As a first-time buyer (FTB) embarking on the house-hunting and mortgage application process for the first time, you’re bound to come up against a lot of words, acronyms and terms that you’ve never heard before.
A good mortgage broker (see below!) will be able to guide you through everything. But to get you started and give you the confidence to ask any question about buying your first home, here are some of the key things you’ll need to know and understand.
- Mortgage – A loan to buy a property, generally repaid over time in monthly instalments. This is secured against the property itself, which means that if you fail to keep up with repayments, the property may be repossessed by the lender in order to get their money back.
- Mortgage term – The length of time it will take to repay your loan. The most common period is 25 years, shortly followed by 30 years, although some lenders will stretch to 35.
- Mortgage interest rate – The rate of interest that is applied to the amount outstanding on your mortgage loan. Each month, you repay a portion of the capital you have borrowed, plus interest.
- Lender – A bank or building society that provides the mortgage loan.
- Mortgage broker – Someone who is professionally qualified to offer you mortgage advice. A broker will help you through every step of the buying and selling process, so they are an excellent support to anyone moving home, especially First Time Buyers. They will even help you work out whether now is the right time to buy – for you. So even if you are just thinking about buying, do contact a broker before you even start looking for a property.
Their key role is to consider your personal and financial circumstances, recommend suitable mortgage products and explain the difference between them. They will help you complete your mortgage application and manage the process on your behalf with the lender, through to approval of the loan and the release of funds in time for you to complete your home purchase.
A good broker will then keep in touch with you, remind you when your current mortgage rate deal is due to expire, and help you find the most appropriate new deal.
We would always recommend using a broker, rather than dealing directly with a lender (such as your own bank) yourself. They will only have their own range of products, and you may be missing out on a more appropriate product offered by another lender.
- Loan to value (LTV) – The size of the loan as a percentage of the value of the property. Usually, the higher the LTV, the higher the interest rate you’ll pay, as the risk of the property value not covering the loan amount is greater for the lender, e.g. if there’s a market fluctuation and house prices drop slightly. You would be able to remortgage once your discounted term comes to an end, as you would have paid off some of the equity, and you may be able to remortgage at a lower LTV. That could give you access to a better interest rate and lower monthly repayments.
- Deposit – The amount you need to contribute yourself towards the cost of the property. Although it’s often quoted that you ‘need’ a 15-20% deposit, as a FTB, you should be able to find mortgage deals where you only have to put down a deposit of 5% of the purchase price and can borrow the remaining 95%.
If you are thinking of a new build, they have a special scheme called ‘Deposit Unlock’ some developers allow you to access.
- Agreement in principle (AIP) – A lender’s confirmation that you can borrow a certain amount. This is subject to checks and approval of your application once you have found a home to buy, so it’s not 100% guaranteed. But it's advisable to work with a broker to secure an AIP before looking for properties, so that when you find a home that you love, you can make an offer with confidence and the estate agent will be able to confirm to their vendor (the seller) that it’s affordable for you.
- Product fee or arrangement fee – A charge from your lender for setting up the mortgage. This cost is usually added to the loan, so it’s spread over the mortgage term.
- Main types of mortgage product:
- Standard variable rate (SVR) – The default mortgage rate charged by a lender after an initial deal ends.
- Fixed – Your mortgage payments are guaranteed to stay the same for a fixed period of time, most commonly 2, 3 or 5 years. When the fixed period comes to an end, the interest rate automatically moves to the SVR, or you can switch to a new product.
- Tracker - This is set at a specific percentage above the Bank of England base interest rate and rises and falls in line with it.
- Discounted - Similar to a tracker, discounted products are set at a specific margin below the lender’s SVR, and the rate you pay moves up and down in line with that. Some lenders offer special discounted rates to FTBs.
- Early repayment charge (ERC) – The penalty fee charged by a lender for repaying the mortgage during a specific period - for example, if you have a 5-year fixed mortgage product and you want to change to a different product during those initial five years. The ERC amount usually decreases each year, therefore the earlier you repay the mortgage, the higher the ERC will be. Not all lenders charge an ERC, so ask your broker to check what the fees would be if you decided to sell early.
If you’re thinking about buying your first home, checking out how much you can afford is the first step. At Mortgage Scout, our advisers have access to more than 90 lenders and over 12,000 mortgages. You can read more about our FTB mortgage service here and try our online calculators to get a rough idea of how much you might be able to borrow. Then either call us on 0800 144 4744 or fill out your details online and one of our advisers will be in touch.
