Martin Lewis: Cheapest mortgages but first-time buyers need to make the right moves

Top advice: Location, Location, Location's Phil Spencer and Kirsty Allsopp are the house buying experts

Top advice: Location, Location, Location's Phil Spencer and Kirsty Allsopp are the house buying experts

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It’s perhaps the cheapest time in history to get a first-time buyers’ mortgage – with rates at historic lows and the new Help to Buy ISA due.

Yet that’s not the same as saying it’s the best time to buy a house. Property is an ‘asset class’ that means prices move – so never assume buying a home is as safe as houses.

It’s far more important to examine your own reasons for buying. If it’s a long-term place to live, to give you security of tenure, and the repayments are affordable (possibly even cheaper than renting) it’s a reasonable aim. Here’s what you need to know…

Step 1. Learn the lingo. A mortgage is likely to be the biggest financial transaction you’ll make, so arm yourself with knowledge to understand the terms commonly used. Here’s the key facts you’ll need to understand about any mortgage.

a. The Rate: This is the interest you are charged, and it dictates the amount you repay each month.

b. The Type: Most mortgages have rate reductions for the first two to five years. These come in a few types. Fixes are where the rate is locked in. Trackers are where it can only move in relation to UK base rate moves. And variable rate, where they tend to move with UK base rates, but can also move at the lender’s whim.

c. Length of the deal: If it’s a short-term deal (eg, a 2yr fix), when does it end?

d. Term: How long is the entire mortgage borrowing length – eg, 25yrs, and when will it be fully repaid?

e. Penalties: Are there any early-repayment penalties if you try and pay it off or move, before the deal ends?

f. Can you overpay? Are you allowed to pay more off without any penalties? This can be very useful as it means you pay less interest over the mortgage terms and clear the debt more quickly.

g. Your loan-to-value (LTV): The proportion of your home’s current value you are borrowing. Eg, a £20,000 deposit on a £100,000 means you’re borrowing £80,000 – so it’s an 80 per cent LTV. The lower the LTV, the better deal you can get.

To help with this I’ve a totally free 60-page First-Time Buyers mortgage booklet you can download from www.mse.me/FTB which takes you through everything in more detail.

Step 2. Deposit, deposit, deposit. Every 5 per cent bigger deposit up to 40 per cent cuts the rate – so a little more can have a big impact. 

Imagine you’ve a £150,000 home, and want a £136,000 mortgage. That’s a 90.7 per cent LTV, the top 2-year fix is 3.98 per cent. Yet if you use £1,100 of savings to reduce the borrowing needed, you’d cross a threshold and be at just under 90 per cent, where the top 2yr fix is 2.69 per cent. This would save over £700/year in mortgage payments alone. 

Of course saving for a deposit is often a struggle. From autumn you’ll also be given the chance of a cash boost towards buying your first home if you save into a new type of Help to Buy ISA.

You can save up to £200 every month and the Government will add 25 per cent on top (so £50 on £200). You can also save an additional £1,000 when you first open it, meaning you can save £1,200 in the first month (that will have £300 added on top of it).

The minimum you need to have saved to get the bonus is £1,600 (so a £400 bonus), and the maximum the Government will contribute is £3,000 (so that means you will have saved £12,000). For full information see www.mse.me/helptobuyisa.

Step 3. Speedily compare to benchmark your cheapest. It’s important to start to work out the exact cost you’re likely to pay as soon as possible. Mortgage rates are currently the lowest they have ever been, with even 5 year fixes below 2 per cent (if you’ve a big enough deposit).

To find a mortgage you want, look across the whole market if possible. There are a number of lenders like Yorkshire BS, Tesco Bank and HSBC who only offer their mortgages direct, and these may be missed by mortgage brokers. So it’s important to start by doing a comparison that includes all deals. My own www.mse.me/mortgagebestbuys comparison tool does, as does www.moneyfacts.co.uk and Google’s mortgage tables.

Step 4. Two things that can kibosh your application. The days when lenders flung out deals to all and sundry are long gone. Getting accepted is now a challenge – I would suggest you start preparing and position yourself at least a year in advance, or failing that, as soon as possible.

a) The credit check. It’s crucial to manage your credit score, preferably months in advance, eg, never make late payments, minimise other applications, put a landline not a mobile on applications. See my 35 credit score boosting tips at www.mse.me/creditscore to make sure that you’re in good financial shape.

b) Affordability checks. Lenders must stress-test if your mortgage is affordable, even if rates were 6-7 per cent. They’ll want evidence of income, big bills, expenses, even eating out. So being frugal in advance helps.

One way to navigate through these checks is to use a top mortgage broker; you can search for one using www.vouchedfor.co.uk or www.unbiased.co.uk – they have info on how harsh each lender’s checks are, and can help ease acceptance. You’ll generally pay a fee for face-to-face advice, though brokers like www.lcplc.co.uk operate fee-free via the phone (they get a fee from the lender).

Step 5. Don’t fall for ‘Help to Buy Mortgage’ branding. While much hyped, the main Help to Buy scheme (ie, not the original only for newbuilds) is about the Government giving lenders a guarantee to enable them to offer more 5 per cent deposit mortgages, meaning more are available. If you’re looking for a 5 per cent deal, it makes no difference to you whether it’s a Help2Buy or not. Just go for the best available.

Step 6. Fixed or variable? With a fixed mortgage, the amount you repay is, er, fixed so it’s like buying an insurance policy against possible rate rises. Variable deals move with UK interest rates (sometimes just at the provider’s whim). Currently you only pay a touch more to fix.

The more crucial the security of knowing exactly what you’ll pay, the more you should edge towards fixing (& fixing longer). If cracking the rock-bottom deal’s your driver, edge to short-term trackers.

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