Buying your first home makes for a really exciting time and Simply understand there’s a lot to get your head around, that’s why we’ve put together this quick guide for first time buyers and things you might want to give consideration to during the process.
Firstly, understand that a mortgage is a long-term commitment and that during this commitment, it’s highly likely that your circumstances will change. If you’re aware and prepared then your journey should be a lot smoother.
When you apply for your first mortgage, the lender will check thoroughly that you can afford the monthly repayments as well as how any increase in interest rates would affect you. The mortgage lender will want to look at both your income and your expenditure, and they may also want to ask about other changes that could impact on your circumstances. Over a typical 25 year mortgage many things can change, including;
– Interest rate levels
– Changes in employment
– Having a family
– Changes should you be unable to work due to sickness/accident
– Changes in relationships/marriage/divorce
It’s important that you give some consideration to the above points so that you have a clear understanding of how different changes may impact on your responsibility of taking on a mortgage.
Changes in Interest Rates
A mortgage is split into 2 parts:
1. Capital. The money that you actually borrow and;
2. Interest. This is the charge made by the mortgage lender for borrowing the capital and is charged until the loan is fully repaid.
A repayment mortgage is usually the most popular option and offers the benefit of knowing that your mortgage balance decreases with each repayment. At the end of the term the mortgage will be repaid in full. With this type of mortgage, you will be repaying both capital and interest each month.
Interest Only Mortgage
There are fewer of this type of mortgage available today but there are some providers that still offer this option.
With an interest only mortgage, each monthly payment is made up only of the interest on the amount that you borrowed initially. The monthly repayments on an interest only mortgage are usually lower than with a repayment mortgage however, at the end of the mortgage term the amount that you initially borrowed (the capital) will still be outstanding and this whole amount will be required to be repaid. It is usually a lender requirement that there is an adequate repayment plan in place that runs alongside the mortgage to clear the outstanding capital borrowed at the end of the mortgage term.
It may be the case that the lender requires a higher deposit or that you earn over a particular amount before they offer this type of mortgage.
It’s no secret that interest rates are at an all time low but the predictions are that they will go back up again in the near future. Should interest rates increase generally so will monthly mortgage repayments and this is where you and the lender need to ensure that if there are any changes in interest rates, you can still afford your mortgage repayments. This is known as the ‘stress test’.
When you take out your first mortgage, the chances are you’ll enter into a ‘special’ or ‘discounted’ rate and this rate will end after a specified period. At this time the monthly repayments on your mortgage will change and you’ll most likely see them become much higher.
Know yourself how much you can afford
It’s easy to get carried away when you start looking at properties and many people can put themselves at risk of over-stretching themselves and so making things difficult in the future.
It’s important to look at future increases in the cost of living, fuel prices and other household bills and how these could impact on your outgoings. If the household bills were to rise significantly, would affording the monthly mortgage repayments become difficult?
Lenders will still assess how affordable a mortgage is to you and they’ll also take into account any other commitments you hold such as debts, loans, credit cards etc.
You’ll also be required to put down a deposit when buying your first home. Check out the Government’s Help to Buy Schemes that could assist you with getting your first mortgage. If you’re still saving for a deposit try the Government’s Help to Buy ISA Scheme.
There are additional costs to take into account when buying your first home such as;
– Legal Fees
– Cost of removals (if needed)
– Mortgage arrangement fees and valuation costs
Buying with a partner or friend
Many people buy their first property with a partner or a friend, usually couples want to start a new life together and friends want to make the process of getting on the housing ladder more affordable.
We don’t like to throw cold water on such an exciting time in peoples’ lives but it’s also worth giving some consideration as to what would happen if things were to go wrong in the future. Knowing where you would stand can make dealing with any changes in circumstances much easier.
When you buy your house, you will need to know how the property is shared. Legally there are 2 types of joint ownership:
1. Joint Tenancy (ideal for married couples/civil partnership) – this is where 2 people own the property and neither have a particular share in it. If one of the owners of the property dies, the other person becomes the sole owner of the property or if they decide to sell the property whilst both are still alive then the proceeds are generally split equally.
2. Tenants in Common – (ideal for friends) – here the property belongs to both people however, each owns a specific share of the property. This enables each person to be able to sell, mortgage or give away their share and should the individual die, their share of the property passes to the named beneficiary in their will. The share split doesn’t have to be 50/50 and this can be decided between those buying the property together at outset.
It is worth pointing out that those who are married and those who are unmarried have very different rights should they split up. Obtaining legal advice from a solicitor to ensure that your rights are protected in the event of a separation may be an additional cost however, it could save you a lot of money and aggravation down the road.
When you take on commitments it’s advisable to plan for looking after your home in adverse circumstances. There are many unforeseen changes that can affect you and threaten your home but fortunately, there are insurances for most of these circumstances when the unexpected happens.
Buildings Insurance – to cover the cost of rebuilding or repairing your home should it become damaged by fire, flooding, subsidence and other circumstances.
Contents Insurance – protecting your possessions in the event of theft or damage can be invaluable.
Life Insurance – pays a lump sum or regular payment should you die. This can help cover costs such as paying off the mortgage, other financial commitments or to help with living expenses.
Critical Illness Insurance – this pays out a lump sum or regular payment if you suffer from an illness/injury from a predetermined list detailed in your policy, examples include heart attack, stroke and certain types of cancer.
Income Protection Insurance – designed to cover a percentage of your income should you be unable to work due to long-term illness or disability and will carry on paying the income either until you are able to go back to work, retire or you reach the end of the policy term.
Mortgage Protection Insurance – should you be unable to work due to sickness, unemployment or accident then your mortgage repayments may be at risk due to loss of income.
Something to fall back on..
Building up an ‘Emergency/Rainy Day’ fund provides great piece of mind should you face a home emergency or a sudden loss of income. It is recommended that 3 months of all essential expenditure is an adequate amount and should you dip into it at any point, you should replace it back to the original level as soon as possible.
If you’re looking at buying your first home, need mortgages and/or protection advice or are looking for financial advice in general, why not get in touch using the form below? Simply fill in your details and we will be in touch as soon as possible.