How first-time buyers can get the best mortgage rates
- 24th October 2022
- Buying Property News
Navigating the home buying process in a Q&A with mortgage partner Chris Lockley
Buying a home can be an exciting process, but with rising interest rates, it can also be an overwhelming experience, especially for first-time buyers.
In order to help prospective buyers navigate the current market, ludlowthompson caught up with Mortgage Partner Chris Lockley at Jigsaw Mortgages to chat about how to find the best mortgage deals.
Q: Should I opt for a fixed-term mortgage when interest rates are rising?
A: At times when interest rates are on an upward trend, demand for fixed-rate mortgages is usually high and can even exceed supply. These types of products enable borrowers to fix a rate for a pre-determined period, usually two or five years.
The major benefit to fixed rates is that you’ll know exactly what your monthly payments are going to be for the duration of the fix. Given the speed and frequency at which rates have changed in recent months, this will be attractive to many aspiring buyers. Whilst you might be paying more for your fixed rate mortgage than for a variable rate mortgage at least you are able to cap your mortgage payment, no matter what happens with interest rates.
Q: What are the alternatives to a fixed-rate mortgage?
A: There are alternatives if a fixed-rate isn’t for you. Tracker rate mortgages are those with rates that change either with the base rate of the Bank of England or the lender’s standard variable rate, known as an SVR.
During times when interest rates are low, these kinds of mortgages can be attractive, as they start at lower rates than a fixed-rate mortgage. However, they offer less certainty than a fixed mortgage, as monthly payments can fluctuate.
Some aspiring buyers may want to opt for an SVR or tracker mortgage (at least in the short-term) in the hope that interest rates will drop again.
Another option, although one that is relatively uncommon is guarantor mortgages. These are offered by select lenders, which enable parents or other family members to act as guarantors. What this means is that they will commit to covering repayments if the borrower defaults. These types of mortgages will typically require the guarantor to hold a savings account with that lender and hold a certain amount of funds within this for a set time period. It should allow you to borrow at rates lower than you could have achieved without the guarantor.
Q: What steps should I take before viewing properties?
A: You should certainly chat with a mortgage broker. Brokers will be able to tell you what mortgage products are available, bear in mind some deals are only accessible via a broker.
When speaking to a broker, have a copy of your credit file, some form of ID, and proof of income/funds on hand in order to help the process run smoothly. You’ll then need to arrange an agreement in principle (AIP). An AIP is simply a soft credit score to test that your credit is healthy. It won’t harm your credit file in most cases but will give you a fairly accurate idea of how much you can afford to borrow.
You will want to avoid taking out any credit, as this can cause your credit score to drop and make it more difficult to secure a good deal.
Q: How much do I need to have saved as a deposit?
A: Lenders will typically require borrowers to pay at least 5% of the value of the property as a deposit. However, products with a loan-to-value ratio of 95% are viewed as being high risk. As a result, many have been withdrawn from the market following recent volatility.
It’s more common for lenders to stipulate that borrowers put down 10% of the value of the property in a deposit. If you can put a higher deposit down, you will have access to a wider range of cheaper mortgage products.
Q: How will rising interest rates impact how much I can afford to borrow?
A: Rising interest rates mean that you will most likely have to factor in higher monthly payments, compared to say the beginning of the year. This may mean that you will have to consider saving more as a deposit or seeing if financial assistance is available, perhaps from a parent or other relative.
Q: What can I do to speed up the mortgage application process?
A: Once you’ve found a property and had your offer accepted, it’s time to formally apply for a mortgage. You will need to disclose any change in your personal circumstances, such as a change of job.
You’ll need to take another look at your lending options with a mortgage broker who will make a final recommendation. At that point, you’ll head into “full application,” which is where you’ll need to provide proof of income, along with a copy of your identification, and place a deposit. Once those are assessed and approved, the property will be valued. Remember that there are several different types of valuations and surveys available, which you should discuss in detail with your broker. Then, your mortgage is officially confirmed.
Check with your broker that you’ve selected the most affordable mortgage deal based on your circumstances, as rates fluctuate daily. Keep in mind that at this point you may be dealing with a different lender from the one who gave the initial AIP. Next, you’ll need to obtain a quote from a solicitor. Typically, estate agencies will connect you with one of their preferred legal partners who can provide quotes relevant to that specific property.
Q: What happens if my mortgage deal is about to expire and I’m not ready to complete?
A: Most mortgage offers will last six months, meaning you will need to complete the purchase within this time frame. Although this is usually sufficient time to complete a purchase, there is the risk that you can run into delays. For example, if you are buying a new-build property and the building work overruns.
If you’re not ready to complete before the deal expires, you’ll need to check in with your broker and lender. Lenders can increase the length of a mortgage offer, but this is at their discretion. They may propose a new rate, and, in some cases, they may even require you to begin the application process over again.
It’s best to avoid this situation entirely by moving through the process as quickly as possible. With current market volatility, it’s unlikely that lenders will want to extend the offer at a low rate.
Q: I’m getting ready to exchange contracts. What do I need to do?
A: Be sure to arrange relevant insurance coverage and have all necessary documentation and your deposit ready. Respond promptly to enquiries from your solicitor. Once your deposit is transferred in the exchange of contracts, you’ll be legally committed to the purchase. This usually happens about a week before completion. After that, you’ll take ownership of your new home.
Q: What other costs do I need to consider?
A: In addition to the costs of a solicitor, which will include surveys and local authority searches, you will also need to consider any moving costs. First-time buyers who have lived in furnished rental properties may also have to buy furniture for their new home.
Good news for first-time buyers is that the Government recently increased the threshold at which Stamp Duty is liable. Those who are purchasing a property up to £425,000 in value will not have to pay any Stamp Duty.
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