First time homebuyers would be well advised to consider their mortgages as marriages, yet few do. Instead, they consider their home to be the marriage, looking for a particular location, style, or type of home. While those are all important considerations to purchasing a home, the reality is that most homes can be modified and changed the same way clothes and hairstyles can. Mortgages, however, are not as easily changed. They’re either tall, or short, and once you commit to one, you’re going to be spending a lot of time together. Because of this it’s very important to make the right decision about your first mortgage. Here are 6 steps you can take to make sure you getting the best deal for you and your family.
Talk to a mortgage broker.
A quick look, and one will find that there are more people advertising themselves as mortgage advisors or brokers than there are companies giving mortgages. Add to that list the number of well meaning real estate agents who want to help close a deal, and you’ve got a recipe for disaster. So, how can you separate well-intentioned talkers from those who can really help?
1) Make sure that you’re dealing with a real mortgage broker. They’re all required to be listed with the FCA register. If they aren’t, then you’re not dealing with someone who is licensed to provide advice.
2) Don’t deal with restricted brokers. This is technically a conflict of interest, but it’s still common practice. A restricted broker will only offer mortgage arrangements from a limited number of lenders, meaning you won’t get the full picture. This isn’t always bad, but since you want the best deal, you want the most options. Find someone who isn’t going to limit those options.
3) Make sure you’re actually getting advice, and get it in writing. This is because a broker can just provide information, which is a great starting point, but it’s not binding. You may benefit from the information, but as a rule, it’s different than actually receiving advice. When a broker does commit to giving you advice, they’re also required to find the best deal for you.
4) Buying based on the written advice of a broker also gives you added legal protections in the form of more rights. Should the mortgage turn out to have been bad deal, or be unsuitable for you, you’ve got more exit options. This is important, as it’s an extra layer of safety should a mortgage not work out.
5) Ask about how your broker is going to be paid. Lenders pay some brokers, and other brokers require a payment from the buyer. In most cases the commissions or payments they receive are fairly standard. It shouldn’t matter if you’re paying them or they’re receiving a commission, as their advice will still usually be impartial, but it’s good to know when considering who to use.
Figure out how much you can afford.
This is the single most important thing to consider before looking at homes. If you don’t have a High Street budget, then there’s no point in looking at homes on that side of town. Instead, you’ll want to look a little farther out, in areas more suited to your budget. That’s not to say that you can’t purchase your dream home, but rather that you should clearly differentiate between a dream and a fantasy. Be aware of your financial limitations, and how to work within them to maintain healthy finances. These days lenders are looking more and more at how much you can afford based on your spending habits, rather than you actual salary (though salary is still the primary consideration).
Experts recommend that you don’t pay more than 35% of your total income towards a mortgage. So, if you’re earning £3,000 a month, your mortgage shouldn’t generally be more than the £275,000 that the current average mortgage in the UK is. If you are spending more, it’s a recipe for disaster. Any change in your economic circumstances can cause your finances to spiral out of control. The less of your income spent on a mortgage payment, the more you’ll be able to save, and the healthier your long-term finances will be.
Prepare your deposit or down payment in advance.
Traditional mortgages have the lowest rate when the buyer is able to put up a deposit of 50% or more. However, this is an extremely unrealistic figure for most first time buyers. In fact, the average deposit is much closer to 5%, and sometimes even less. Because of the way mortgage lenders look at finance, they prefer to see what’s known as seasoned deposits. This means that they want to see that your deposit money has been in an account for at least three months. Money from mum and dad, or a financial windfall isn’t usually looked on as favourably as seasoned deposits. If you’re tapping family or other unconventional savings for your deposit, let them sit for a few months before you apply.
You also need to consider the stamp costs, which increase as you step up in home value. For instance, it’s 1% for homes under £250,000, meaning you’ll need up to an extra £2,500 just to complete the purchase costs. If you’re buying a higher value home, that rate goes up sharply. For instance, a home above £250,000, but less than £500,000 has a stamp cost of 3%, or a maximum of £7,500. While these are relatively small amounts in comparison to the overall mortgage, new homebuyers are regularly shocked by them, and often unprepared for the added costs.
There is also the Help to Buy program, which will boost your deposit if it’s relatively small. The way it works is simple. You can receive an initial interest free loan to boost your deposit to the preferred 20% most lenders are looking for. Repayment of this loan typically occurs when the home is sold. So a 20% home loan value would later trigger a repayment equal to 20% of the home’s resale price.
Do you know the difference between a fixed rate and a variable rate mortgage?
Fixed rate and variable rate mortgages aren’t something every first time buyer understands well, as most traditional loans and credit cards usually operate on relatively standard rates. Mortgage loans are different though, in that they can be fixed rate, or variable rate. When interest rates are low, the best deals are fixed rates for the first two to 10 years, and then converting to a variable rate after. Variable rates generally are set above that of the base rate set by the Bank of England, though they can and sometimes do vary considerably. This is especially true of standard variable rates (SVRs), which are often based on the lender’s rate more than the Bank of England’s rate.
Are you borrowing from a bank or a building society?
There was a time when building societies were the absolute best place to get a mortgage. However, that’s changed considerably over the last ten years, with large High Street banks purchasing a number of building societies, while other building societies have finished their charters or converted to banks in their own right, and are no longer around. If you are a member of a building society, you could usually find a better deal through them than a bank. However, more and more first time buyers are finding that they can also get a good rate from the bank.
All things being equal in terms of interest rates and payment structures, the most important difference between banks and building societies are repayment charges. These are also known as redemption fees, and banks apply them more often than good building societies. This is a period where buyers are locked into a particular rate scheme, and are required to pay a penalty fee if they pay off their mortgage early or change lenders. Make sure you have a no redemption mortgage. Also, be sure you’re getting one with no overhang. This means that once you’ve passed whatever initial interest scheme has been agreed, you’re free from any penalties or other fees if you change your mortgage or refinance. In such cases, the most you’ll pay to switch is a few hundred quid in paperwork and notary fees.
Are you prepared for the wait?
People are generally accustomed to loans and purchases being approved relatively quickly. Credit card decisions are often instant, as are most auto loans from recognized dealers. At most one might wait a day or two for a loan on poor credit, but those who are creditworthy enough to purchase a home are rarely accustomed to waiting. Mortgages, however, aren’t something banks play with since the financial crisis. Now they’re quite strict, and will usually take at least two weeks to review interested borrowers. In fact, they can take as much as four weeks or more in some cases. This means that you should be prepared to wait before you’re approved. In other words, don’t home shop until you know what you’re approved to shop for.
Remember that mortgages can be very different from one lender to another. Get to know your mortgage and your lender before you say, “I do”. That way you’ll have a mortgage you’re happy with, and can comfortably afford.