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At 359,000 people, the number of first-time buyers in the UK has hit a nine-year high. It’s quite surprising considering that homes are now an average of 21% more expensive than 10 years ago.
The majority of first-time buyers would have saved all their hard-earned money for a deposit (an average of £33,000 this year) towards a mortgage. Buying your first home can seem like a murky, complicated world. But it doesn’t have to be! Here is our first time buyers guide to mortgages
Let’s start simple. A mortgage is where you borrow money to purchase a property. You pay it back monthly with interest – usually 25 years but some lenders will offer varying periods.
It may seem strange committing to such a long-term loan, but a mortgage can come with many advantages:
While there are many different types of mortgages, to keep things simple, we’ve listed the most common types below!
This is where you pay part of the interest you owe, as well as part of the mortgage itself. It’s one of the best ways to ensure your property will actually be yours at the end of the mortgage period. A repayment mortgage can also be transferred to another property if you decide to move (this is called ‘porting’).
Fixed rate mortgages remain a firm favourite with first-time buyers. This is because the mortgage rate is set for a fixed amount of time (2, 3 or 5 years). It’s one of the safest ways to pay off your mortgage as you’ll know exactly what you owe for a longer period of time.
If interest rates go up then you’ll still only have to pay the fixed rate you started out with. But if interest rates go down, you could end up paying more in interest rates than if you were on a variable rate mortgage. When your fixed rate period ends, you can always apply for another fixed rate deal! If you don’t, your lender will put you on the standard variable rate.
A variable rate mortgage is essentially the opposite of a fixed rate mortgage. If the interest rate changes, then your monthly mortgage repayments change. Should the interest rates go up, your mortgage goes up. If interest rates go down, your mortgage goes down.
An interest-only mortgage is potentially a very bold move. It means you only pay the interest owed on your mortgage each month, but you must be able to pay the entire mortgage off at the end of your period. So if you have a 25 year mortgage, you may just pay the interest during the 25 years, but when that period comes to an end you will need to pay everything off.
This can be a great option for people who would prefer to save the money aside each month until the time comes to pay it off – or for people who are due to inherit a big sum of money. Another good thing about interest-only mortgages is that if the value of your home has rocketed then you can pay it off in one go by remortgaging your home.
However, it’s a very risky type of mortgage, so it isn’t a great choice if you’re apprehensive about how you’re going to find the money to pay it off at the end!
The government introduced the Help to Buy scheme in 2013 and was designed to help first-time buyers get their foot on the property ladder. It’s essentially an equity loan where people can save just a 5% deposit for a new build property with a value up to £600,000, take a 20% loan from the government (40% if the property is in London) and the remaining percentage as a mortgage.
Here’s more information on Help to Buy schemes!