rate of 2.49 per cent when the base rate is at 0.5 per cent, and rise to 2.99 per cent if the base rate rose to 1 per cent.
The cost of your mortgage rises proportionally with the base rate. You can sign up to a tracker with various different lengths: a lifetime tracker runs for the full term of your mortgage, say twenty-five years, or you could have a two-, three-, five- or ten-year tracker.
Fixed rates pros and cons
Fixed rates do not alter with the base rate. You lock into a specific rate for a set period – two, three or five years normally, but increasingly ten-year fixed rates have come onto the market. Whether you go for a variable or a fixed rate comes down to how much you want to bet on base rates rising or falling. Fixed rates are best for people who want the certainty of knowing exactly how much they must pay month by month for their mortgage for the next few years, but they may be slightly more expensive. You need to make a clear-eyed decision, because you will pay high exit fees to get out of your deal, whether it is fixed or tracker: as much as 5 per cent of your mortgage in what is known as an early repayment charge (ERC).
You may also be charged an ERC for paying off a chunk of your mortgage at once, for example, if/when you win the lottery. Some deals let you overpay a certain percentage a year if you can afford to, but there is a limit.
When weighing up your options, consider that every time you move deal you will probably have to pay arrangement fees. If you are signing up for an inexpensive-seeming two-year deal, factor in that you will have to soon pay out arrangement fees when it comes to an end and you want a new rate.
On the other hand the downside of signing up for a deal that is very long, say a ten-year fix, is that you may struggle to transfer it to a new house if you intend to move. Some mortgage deals are ‘portable’, but if your circumstances have changed since you took it out, or your bank does not like the look of your new place, you may struggle.
Watch out for any small print that allows a bank to put up its tracker rates even when the base rate does not rise. Some have a ‘collar’ that stops your rate falling too low if the base rate falls below a certain minimum.
Buying with the Bank of Mum and Dad (BOMAD): top tips and family mortgages
The Bank of Mum and Dad became the UK’s ninth-biggest unofficial mortgage lender, in 2017 helping to fund 26 per cent of all UK property transactions, on a par with Yorkshire Building Society, according to research by Legal & General. Of those under thirty-five seeking to buy in 2017, 62 per cent were being partially bankrolled by parents or other family members.
This has bred a new category of family mortgages. David Hollingworth, of broker London & Country, says you should not necessarily head straight for something badged up a first-time buyer deal – a normal mortgage might be cheaper or more appropriate. Nevertheless if you are struggling with a deposit there are some innovative solutions.
Barclays Family Springboard will lend as much as 100 per cent LTV as long as your parent will lock 10 per cent of the property price (i.e. the 10 per cent deposit they might otherwise have given you) in cash into a linked savings account as additional security. This means your parent keeps their cash in their name rather than giving it to you, and will be able to access it at a later date, within three years, assuming you make all your mortgage payments on time.
Post Office’s Family Link gives you the opportunity to take out two mortgages on two properties, 90 per cent LTV on the one you want to buy and 10 per cent against your parents’ home. You the buyer pay off both loans, but the 10 per cent one is interest-free, though you have to clear it within five years. You must be a first-time buyer to take advantage of this, and your parents must have an income of at least £20,000.
Aldermore has a similar concept, a Family Guarantee mortgage, again at 100 per cent LTV, which allows parents to use spare equity in their own home as security, rather than cash, as do Family Building Society and Bath Building Society. The major drawback of these is that your parents’ home is at risk of being repossessed if you cannot pay your mortgage, which could make for some tense Sunday lunches. They are also more expensive than conventional mortgages. If your parents can afford to give you cash instead, you will get a better interest rate.
If your parents or grandparents are giving you some or all of your deposit in cash, lenders will want to know whether it is a gift or a loan, and whether the money has any strings attached, such as having to repay them monthly. This will affect the perceived affordability of your mortgage and therefore how much you can borrow. A ‘soft loan’, which is where your parents expect to be repaid, but only when you sell your property, therefore no monthly repayments are required, is not a problem. Banks will often require a letter from your parents confirming that the money is a gift, or a ‘soft loan’.
First-time buyer schemes to help you buy (with or without BOMAD)
You can take advantage of the following options whether or not you have money from your parents. If you are saving up to buy your first home use either a Lifetime ISA or Help to Buy ISA and you get some free cash from the government. See more details in savings chapter 5.
Help to Buy Equity loan
This government scheme has been extended to run until 2021. The idea is to help those with small deposits to access bigger homes and better interest rates. By its terms, you have to buy a new-build property from an approved house builder, with a 5 per cent deposit, receiving a 20 per cent loan from the government. This means you can take out a 75 per cent LTV mortgage; those buying in London receive a 40 per cent loan, so they need borrow only 60 per cent LTV.
The 20 per cent loan is interest-free for the first five years, then you have to pay interest at initially 1.75 per cent, a rate which increases in line with CPI inflation (for more on what that is, see the savings chapter 5). In exchange, the government, like the bank, owns 20 per cent of your property. You pay this off if and when you move, or you can pay it off sooner if you have managed to save the money.
Your mortgage should be a lot more affordable because you have a lower LTV despite your small 5 per cent deposit. Typically monthly payments are reduced by a third compared with what you would be paying with a 95 per cent LTV. As a result many first-time buyers using Help to Buy have been able to afford a slightly bigger property. There is a limit on how much you can pay for your home. In England this is £600,000, in Wales, £300,000. In Scotland £200,000.
One of the downsides is, as some people who took out their Help to Buy loans five years ago are now finding, that if your property does not appreciate in price much you may struggle to repay the government stake and buy another home. If you sell you may find that you have gained little. Many will sign up for Help to Buy assuming that they will use the increased value of their property to remortgage and pay off the equity loan. There are also complaints that those who come to the end of their original Help to Buy mortgage term may struggle to remortgage on to a better deal; there are fewer Help to Buy eligible remortgage products available.
You can find more details on the Help to Buy website (helptobuy.org.uk).
Shared ownership
If you cannot afford a whole property you can actually buy part of one, from just 25 per cent of it to 75 per cent of it, through the shared-ownership scheme. You rent the rest from a housing
