Mortgages Guide | Mortgage Help Product Information

TheMoveChannel.com | First Time Buyer Mortgages

Introduction

Britain is a nation that has become fixated with house prices and given the coverage that the subject receives, it is difficult to be blind to the financial benefit that the steady or surging long term gains of property ownership brings. It's unsurprising then that young professionals are so keen to get started on the housing ladder.

However, thanks largely to the rising house prices that make home ownership so appealing, many first time buyers simply can't afford to get together a deposit of a sufficient size to meet the loan to value requirements on most mortgages.

First time buyer mortgages can be divided into two types:

  • 100% mortgages.
  • Standard mortgages that are tailored to include certain features or incentives that are particularly appealing to first time buyers.

Historically first time buyers were offered better deals than existing homeowners or people looking to remortgage. This used to be done through the use of deals that were exclusive to first time buyers, but these days it is rare to find deals that are not open to all types of borrower.

All types of mortgage sometimes come with incentives or features that hold particular appeal to first time buyers. These can include: cashback on completion (ranging from a few hundred to several thousand pounds), a refund of the property valuation fees, help with legal costs and so on. With new build properties, it is sometimes possible to get additional incentives such as free kitchen appliances or deals that allow you to move in to a fully equipped property for a set sum of money as a deposit.

Within the bounds of standard mainstream mortgages, many first time buyers go for fixed or capped rate mortgages. This is often a sensible choice as it allows borrowers to rigidly set their budget at a time when spare income may not be freely available to cope with increases in interest rates that may otherwise affect their mortgage payments, if they had a discounted rate for instance.

First time buyers should be aware that to get the best deals in terms of interest rates, the bigger the deposit the more competitive the rate. If possible, it is usually best to try and aim for at least ten percent. But this fact leaves many potential borrowers facing a dilemma of whether to delay the purchase and save a larger deposit or to take on a mortgage loan with a marginally higher interest rate. While saving can be good preparation for the financial rigidity that is required in making your mortgage payments each and every month, delaying the purchase often means you have to pay a higher asking price as the markets are likely to have risen by the time you get round to buying.

A final point that first time buyers should remember is that while the normal threshold for paying stamp duty is £60,000, under the last budget stamp duty has been abolished on properties that are sold for less than £150,000 in around 2,000 of the most deprived areas in the UK. Some of these regeneration zones are actually quite popular with first time buyers anyway, so this can be an added incentive to target those locations.

Cash Back Mortgages

Cashback mortgages provide you with a single lump sum of cash either immediately on completion of the mortgage transaction or after the first monthly repayment.

The amount of the lump sum is usually calculated as a percentage of the overall loan amount, though it can be a set figure. Some lenders offer a sliding scale of cashback, depending on how long borrowers are willing to tie themselves in to the deal. Although cashback amounts in the region of 1 to 3% are fairly common, the percentage of the loan that is given as cashback can be as high as 10%. Such seemingly great deals don't usually come without strings attached however, usually in the form of very severe early redemption penalties that may well involve the repayment of some, all or even more than the cashback value.

It is quite common to find mortgages that include a relatively small cashback element, possibly in the region of £200 to £250. This can be a cash sum for you to spend as you wish, though it sometimes has a specified purpose, such as covering all or part of your solicitor fees. This type of cashback deal does not usually have such severe penalties and may well not be advertised as a cashback mortgage.

Various different types of rate can come with cashback - capped, discounted, fixed and variable, with cashback products usually available for both mortgages and remortgages. It is not common to associate cashback schemes with UK-based foreign currency mortgages, tracker mortgages or other non-standard loans.

Advantages

Cashback schemes can be useful for buyers who need to have funds available more or less immediately after the mortgage is completed. Although most cashback deals are open to all borrowers, one group with whom they are particular popular is first time buyers. The cashback sum is often used to buy furniture, fittings and other mod cons that they may not already have, or used to cover the cost of stamp duty, surveys, legal fees or other such incidentals.

Disadvantages

The rate of interest is likely to be higher than for non-cashback equivalents, since the lender will seek to recoup the cashback sum over the life of the loan by charging you more for the privilege of borrowing the money. By opting for a cash bonus, you will normally be giving up the option of a competitive fixed rate or a hefty initial discount.

It is often the case that the higher the cashback the less competitive the rate of interest, either during any discount period or once the mortgage reverts to the lender's SVR. The more the lender gives you up front, the more they will need to charge you to make the money back in the long term. When you take into account the build up of interest over time that the higher rate will accrue, this form of mortgage often proves to be relatively inefficient.

