouldn’t get the benefit. The fixed rate could apply for a two, three or five year period, but there are also some fixed rate mortgages which apply for 10 or more years.

At the end of the fixed rate period, you can look at other deals the lender might be offering or move the mortgage to a lender with a better deal.

If you were to finish the mortgage early for some reason, you would probably pay an early repayment charge, so do factor in any possible change in your circumstances over the term when you’re deciding how long you want to fix the mortgage rate for.

Variable rate mortgages are likely to have lower interest rates than fixed rate versions, but if you opt for one of these, your interest rate can change. It’s likely to do this if the Bank of England increases the base rate.

Different types of variable rate mortgages

All variable rate mortgages are not the same. You can choose from:

Tracker mortgages have a variable interest rate which is linked to the Bank of England base rate for an agreed period. If the rate fell, you would benefit, but you need to consider if you can manage increased payments if the rate rises.

Standard variable rate (SVR) mortgages have interest rates set by the lender, which can increase or decrease the rate. This is most likely to happen because of changes to the Bank of England base rate, but changes can be independent of what happens to the base rate.

Discounted rate mortgages are linked to the lender’s SVR, and if it changes, so will what you pay. 

What happens when you’ve found a home?

Once you’ve had an offer accepted on the home you want to buy, you can apply for a mortgage. You’ll need to provide documents to prove identity, income and show outgoings. Background checks will be undertaken to check your credit history. The lender will also talk to you about valuing the property.

Once everything is complete and the lender has satisfied all its criteria, a mortgage offer can be made.

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