First time buyer

Most people need to take out a mortgage to buy a home as they do not have enough money in the bank to buy a property outright. A mortgage is a loan that is used to purchase either a property or a piece of land. Normally when somebody takes out a mortgage they will put some of their own money towards the purchase as a deposit, and the remainder of the cost will be paid using the mortgage loan.

A mortgage is secured against the value of your house. This means, if you default (fail to pay) on your mortgage, the lender can reclaim your house and sell it to get back the money they have loaned to you. For this reason, it is very important to make sure you can afford to pay a mortgage before you get one.

You can take out a repayment or interest-only mortgage to help you purchase your home. Most first time buyers will be looking at repayment mortgages, where you pay back the interest on the loan and the loan itself in monthly instalments. This means at the end of the mortgage term, you will have paid off the original loan and the interest charged by the lender.

If you take out an interest-only mortgage you will only pay the interest each month, but you will need to have a separate plan in place to pay off the loan at the end of the mortgage term. This could be using savings or a pension for example.

Whilst there are many products on the market, mortgages fall into two broad categories. Fixed rate and variable rate products.

Fixed rate mortgages A fixed rate mortgage offers a set rate for a period of time. The benefit of a fixed rate mortgage is the ease with which you can budget, knowing exactly what you will pay for your mortgage each month. However, lenders will typically charge you a higher rate for this benefit. Essentially the lender is charging you for their risk if rates change.

Fixed rate mortgages are available for a set period, typically 2-5 years, although some lenders offer longer term fixes of 10 years or more. During the fixed period you will normally be charged fees if you end the mortgage during this time. It is important to factor this in, if you choose to move to a new house during this time you may have to pay this fee.

Variable rate mortgages If you choose a variable rate mortgage, your mortgage rate can change at any point although they usually will change based on changes to the Bank of England’s base rate. You can find better deals on variable rates, but you have less certainty to budget your monthly expenses.

There are three main types of variable rate mortgage:

Tracker Mortgages follow the Bank of England base rate, meaning your rate will change if the base rate does. The rate you pay will be a percentage plus the base rate, for example 2% plus the current Bank of England base rate. If the base rate raised by 0.25%, your mortgage rate would rise by the same amount.

Standard variable rates (SVR) can change at the lender’s discretion. Your mortgage lender can decide to make an increase or decrease in your rate at any time. In practice, changes are likely to be triggered by changes to the Bank of England base rate, but it is possible that your lender could change it for other reasons.

Discounted rates are linked to a lender’s SVR, meaning they can go up or down if the lender’s SVR rate changes. Discounted rates are offered for a fixed period of time, typically 2-5 years.

When you purchase your first home, it is important to understand the various charges and fees that you will need to pay. As well as your deposit, and obvious costs such as renovating, furniture and moving costs, you also need to budget for legal fees and associated costs.

Product fee
Sometimes referred to as an arrangement or completion fee, this is a standard fee for a mortgage product. You are normally able to add this fee to your total mortgage if you need to, but be aware that this will increase your total mortgage size and therefore it will affect the amount of interest you pay back.

Valuation fee
Your mortgage lender will value the property you would like to buy to check that it is worth the amount you want to borrow to purchase it. The lender’s survey only considers the value of the property, so it is worth considering carrying out your own more detailed survey to identify any issues before you purchase the house. Some lenders may waive the valuation fee as part of their mortgage deal.

Mortgage account fee or exit fee
You may be charged a mortgage account fee on application to cover the lender’s administration costs, which is usually less than a few hundred pounds. Alternatively your mortgage may have an exit fee instead, which is paid when you either move to another mortgage product or pay off your mortgage in full.

Conveyancing and legal fees
You will need a conveyancer (solicitor) to manage the contracts and documents involved in purchasing a house. Your conveyancer will manage the various legal processes to purchase your new home, they will charge you for the necessary search and land registry fees as well as their own rate.

Mortgage broker fee

Your mortgage advisor may charge you a fee which will depend on your circumstances, and should always be discussed with you before you incur any cost.

Stamp duty
Stamp duty is payable on the purchase of any home that costs above £250,000. For properties above £250,000 the stamp duty rate rises as the value of the home increases. There are different rules if the property is a second home or buy to let.

However, as a first time buyer stamp duty is waived if the value of the home is less than £425,000. As stamp duty is a significant expense when purchasing a home it is worth understanding this cost fully. The Money Advice Service have a guide to help you understand how much stamp duty you would pay based on the value of your home.

Insurance
Buildings insurance is often compulsory when taking out a mortgage product from a lender, but you should also consider contents and life insurance when taking out a mortgage.

Buildings and contents insurance covers the property and its contents should something damage your home, such as a fire. Life insurance ensures that your mortgage is paid if you die during the term of your mortgage.