If you are about to take the plunge and purchase your first home, it is important that you arm yourself with as much information as possible. One of the most common questions asked by those looking for their dream homes is: “How much can I afford?”
While lenders may be able to offer a rough estimate, there are many other factors that determine what you can afford. Among them is the type of mortgage that you choose and whether your monthly income, debts and credit rating will allow for an approval.
There are some basic types of mortgages, including fixed-rate mortgages and variable interest-only mortgages, but the type of mortgage you choose will depend on your monthly income, what you want to purchase, your credit score and how much money you are prepared to spend each month.
Here we will take a look at some of the most popular mortgages for first-time buyers.
First-time buyer mortgages
First time buyer mortgages are designed for those who have never shared ownership of a property. It is possible to purchase your first home with another person, in which case you will need to take out a joint mortgage; but this article is concerned with funding 100 percent of the purchase price.
The most common type of first-time buyer mortgage is a traditional mortgage. This will require that you pay back the money over an agreed period of time (this period can vary, but 30 years is the most common) and at the end of which you should own your home outright. Monthly payments with a traditional mortgage are often higher than those for other types, but they make it easier to budget and there are no hidden surprises.
You will usually be required to put down a deposit when taking out your first-time buyer mortgage (typically between 10 and 20 percent) which the lender will keep in an account until you pay off part of the loan or until you have lived in your home for several years. The percentage you are required to pay initially will depend on the type of mortgage you take out. For example, if you opt for a traditional mortgage your deposit will be between 10 and 20 percent, but if you select an interest-only deal, it will typically be between 25 and 50 percent.
It is possible to go back to your lender at any time during the loan period to take out an additional mortgage on your home, if needed. This may be necessary if you need to borrow money for home improvements or pay for your children’s education. You are likely to have to pay back these advances along with the original mortgage when the term expires. However, many lenders allow you to repay this extra borrowing over a longer period of time at a lower rate of interest.
With traditional mortgages your monthly payments are fixed, but if you select an interest-only or an adjustable-rate mortgage, they will typically rise over the course of the agreement. This can be beneficial if you leave your loan open, as you won’t have to worry about the monthly repayments increasing, but you will also need to save money for your deposit and think about what you want to do at the end of the term.
Interest-only mortgages and adjustable-rate mortgages offer you more flexibility than fixed-rate mortgages, as they often have lower monthly payments initially. Many first-time buyer borrowers choose this option, particularly if they are unsure whether they will have enough money to afford fixed-rate mortgage payments. At the end of the term, you may be required to repay some or all of your borrowing, but some lenders allow you to extend the mortgage without going back through the application process.
Before ultimately making your decision, you’ll want to be sure you consider the pros and cons of each type of mortgage, and compare rates from different lenders.