Mortgages: An introduction for First Time Buyers
Home ownership rates are rising in the UK, and much of this is due to the influx of first time home buyers. The Bank of England’s Base Rate is currently at a level where many mortgage lending institutions can offer home loans that first time buyers can afford. But if you are a first time home buyer, where do you begin? What sort of mortgage should you choose? There are the fixed rated mortgages, variable and interest only mortgages. There are also first time home buyer programs that may include one or more of these options. The choices can be seem overwhelming, but this article will assist first time home buyers in determining the differences in mortgages, and to help in the process of choosing the best mortgage with the most suitable programme.
Fixed Rate Mortgages
A fixed rate mortgage is a home loan with an interest rate that does not change for a predetermined period made by the lender. If the interest rate was set at 5.5%, for example, it will remain at 5.5% for however long the loan is available at this rate. Fixed rate mortgages can be even obtained for 15 or 25 years, but not all lenders are willing to offer fixed rates for this length of time. It pays to research lenders if this is what you seek.
Fixed rate mortgages may offer a higher APR (Annual Percentage Rate) than other types of mortgages. This is because the lending institutions make money on the interest of the loan, not the principle. A lot can happen during the life of the loan, and the Bank of England is sure to adjust the Base Rate, sometimes several times, during that period. But if the interest of the mortgage is constant, or fixed, the lending institution will never make more money than what was originally set by the fixed rate loan period.
Adjustable Rate Mortgages
Adjustable, or variable, rate mortgages have an interest rate that fluctuates any time the Bank of England changes the Base Rate. In an adjustable rate mortgage, the amount of interest you pay will correspond to the Base Rate as it is adjusted up or down. If it goes up, your payments go up; that means that with an adjustable rate mortgage, the borrower’s repayments will change, potentially quarterly, during the life of the loan.
These loans may be less expensive than fixed rate mortgages. This is because the lender, who makes money off the interest rate, can make more money on the loan when they are able to adjust it. When the Bank of England raises the Base Rate, the lender itself will pay the cost of funding that loan at an increased adjusted rate. But they are able to adjust your rate and recoup their increased costs. So in essence, if their costs change, so do yours.
First Time Buyer Mortgages
First time buyer mortgages usually involve one of the previous two mortgages but with added incentives or reduced qualifications. Many first time buyer mortgages can be fixed or adjustable, depending upon what the lender includes in their first time home owner programme. Several mortgage lenders are willing to lend some first time buyers a 100% mortgage thus alleviating the need for a deposit. However, there are generally fees attached and it is prudent to inquire with your lender of choice all fees associated with this type of mortgage. But, this gives first time home buyers the opportunity to get into a home and begin their lives as property owners, without having to save money for years and years to make a down payment.
So if you are a first time home buyer looking for a first time buyer mortgage, contact your mortgage lender, IFA, or certified mortgage broker, and inquire about the financial opportunities for someone like you.
Published on September 19, 2007
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