Cashback mortgages almost always carry early redemption penalties. If you try to pay off the mortgage within the penalty period, whether by selling your home or remortgaging, you may have to pay a fairly substantial sum of money back to the lender. Some lenders operate a sliding scale of penalties, which decrease each year, or in steps, while others will charge the same penalty for the entire early redemption period.

The size of the cashback sum is often linked to the percentage of the property value that a customer is seeking to borrow. Some of the largest cashback deals are available only to those borrowers with a 75 percent deposit. Where this is the case, it can be cheaper in the long run to go for a more competitive non-cashback loan worth a larger percentage of the property value and hang on to some of the cash that was otherwise earmarked for the deposit. Where a lender operates such an incremental cashback scheme, the same reasoning applies at higher loan-to-value amounts.

100 Percent Mortgages

There are quite a large number of people who are unable to raise a deposit to buy a property. You may have no existing equity in a property, no savings and little prospect of any in the near future, you may be using up all you do have on the other costs of the move, or you could perhaps be saving what you have so that you can fix up your new home when you do buy it. But if this or any of the many other reasons do apply to you, it does not necessarily mean that the mortgage market is closed for business, thanks to the existence of 100 percent mortgages that are aimed at people in exactly such circumstances.

One hundred percent loans can usually be offered with many of the other types of mortgage rate - you are often given a choice of fixed, capped or discounted mortgages. Few people who can actually afford a deposit would choose a one hundred percent loan, as there are quite a number of downsides to them, but for those who may otherwise struggle to start playing the property game, they can provide a helpful stepping stone to get you started.

Advantages

The obvious advantages of 100 percent mortgages are fairly obvious - you have no need to raise a deposit, and any money you do already have can be saved for the move or for the new home.

Some 100 percent mortgages allow you to add your legal fees, surveyor's fees and any other up-front costs to the loan. This further reduces the amount of money you need up-front in order to complete the transaction.

If you know that you can afford the repayments because you are already paying out a similar amount in rent but don't have sufficient spare cash to save over and above this level, then a 100% loan could be for you. 100% mortgages allow you to get started owning a home and it is quite possible that your monthly outgoings will actually be lower than if you were renting.

Some lenders will take into account changes in the value of your property when calculating your ongoing repayments. So if prices in your area rise sharply, or the value of your home is driven up by improvements that you carry out, some lenders may be willing to reassess the property value, with the possible benefit that you have sufficient equity in your home to drop to a lower loan-to-value price banding and move to a more competitive rate of interest. You would need to check with the lender to find out whether or not this is a policy that they employ.

Disadvantages

The interest rate with a one hundred percent loan are almost certain not to be quite as competitive as rates for people who are borrowing a smaller portion of the value of their home.

You will usually have to pay a Mortgage Indemnity Guarantee fee for not offering a deposit. This can also be added to your loan. The lender is usually quite happy for you to add this sort of fee to the loan for two reasons:

  • Spread over the life of the mortgage, these fees make relatively little difference to your monthly payments, so will not significantly increase the risk of you defaulting on your mortgage.
  • Anything you add to the loan you pay interest on. Therefore, the lender gets twenty-five years worth of interest on everything that is added to the loan.

MIG fees are usually charged as a portion of the loan rather than a fixed fee. Despite the additional interest charges that adding the fee to you loan will generate, many first time buyers simply don't have a choice, since this fee can often come to several thousand pounds, It is possible to find lenders that will loan you 100% without charging you a MIG, but it is rare and you are likely to be charged a higher rate of interest to compensate. MIG-free 100% loans are generally found amongst those lenders that base their decision on your ability to meet the monthly mortgage repayments, rather than those that use fixed rigid multiples.

With 100 percent loans, you are sort of being hit with an expensive triple whammy. You are likely to be charged a slightly higher rate of interest due to the size of the loan, and the interest is being charged on a larger sum of money than if you had used a deposit to buy the same property. You are also likely to be charged a MIG fee, which is likely to be added to the loan - all of which means a pretty sizeable amount of interest in total when compared to somebody borrowing the same amount with a deposit at a lower loan to value.

Lending criteria varies depending on the lender and also on your personal financial circumstances, but lenders are usually a little more rigid when lending the full value of the property. Expect to be able to borrow from three to three and a half times your salary, though you may get up to four times your income if you shop around. Some lenders will also take your guaranteed bonuses into account. Joint buyers can usually borrow up to two and a half times their combined salaries.

First time buyers with 100% mortgages are the borrower group that is most vulnerable to market fluctuations. If you have a 100% mortgage, you are on the brink of negative equity right from the start of your term, so if prices did drop sharply and suddenly in your area, you may find that selling your property would not generate sufficient money to repay the loan. You also need to bear in mind what would happen to your repayments if interest rates jump sharply. It is important to do the calculations and see what the impact would be.