Finance

Which? Mortgage Clinic – Part 3

Mortgage Clinic

As a first time buyer, understanding mortgage terminology and knowing what mortgage is right for you can be difficult, so David Blake at Which? Mortgage Advisers has joined up with First Time Buyer, to answer your mortgage-related questions

Q What is the new Help to Buy: ISA and is it worth getting one?

A If you’re a first-time buyer saving for that all important deposit, the Help to Buy: ISA, launched on 1 December 2015, could offer a real helping hand.

As with other ISAs, any savings deposited won’t be taxed, but the main benefit is that for every £200 you save, the government will pay you a £50 bonus towards the purchase price of a property. This means the government will effectively give you a 25% top-up on savings up to £12,000, so you could earn a maximum bonus of £3,000 – tax free.

The maximum you can pay in monthly is £200. However, when you first open the account, you’re allowed to make an additional contribution of £1,000, so you could save £1,200 in the first month.

You can of course withdraw money, but it’s worth remembering to check the terms and conditions on withdrawals, as with any other ISA.

To be eligible, you need to be a first time buyer, so you can’t already own a property, or have owned one in the past. Also, the government bonus will only be paid to you when you buy property, meaning you won’t be able to use the money for something else. The price of the property you purchase must be £250,000 or less, or, if you’re buying in London, £450,000. However, unlike other schemes, this isn’t limited to newbuild homes.

It’s worth bearing in mind that it would take over four and a half years of saving, paying in the maximum amount, to see the full benefit of the Government’s £3,000 bonus. If you’re looking to buy sooner than this, there could be better options, but for most, it will provide an attractive way to get over the initial hurdle of saving a deposit.

Q Do you get a favourable interest rate for your mortgage if you use government schemes like Help to Buy, or shared ownership?

A Using government schemes can help to make taking the first step on to the property ladder that bit easier and, in some instances, they can help you secure a more favourable interest rate.
If using Help to Buy 1 – the 20% government loan which is applicable to newbuild properties, accompanied with your own 5% contribution – then you’ll benefit from a lower rate of interest initially, as the mortgage rate will be based on a loan to value (LTV) of 75%. While the mortgage rate may be less, you need to remember that the repayment of the government loan will be taken into account when a lender assesses how much they are prepared to lend to you. It is also worth bearing in mind that when you come to refinance the mortgage in the future, you could find that your options are more limited, with few lenders offering the option to re-mortgage when using this scheme.

Shared ownership is another option popular with those looking to take a step on the property ladder, but it won’t enable you to take advantage of a lower interest rate. Typically, it’s standard high street lenders who offer shared ownership mortgages and, ultimately, it’s the size of deposit that determines the rate of interest.

Likewise, Help to Buy 2 is essentially a mortgage guarantee, whereby the Government is guaranteeing the money provided by the lender, rather than the customer taking out an equity loan. This scheme aims to reduce the risk to lenders, in theory, aiming to make obtaining a 95% loan easier by guaranteeing a further 15% on top of a borrower’s contribution of 5%. However, as the mortgage is based on a 95% LTV, this type of mortgage does not reduce the rate of interest, compared to other 95% mortgage products on the market.

Q What length of mortgage should a first time buyer opt for?

A Choosing a suitable mortgage term to meet your circumstances will often depend on your priorities.

For some homebuyers, paying off a mortgage as soon as possible is the main goal and so many choose a mortgage with a shorter repayment term. This will, of course, mean paying more each month over a shorter period of time, but it can vastly reduce the total amount of interest paid over the course of the mortgage.

Often first time buyers may want to spread the cost of their mortgage out as far as possible, to reduce the monthly repayments.

In either case, what you can afford each month will help to determine the length of mortgage term you should opt for. Generally, you should look to balance what you can afford, while aiming to pay your mortgage back as soon as you possibly can.

It’s important to remember that, these days, most mortgages come with flexible overpayment facilities, enabling lower contractual payments, but still allowing you to pay extra, should you want to.

For further help and advice from Which? Mortgage Advisers, please visit: which.co.uk/ftbmortgages, or call 0808 159 4852

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