So, you’re buying your first flat or home – congrats! Before you sign on the dotted line, you’ll need to sort your mortgage.
We know applying for your first mortgage can be overwhelming. Our guide covers everything you need to know, from choosing the right mortgage to understanding interest rates.
Different types of mortgages
The first thing to work out is what type of mortgage you want. There are two main types:
Repayment mortgage
With a repayment mortgage, each monthly payment you make goes towards both the amount you borrowed and the interest.
At the start, it’s likely more of your payment will go towards the interest. But over time, you’ll start to chip away at the amount you borrowed too.
If you keep your mortgage for the full term – say, 20 years – you wouldn’t owe anything to the lender at the end.
Interest only mortgage
With this option, your monthly payments only cover the interest on the amount you borrowed.
For example, say you borrowed £200,000 at an interest rate of 5%. That means you’d pay £10,000 a year in interest, split into your monthly payments.
Some people choose it because it means lower monthly payments to start with. But it’s important to remember you’ll still owe £200,000 at the end of the agreement.
You’ll need to either make extra payments to pay it off, or have a way to repay it in one lump sum at the end.
It’s quite rare for first-time buyers to be able to get an interest-only mortgage.
Mortgage rates
The next thing to consider is whether you want a fixed-rate mortgage or a variable rate mortgage.
Fixed rate
A fixed-rate mortgage keeps your interest rate the same for a set period – usually 2, 5 or 10 years.
This is useful because even if the UK economy or interest rates change, your monthly payments won’t change during this time.
When the fixed-rate period ends, you’ll usually move onto your lender’s Standard Variable Rate (SVR) unless you choose a new mortgage deal.
Variable rate
With a variable-rate mortgage, the interest rate can go up or down over time. This means your monthly payments could change.
There are three different types:
- Tracker: this follows the Bank of England Bank Rate, plus a set percentage.
- Standard Variable Rate (SVR): this is your lender’s standard mortgage rate. It can change at any time and doesn’t have to match the Bank of England’s rate.
- Discount mortgage: this is when you get a discount on your lender’s SVR for a set period of time.
Some deals include an Early Repayment Charge (ERC). This means you might have to pay a fee if you repay the mortgage early or switch to another deal.
Check your mortgage terms before you make any changes.
What do I need to do before I apply for a mortgage?
Before you even put in an offer on a house or apply for a mortgage, here are a few things you’ll need to do first.
Save a deposit
If you have a bigger deposit, you could get better options and rates when it comes to mortgages. That’s because you’re often seen as less of a risk to the lender.
And don’t forget to save for the other fees and costs involved with buying a house, including:
- Arrangement fee: some lenders charge a fee for setting up the mortgage. This could be a fixed amount or a percentage of the loan.
- Valuation fee: your lender might arrange a valuation of the property to check how much it’s worth. You might need to pay for this, but some lenders include it at no extra cost.
- Surveys: it’s a good idea to pay for a RICS (Royal Institution of Chartered Surveyors) survey to find any potential issues with the home before you buy it. There are three levels depending on how much detail you want.
- Legal fees: a solicitor will be able to handle all of the tricky legal bits of buying a property for you. How much it’ll cost depends on the solicitor you choose.
- Stamp duty or land tax: depending on where you live in the UK, this is a tax you'll need to pay when buying a property. You might get a discount if you're a first-time buyer. Find out more about stamp duty and how it all works.
Check your credit score
It’s a good idea to check your credit score through a company like Experian or Equifax.
If it isn’t looking great right now, don’t panic. There are lots of ways you can improve your credit score.
A better credit score could mean you could get better rates, as lenders might see you as financially responsible and lower risk.
Reduce debts
Student loans, car finance and credit card bills can all affect how much you can borrow. Lenders will look at all these things to decide whether you can afford the mortgage.
If you can, try to reduce your debts before applying. But make sure you consider your overall finances and don’t forget to set money aside for your deposit and other costs associated with buying a home.
Prepare proof of income
You’ll need to be ready to prove how much you earn to be able to get your mortgage.
If you’re employed, they’ll usually ask you for three months’ worth of payslips and bank statements.
If you’re self-employed, it can be slightly trickier. You might need to send them:
- 2 years’ worth of your personal and business tax returns
- 3-6 months of bank statements
- other business accounts and contracts or invoices
For more tips on how to get prepared, check out our in-depth guide to buying a home.
Do I need home insurance to get a mortgage?
It’s normally a condition of your mortgage that you need at least buildings insurance in place. This covers the cost of fixing the structure and fittings of your home if it’s damaged.
You can always upgrade this to full home insurance though, which includes contents cover. This means your furniture and belongings will be protected once you’re moved in.
Heads up, your mortgage lender might offer you their home insurance, but you don’t have to buy it from them. You can shop around to find a policy that suits you and your needs.
Remember that limits and exclusions apply, so always check your policy book to understand what you’re covered for.
Save money on home insurance
Buying a house is expensive! So, if you can, you might want to save money on your home insurance. Here are three simple ways you can bring the cost down:
- Combine your car and home insurance: if you choose a MultiCover policy, you’ll get a discount on both policies. Plus, you’ll only have one renewal date and one policy to look after.
- Install security: if you choose security measures like alarms, smart doorbells or motion sensor lighting, it can bring the cost of your cover down. That’s because you’re less likely to claim for things like theft or vandalism.
- Choose a higher voluntary excess: this is the amount you pay towards the cost of a claim. A higher excess could mean lower monthly payments, but always make sure it’s an amount you can afford if you need to claim. Find out how excess works.
For a little more help, check out our complete guide to buying home insurance.
And once you’re ready to move in, here’s a handy moving home checklist.
