As a first-time buyer, it’s likely you will need a mortgage to buy your home. But where do you start?
We’ve put together a guide especially for first-time buyers, explaining the different types of mortgages available, money-saving schemes, how to apply for a mortgage and everything you need to know at this exciting point in your life.
Let’s start with the basics…
What is a mortgage?
A mortgage is a loan which is used to purchase property. You use borrowed money to buy the house upfront and pay the lender back in instalments plus interest. In most cases, the loan repayments are spread out to your state retirement age to make the loan payments affordable.
Different types of mortgages
There are different types of mortgages which determine how much interest you pay on the loan and how you pay it back.
Fixed rate
With a fixed-rate mortgage, your monthly repayments are ‘fixed’ at a particular amount for a set period of time. This set time is usually short term (2 years) or long term (5 years).. Once the fixed rate period ends, you will either revert to the lender’s standard variable rate of interest (SVR) or need to find a new mortgage deal.
Pros:
- Great for budgeting as you know exactly what you’ll pay each month.
- If interest rates rise, your payments will not increase.
Cons:
- If interest rates fall, your payments will not drop.
- There are likely to be large penalties if you want to pay off your mortgage early.
Variable rate mortgages
As you might expect, your monthly cost on a variable rate mortgage can fluctuate. Whether your payments go up or down is usually affected by the economy, although there are other factors.
There are three main types of variable-rate mortgage:
Tracker mortgage
The mortgage rate follows the Bank of England’s base rate (or another, fixed indicator), plus a set percentage. I.e. if the base rate increases, so do your payments. If it drops, your payments will also go down.
Pros:
- If the base rate drops, you’ll pay less.
Cons:
- If the base rate increases, you’ll pay more, which can be difficult to budget for.
- You will be tied to the deal for a certain period of time meaning you’ll lose out if the base rate goes up.
Standard variable rate (SVR) mortgage
Your lender will have their own SVR which they set and can change (many are led by the Bank of England’s base rate). This is the rate of interest you will usually automatically switch to once any other deals expire e.g. at the end of a fixed rate term.
Pros:
- There aren’t usually penalties for paying off your mortgage early.
Cons:
- SVRs are usually a comparatively expensive mortgage option.
- You won’t know if your payments will go up or down on a monthly basis.
Discount mortgage
This mortgage deal offers a discount off the lender’s SVR for a set period of time (before you revert to SVR).
Pros:
- You may initially pay less.
Cons:
- Your rate will still fluctuate in line with the SVR, which can be difficult to budget for.
Interest only mortgage
With an interest only mortgage, you only pay back the interest on your loan each month, for a set period of time. You will still have to pay back the full loan amount eventually.
Pros:
- Your monthly payments will be relatively small.
- You can wait for an investment to mature/you receive an expected inheritance to pay off your mortgage in the future.
Cons:
- Your monthly payments may still fluctuate.
- You don’t make progress towards paying back the mortgage itself.
- Lenders usually require a much larger deposit or equity as they will want security of repayment at the end of the loan term.
Mortgage first-time buyer
Some mortgages are better suited to first-time buyers than others. They will often have higher loan-to-value ratios (LTV) and potentially other features, e.g. fee waivers or cash back. You may find a lender who offers specific first-time buyer mortgage rates.
How much deposit do I need to buy a home?
To get a mortgage, you will almost always have to pay a lump sum upfront. The bigger this deposit, the smaller your mortgage and you may get better mortgage rates with a larger deposit.
You will usually need at least 5% of the property price ready as a lump sum in order to get a mortgage for the remaining amount. Because the deposit is a percentage of the price, the actual money needed varies. For example, a 10% deposit for a £300,000 house is £30,000, but a 10% deposit for a £500,000 house is £50,000.
Tips for saving a house deposit
Alongside general saving tips such as saving rent by living with relatives, reducing luxuries etc., there are a couple of good ISA (Individual Savings Account) options which benefit first-time buyers.
Help to Buy ISA
These are no longer available but, if you opened one before December 2019 you can still use your savings for a deposit (before December 2030). This will equate to an extra 25% on your savings.
