Mortgages for First Time Buyers
Last updated: August 2009
In this article, we take a look at mortgages, starting with the different repayment methods: repayment and interest only. We also take a look at fixed rate and variable rate mortgages.
A mortgage is a special type of loan that allows a first time buyer to borrow a seemly ridiculous amount of money towards the purchase of a house. However, mortgages make home ownership possible for the masses. As a first time buyer, I know that mortgages can be extremely confusing. Firstly, there are two ways to repay a mortgage: repayment and interest-only. Then there are so many options that affect the amount of interest you need to pay. Let us start by explaining the two different types of repaying a mortgage.
Repayment Mortgages
The first way to repay a mortgage is by repaying both the interest and the amount you borrow. Repayment mortgages are the most common choice amongst first time buyers. They can generally be divided into fixed rate and variable rate.
Fixed Rate
A fixed rate mortgage has an interest rate that stays the same for the length of the arrangement. You should choose a fixed rate mortgage because...
- It allows you to plan your finances for the length of the arrangement because you will know your exact repayment each month.
- You will be protected from increases in interest rates.
The downside to fixed rate mortgages is that:
- They are only fixed for a period of time.
- They generally have a higher rate of interest than a variable rate mortgage.
- There will usually be an early repayment charge if you try to pay off your mortgage early.
Variable Rate
A variable rate mortgage has an interest rate that varies for the length of the loan. Interest rates can go up as well as down and they are generally dictated by the Bank of England base rate. If you are economics expert and you feel that interest rates will go down, you may decide that this is the best option. If you are not an economics expert, we think it's best to seek independent advice.
Due to the added risk of a variable rate mortgage, the interest rate is generally lower than that of the equivalent fixed rate deal.
Here are the advantages of getting a variable rate mortgage:
- You may benefit from interest rate cuts.
- Sometimes have no application fee.
Here are the disadvantages:
- If interest rates go up, it could cost you more than a fixed rate deal.
- It is difficult to plan your finances because nobody really knows if rates will be going up or down and by how much.
- The lender may not pass on interest rate cuts.
Another type of variable rate mortgage is called a tracker. This is the same as the above, although the lender will commit to passing on changes in the interest rate set by the Bank of England.
If you are not content with a fixed rate or a variable rate mortgage, you may consider getting a capped rate mortgage. This combines the benefit of a variable rate mortgage (i.e. the benefit from a interest rate cut) with the benefit of a fixed rate mortgage (i.e. being able to plan your finances). With a capped rate mortgage, you do not to pay more than a particular rate.
Interest Only Mortgages
An interest only mortgage is where you only pay the interest on the amount that you owe to the lender. Under this arrangement, you are not actually paying back the money that you have borrowed (only the interest) but there are special cases when you might want this kind of mortgage.
If you can invest your spare money in something that grows in value, you should be able to pay-off the mortgage when needed.
Other Types of Mortgages
You may come across mortgages that combine some form of investment with one of the above mortgage types - such an investment may be an endowment or an ISA. It is best to check the terms and conditions of a mortgage, whether it is unique to a lender or otherwise.
Conclusion
If you are still in doubt about mortgages, we recommend that you seek help from an independent financial advisor.
A note on financial / mortgage advisors that work for estate agents: An estate agent may well ask you if you would like the help of their own financial advisor to help you find the best mortgage deal. Estate agents will tell you that they are free but we know that nothing is completely free so what's the catch? Firstly, you need to find out whether they are searching the whole of the mortgage market. For example, if they work for a mortgage company, they will probably recommend mortgages from that company. If the mortgage advisor is truly independent, they may still offer you a mortgage that bags them the most commission, rather than the best mortgage for you. Yes, commission is what they get and that is why they are free. You may decide to look at what they advise and then go elsewhere - some would say this is wasting their time, some would say that's just shopping around.
Mortgage Resources
- Calculate your Mortgage Repayments (spreadsheet)
- The Council of Mortgage Lenders - The trade association for the mortgage lending industry.
- Mortgage advice - Find independent financial advisors in your area.
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Article by Tim Ballard.
March 2008 (updated: August 2009)
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User Comments
Tim from Suffolk said...
Go on, be the first to add a comment!
Thursday, April 10th 2008 06:53 PM
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