Popular mortgages for first-time buyers If you’re thinking of taking your first step onto the property ladder, just hearing the word ‘mortgage’ may make you feel slightly anxious, and that’s absolutely understandable.
But since buying a home is probably the largest purchase you’ll have made to date, it’s vital that you understand the different types of mortgages available, so that you can decide on what option best suits your individual circumstances.
Mortgage Advice Bureau has put together this handy guide that explains the jargon, to help you navigate your way through the mortgage maze.
Let’s start with the basics; most mortgage products available are now repayment mortgages. This means that you make an interest and capital repayment each month, so you’re reducing the amount you owe with every repayment.
In the earlier years of your mortgage, the majority of your monthly payments comprise interest, although an amount of the payment does reduce the capital borrowed. However, towards the latter part of the term, this situation is reversed so that you’re paying off larger chunks of capital, and less interest as the amount outstanding reduces
Prior to the Credit Crunch in 2008, interest-only products were widely available and very popular with borrowers, particularly first-time buyers, as the monthly repayments were much cheaper. As the name suggests, these mortgages meant that only the interest on the overall amount borrowed was being serviced, and capital outstanding wasn’t being reduced.
These days however, for the vast majority of borrowers (particularly those purchasing their first property) interest-only mortgages aren’t recommended. That’s because they can leave borrowers in the position of reaching the end of their mortgage but without having paid off any capital at all.
So, now that we’ve established its most likely you’ll be offered a repayment mortgage, let’s look at the most popular types of product available for first time buyers…
As the name suggests, if you take out a fixed-rate mortgage, the monthly amount that you pay will stay the same throughout the length of the deal, even if the Bank of England Bank Rate changes. Fixed-rate mortgage products vary in length, with two, three, five, seven and even ten year fixes all available, albeit that the rate of interest for the fixed term can vary significantly between deals.
Fixed rate products enable you to budget more easily each month, as your monthly outgoings are more predictable. They’re also the most popular product on the market by far, with over 90 per cent of all borrowers opting for a fixed rate of some kind, according to Mortgage Advice Bureau borrower data.
Standard Variable Rates
A Standard Variable Rate (SVR) is the normal interest rate a mortgage lender will charge for the term of your mortgage, unless you opt to take out a specific product with a different rate instead. It’s also the rate that your mortgage will revert to once any product you take out ends.
The majority of lenders based their SVR on the Bank of England Bank Rate, but that’s not always the case. However, the common theme with an SVR is that it’s your lender’s decision to raise or decrease the rate they charge. That means that even if the Bank of England reduce the Bank Rate, for example, it doesn’t necessarily mean that your lender will also reduce their SVR accordingly.
Family Springboard Mortgages
These are a relatively new type of product which have, for the most part, replaced guarantor mortgages, especially for those who are purchasing their first home. With family springboard products, the borrower applies for a mortgage in the normal way but is supported by a family member (or perhaps even a friend) who lodges their savings in an allocated, linked savings account to the borrower’s mortgage account.
These savings act as the deposit and can’t be accessed by the person who has lodged them for the term of the mortgage product, which could be two, three or five years, depending on the lender. The borrower then makes their mortgage payments in the normal way each month, and if they successfully make all their repayments for the duration of the product term, the savings are released back to the person who lodged them, in many cases with interest.
Although the terms of each deal vary between lenders, these sorts of mortgages can prove very helpful for first time buyers who are perhaps paying rent – and therefore could afford to service the monthly payment on a mortgage instead – yet they are unable to save for the deposit required to purchase.
It’s worth noting though that some lenders require that the person lodging their savings – and who will also step in to make the mortgage payment in the event that the borrower can’t – is also assessed under the same lending criteria as the main borrower to ensure that they can afford to lodge the deposit and assist with making payments, should they need to.
If you’d like more helpful information on purchasing your first home, why not click here to download your free copy of the Mortgage Advice Bureau First Time Buyers guide.
About Mortgage Advice Bureau
Mortgage Advice Bureau is the UK’s most recognised mortgage intermediary brand*, winning over 70 national awards for the quality of its advice and service during the last five years.
It has over 1,350 advisers offering expert mortgage and protection advice on a local, regional and national level to consumers, both face to face and over the phone. Mortgage Advice Bureau handles over £14bn of loans annually and was the first – and is currently the only – mortgage intermediary to have floated on the London Stock Exchange, having joined the Alternative Investment Market (AIM) in November 2014.
*Based on Opinium consumer research, Summer 2019.