Mortgages: First steps for first-timers

Falling rates and strong competition among lenders make it a good time to borrow. Here we show how to get the best dealRates are low but you should still scour the market for the best loan, says Tony Lyons

Following the recent cuts in interest rates, mortgages are now the cheapest they have been for a generation. The average mortgage today takes less than 20 per cent of disposable income; it was more than double this a decade ago. House prices are still rising - but they aren't leaping ahead except in London. So if you want to buy your first home, now is a good time.

If you don't take steps to sort out your own mortgage you may well end up being sold a package by the financial services side of the estate agency, which may not be the best deal.

It's better to start by reading one of the specialist mortgage magazines, or looking on the internet, to get a realistic idea of what you can afford before you go househunting. Then chat to a mortgage specialist in a local building society or bank branch, or visit an independent financial adviser (IFA), and see how much you can borrow. "Now rates are down, we are prepared to lend more than we used to," says Tim Fletcher at the Bradford & Bingley. "In most cases, you'll find you can borrow up to three times the main salary and three-quarters of any second salary if a couple is involved, or two and a half times the combined amount - sometimes even more."

The only problem with going to a lender is that it will only tell you about its own deals. IFAs will trawl the market for the best loan suitable to you and do most of the paperwork. In return they receive fees or commission, which generally comes to 1 per cent of the amount borrowed. You should be able to make up for any charges in the savings on the monthly repayments.

"We do a full fact find with every new client, which takes around 30 minutes," says Ray Boulger, of John Charcol, a mortgage broker and IFA. "From this we work out their income, commitments, debts, and what savings they have."

The bigger the deposit you can leave, the better the likely deal. A 10 per cent deposit can significantly cut costs as many lenders impose mortgage indem-nity guarantee penalties on higher loans. The only purpose of MIGs is to protect a lender's interests in case of a default, and it can cost thousands of pounds over the life of a mortgage (see article at the bottom of page 8).

Allow for other expenses. All properties between pounds 60,000 and pounds 250,000 incur 1 per cent stamp duty, and the legal fees for an average transaction can come to around pounds 1,000.

"The two key decisions are what type of mortgage to go for and how to pay for it," says Mr Boulger. "I would advise young first-time buyers to look at fixed- rate mortgages with minimal redemption penalties as interest rates are now very low and unlikely to go much lower."

You can choose to repay both capital and interest each month, or take an interest-only loan backed by an investment designed to pay off the capital at the end of the term. Most interest-only deals used to be sold with endowment policies as the investment vehicle. But these are not so popular now that the excessive commission payments and inflexibility of the deals have been exposed.

n Contacts: John Charcol, 0800 718191; Bradford & Bingley, 0800 570800.