ByMartin Lewis, Martin Lewis
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.
It's 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 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.
The Rate:
This is the interest you are charged, and it dictates the amount you repay each month.
The Type:
Most mortgages have rate reductions for the first two to five years. These come in a few types. Fixed are where the rate is locked in. Trackers are where it can only move in relation to UK base rate movements. And variable rate, where they tend to move with UK base rates, but can also move at the lenders whim.
'It’s vital before buying that you first work out what your real needs are'
Length of the deal:
If it's a short-term deal, when does it end?
Term:
How long is the entire mortgage borrowing length - eg, 25yrs - and when will it be fully repaid?
Penalties:
Are there any penalties if you try and pay it off or move, before the deal ends?
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 and clear the debt more quickly.
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.
Step 2
Deposit, deposit, deposit. Every five 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 two-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 two-year fix is 2.69 per cent. This would save over £700 a 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 (meaning you will have saved £12,000).
Step 3
Speedily compare to benchmark your cheapest. To find a mortgage, 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
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 you 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 information 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.
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 new builds) is about the Government giving lenders a guarantee to enable them to offer more five per cent deposit mortgages. If you're looking for a five per cent deal, it makes no difference whether it's a Help2Buy or not. Go for the best available.
Step 6
Fixed or variable? With a fixed mortgage, 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.
It's very difficult to predict future interest rate moves. Even top economists are singing a different tune now from a year ago, and there's even the possibility they may fall before that. So focus on your own situation.
The more crucial the security of knowing exactly what you'll pay, the more you should edge towards fixing (and fixing longer). If cracking the rock-bottom deal's your driver, edge to short-term trackers.
THIS WEEK'S DEALS
Trade in your old bike at www.evanscycles.com and you can get between £20 and £500 off a new bike. You can either do it in store or by entering a code to get the discount online before wheeling in the old bike when collecting your new one.
‘Like’ the Krispy Kreme UK Facebook page and enter your details to get a free original glazed Krispy Kreme doughnut which usually costs £1.35-£1.75, depending on the location.