As a first time buyer, looking at the media and seeing all the conversations about interest rate rises must be an unnerving, and even for some off-putting, time to be buying a house. Here I try to answer some common questions asked by first time buyers.
What type of interest rates are available, and how do I protect myself against interest rate rises?
- Fixed Rate – As a first time buyer, this is the most secure interest rate. Regardless of whether the Bank of England base rate is going up or down, your interest rate will remain the same.
- Tracker Rate – This follows the Bank of England base rate, so there will be times where a tracker rate can be beneficial. However, during times such as now, where the base rate is increasing, you will find your monthly payments increasing each time this happens. This is a rate for those who are willing to take more of a risk and have disposable income to mitigate against the risk of payments increasing.
- Variable Rate – This rate is normally set by the mortgage lender, so it doesn’t necessarily track the Bank of England base rate. Again, it is always at risk of changing, which puts your payments at risk of changing too.
What a first time buyer should consider is that the costs of running a property can be unexpected, so having a fixed rate can allow you to budget each month without worrying about what is happening in the markets. But what is the downside of a fixed rate?
- They can be priced higher, although, at the moment, there appears to be very little difference between a fixed rate and a variable/tracker rate.
- They could come with early repayment charges if you wanted to repay your mortgage during that fixed-rate period.
- If interest rates did drop, you would not be able to take advantage, while you were on your fixed rate, unless you paid the early repayment charge.
How does the length of a mortgage affect monthly payments?
Mortgage terms could vary between anything from five years to 40 years. Taking a longer mortgage term will reduce the monthly cost; however, it does mean you pay more interest ultimately on your mortgage.
Things to consider when looking at the mortgage term:
- What age do you want the mortgage to be repaid by? Most people don’t want to take a mortgage into retirement and are keen to have it repaid prior to retirement.
- How much do you want your monthly payments to be? Always have a budget in mind and then set the term around this. You don’t want to be stretching yourself too much on your mortgage, and then you can’t enjoy your new property, but you also don’t want to be paying more interest than you need to.
What happens if I make overpayments?
This is a really common question we get asked, and it’s such a beneficial thing if you can afford to make overpayments. Ultimately, if you can make overpayments on your mortgage, you will bring the balance of your mortgage down, decreasing either the monthly payments or the term of the mortgage. This will mean that you will pay less interest.
For example, if you have a mortgage of £200,000 over 30 years and you could afford to pay an extra £100 each month, you could end up reducing your mortgage term by five years.
Similarly, if you had a mortgage of £100,000 over 25 years and paid an additional £75 per month, you could also end up reducing the term by approximately five years.
There are many factors involved in this, such as the mortgage interest rate you are on, so it’s something to discuss on an individual level with your mortgage adviser. Many lenders allow overpayments of up to 10% per year of your mortgage balance, but again, check this with your adviser before you pay anything to make sure you don’t get any charges.
Mortgage advice is always personalised, so it’s best to speak to a specialist mortgage adviser. The above is designed to give you an insight and not provide advice.
For more information: metrofinance.co.uk
