A guide to mortgages for first time buyers

In some respects homebuyers have never had it so good – interest rates are at an all time low, property prices have fallen, substantially in some areas, making purchasing more affordable and there is a relatively wide choice of mortgage products - even if lending criteria are tougher. 

First time buyers are suffering the most.  In order to qualify for the most competitively priced products they have to find a deposit of 25% - out of the question for many unless they can get help from their parents or other family members.  But mortgages requiring a deposit of just 10% of the value of the house are available and whatever first time buyers might think, historically they are still very cheap.

So what are the choices for a first time buyer, new to the game? Read below about the different types of mortgages available. You can also click here to read Citywire’s ten step guide to buying a house.  

Repayment or Interest Only? 

There are two basic types of mortgage – repayment or interest only.  Today most first time buyers will be offered a repayment loan where each monthly payment consists partly of repayment of the outstanding debt, and partly of interest.  At the end of the term, usually 25 years, the debt is fully repaid.  This is likely to be the most suitable loan for an FTB.

As the name implies, with an interest-only mortgage the borrower makes monthly payment of interest – but none of the debt is repaid.  The advantage of interest-only loans is that monthly outgoings are lower.  For example, payments on a £100,000 interest-only loan at 6% work out at £500 a month.  Monthly outgoings on the same borrowing on a repayment basis work out at £652 a month. 

But interest only loans are likely to become increasingly difficult to obtain.  Lenders remain wary of homebuyers’ ability to repay outstanding debt if there is no obvious repayment vehicle and political pressure is making it increasingly difficult to repossess properties from borrowers in default. 

Unless you expect to inherit a large sum at some stage in the future, or you have other means of repaying the outstanding mortgage, interest-only loans (if you can get one) should only be taken out by FTBs to save costs in the early stages and you should switch to a repayment loan as soon as you can afford to do so.  

Fixed Interest Loans

The big advantage of a fixed rate loan is that during the period that the interest rate is fixed, monthly mortgage repayments remain constant and do not rise or fall.  Lenders prefer FTBs to have a fixed interest loan because it protects them from unexpected rises in monthly repayments in the early years of a mortgage when finances are likely to be tight.  The period during which the interest charge is fixed can be anything from one year to the lifetime of the loan.  But the most common fixes are from two to five years with a few 10 year and lifetime fixes on offer. 

The disadvantage of fixed rate mortgages is that if interest rates come down below the level at which your loan is fixed, you will be obliged to continue making repayments at the higher fixed rate.  You can get out of the fixed rate, but there is almost always a penalty fee to pay which usually makes it uneconomic to do so.  But for many, particularly FTBs, the security of certainty outweighs the downside risk.  And with interest rates currently at an all time low, there is little chance of interest rates going any lower. 

Variable RateTracker Loans