Buying your first home is beset with possible pitfalls for people who do not know the ins and outs of mortgages. The whole process is often baffling for first timers who struggle to understand why it takes so long.
If you have been saving for a deposit and are about to take the first tentative steps towards applying for a mortgage, there are some things you should know first. The financial institutions will scrutinise your financial state deeply. Not only are lenders more cautious than ever before about who they lend money too, but the government is about to encourage them to make the qualifying criteria more strict in an attempt to make mortgages harder to come by. They hope to cut the number of houses sold and thereby control prices.
Twenty percent deposits are beyond the reach of most people, yet that is a condition of the mortgage. The government introduced a help to buy arrangement where, when you have found your dream home in an estate agents in Bow, you put down only five percent of the deposit if you are buying a new build home, and they put down the other fifteen percent. You do not have to start paying that part of the deposit back for the first five years. The help to buy project has received much criticism because it has enabled the wealthy to use it as a means to buying a second home. It is also partially responsible for the housing bubble we are experiencing at the moment, where house prices are rising fast. Don’t be surprised if the help to buy scheme is paused for a while, or even cancelled, very soon. Price hikes are driven by demand and removing people’s ability to buy will reduce it.
A repayment mortgage is the best one in my opinion. You borrow the money at variable interest rate and make repayments on it. What could be easier? For the first five years, very little will be paid off the sum owed because most of your payments go towards servicing the interest. As the years pass, the balance slowly reduces until more money goes towards reducing it and less towards the interest. You can take out a repayment mortgage with a fixed interest too, and the knowledge that it will not rise as national rates do allow people to worry less. Of course, if interest rates come down they lose out, because theirs doesn’t
These were widely taken out in the nineteen eighties and proved to be a mistake for many You do not make repayments on the sum borrowed. Instead, you only pay the interest and life insurance policy that matures to pay off the mortgage, or so you hope. With an endowment, you are at the mercy of others who invest your money. If the investments perform badly, as many have, there will not be enough money in the policy to clear your debt.
Those are the fundamental things you need to know if you are thinking about getting on the first rung of the housing ladder. It is an exciting and frightening time, but it works out well for many people, and everyone should try at least once in their lives. I hope it works out for you.