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Getting Your First Mortgage

Buying your first property can be quite a stressful and difficult experience, especially if you are not sure about how the whole process works.

Before you choose a property, the first thing to do is to sort out your mortgage.

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You'll need to be highly realistic about how much you can afford to pay back each month in mortgage repayments - remembering to factor in at least a couple of percentage points' difference in interest rates.

After doing that, you then need to do the tricky bit of searching the mortgage market. There are now over 100 lenders who can offer mortgages designed especially for first time buyers. It's a bit of an overwhelming number to choose from, so this is where getting impartial mortgage advice from an adviser can really help.  But you should make sure they are 'whole of market': the salesman based at your estate agents may not offer you the best advice.

And just like every borrower, you need to decide what kind of mortgage you want: for example a fixed rate mortgage, tracker mortgage or an offset mortgage.

Income Multiples

To assess your suitability for a mortgage, most lenders attempt to simplify the process by using income multiples to measure your borrowing power.

In the past, lenders simply multiplied your income to calculate how much they would lend you. Normally a single person could borrow 3.5 x their single salary while a couple would be offered 2.5 x their joint salary.  In the later days of the house price boom, some lenders were willing to lend single applicants 4, 5, even up to 8 times their annual salary

More recently though, mortgage lenders have moved to using affordability criteria. This is where they consider your outgoings and your income to work out what you can afford in repayments.

Deposits (or downpayments)

Although there was such a thing as a 100% mortgage, such deals have disappeared and it is usual for first time buyers to have a deposit of at least 25% of the purchase price. The higher the deposit, the better to demonstrate that you have financial discipline, and the more likely you are to get cheaper borrowing rates.

Some lenders impose a Higher Lending Charge (which used to be called a Mortgage Indemnity Guarantee) when you borrow more than 90% of the property value. This 90% figure is known as the LTV (Loan to Value) ratio. Even where there isn't a specific charge, many lenders offer cheaper interest rates if your LTV is below 90%. If you do borrow at a high LTV you should be looking for a lender who doesn't charge a higher lending charge; this will only add to your overall lending costs.

Repayment vs. Interest-Only

Most mortgages should be taken on a repayment basis, as this is the only guaranteed way to reduce your debt.  However, there are some first time buyer mortgages which are designed to be interest-only for a set period (typically over 3 years).

This reduces the initial monthly payments but again means that you're only servicing the debt; no capital is actually being repaid during this time. This means you still owe the same amount after the 3 year period is up.

The idea is that by the end of the mortgage period, both your salary and the value of your property will have increased, resulting in you being able to afford to switch to a repayment mortgage deal.

Other options

Some parents help first time buyers onto the property ladder by helping them with their deposit.

Withguarantor mortgages though, parents can be even more involved: this type of mortgage deal takes into account parental income as well as the applicant's income, as long as the parents can still cover their own mortgage (if applicable).

To avoid tax complications the parents are not listed as owners, but they are liable for the repayments and arrears. It is also possible for parents to guarantee just the extra portion of the mortgage above the amount covered by their son or daughter's income, or to undertake to cover repayments in case of default.

Parents can also help their children without surrendering their cash. There are a number of offset mortgages which will use parental savings to reduce the child's mortgage, while still allowing access to the cash if necessary.

Another option is to buy a property with a friend and there are now a number of lenders who will allow up to 4 people to get ajoint mortgagetogether.

You do need to think about consequences of this scenario, such as one of you losing their job or if someone wanted to sell their share.  This type of mortgage is not one to be taken lightly and it is advisable to get specialist legal and mortgage advice if you are considering it.

Homebuying Schemes

As a First Time Buyer, you might also be eligible for one of the Shared Ownership schemes run across the UK that have been put in place by the government and local authorities.

Normal Shared Ownership schemes that are run by Housing Associations result in borrowers buying a share of a property (between 25% and 75%) and paying rent on the rest. The borrower under this arrangement does have the right to increase their share in the future if they desired.

Under the Homebuy scheme, Local Authority and Registered Social Landlord tenants can also apply for an interest free loan equivalent to 25% of the property purchase price.

There is also additional help for "key workers" such as nurses, teachers and police officers who live in London, the South East and the East of England; areas of the country where buying a property has been particularly difficult.

The Government also teamed up with a select few lajor mortgage lenders to launch the Open Market Home Buy scheme which aims to help 20,000 first time buyers by 2010.

This is a shared equity scheme where the government and the lender each contribute 12.5% of the cost of a property for qualifying purchases, though it's only initially a pilot scheme.

Naturally, as a First Time Buyer, there will be tough competition for all these schemes but they are worth considering.  Take a look at www.communities.gov.uk for more information on these schemes.

A final word...

If you are ready to own a home and choose a mortgage lender, there's a very good reason why we suggest taking impartial mortgage advice:

Research from the Association of Mortgage Intermediaries shows that mortgage applicants who did apply through an adviser saved on average £962 a year on the costs of their mortgage.

If you'd like to speak to an adviser today, SoSmart Money can introduce you to London and Country, an FSA authorised mortgage broker. You'll get a call back from an FSA-qualified adviser, and can start getting valuable professional advice with no obligation.


THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.

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