LISA
A Lifetime Individual Savings Account is a specific ISA which you can use to save an extra £1000 per year tax free. It can be used to buy your first home.
How much can I borrow as a first-time buyer?
As a rule of thumb, mortgage lenders tend to offer four to five times your annual income as a loan. This amount then varies depending on other regular outgoings and financial commitments.
Preparing for a mortgage application
If you are hoping to get a first-time buyer mortgage, it is good to be prepared when you approach lenders.
- A good credit score will really help you get the mortgage you want. This shows the lender you can be trusted to make your repayments. You can check your credit score online and improve it by making payments for things e.g. phone bills on time; close credit card accounts you don’t use; end financial ties with people who have bad credit e.g. joint bank accounts; register on the electoral role, confirming your name and address to minimise risk of fraud.
- Calculate what you can afford in mortgage repayments. Take into account what you will pay as a house deposit, Stamp Duty, insurance, moving costs, closing fees, monthly bills, living expenses etc.
How to apply for a first-time buyer mortgage
Once you have improved your credit score as much as possible and decided how much you can afford in monthly repayments, you are ready to apply for a mortgage in principle.
- Calculate how much you could borrow based on the size of your deposit and how much you earn. (a mortgage adviser can help with this).)
- Meet with a lender and apply for a mortgage in principle which confirms how much they will lend you. It gives you an idea of the properties you can afford.
- House hunt and look at the different mortgage options e.g. fixed rate, tracker etc.
- Think about your mortgage term i.e. how long you will be paying off the loan. A longer term means lower monthly payments but more interest.
- Meet with a mortgage advisor/broker/lender to arrange the contracts and secure your mortgage.
What documents do I need to apply for a mortgage?
You will need:
- Proof of your deposit
- Bank statements for at least the past three months
- Payslips from the past three months (or if self-employed – 3 years Accounts or SA302s)
- Proof of identity e.g. driving license or passport
- Proof of address e.g. a utility bill
- Credit report
- Rental history: contact information for your landlord (if relevant)
First Homes scheme
As a first-time buyer considering mortgage options, there are schemes specifically designed to help you get onto the property ladder. The First Homes scheme is available in England and enables first-time buyers to purchase a home for up to 30-50% less than its market value.
- The house must be new and built by a developer participating in the scheme or bought from someone who used the First Homes scheme themselves.
- You must be aged 18+; be a first-time buyer; be able to get a mortgage for at least half the property value; earn less than £80,000 pre tax (£90,000 in London).
- If buying with others you must all be 18+; all apply together; not have a joint income over £80,000 pre tax (£90,000 in London).
- There may also be additional local criteria.
Shared Ownership
This scheme is not specifically designed for first-time buyers but can be a great option for them. The idea is that you buy part of a property (often 10-75% market value) and rent the rest. If you don’t have enough money for a deposit or can’t afford the full cost of a property, this is an option to get onto the property ladder.
- You may be able to buy up to 100% of the property over time in a process called ‘staircasing’.
- You must be 18+; have an annual income below a certain threshold; be a first-time buyer/selling your home; not own any other property.
Top tips for first-time buyers
Buying your first home is extremely exciting but it can also feel daunting. Getting a mortgage can feel like a complicated task and it can be tempting to rush into a contract. Our three top tips for first-time buyers are:
- Make use of available government schemes. Spend some time researching what is currently available and if it could benefit you.
- Don’t overborrow. It’s tempting to borrow the maximum a lender offers but think about how much you really want to be paying back each month. Consider your quality of life and all your other expenses before committing to a mortgage you can’t afford.
- Get professional help. There are lots of experienced professionals ready to guide you through the mortgage process, from brokers to estate agents. Use their expertise and ask questions. It is essential to fully understand your responsibilities and can be extremely costly to miss a detail or misunderstand a key point in your contract.
Get in touch
If you’re a first-time buyer and starting to think about mortgages, we hope this guide has provided a useful introduction to the options available. If you have any questions or would like to find out more, please get in touch. Our friendly, knowledgeable team are here to help.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
Savings and Incentive schemes quoted are subject to change and may no longer be available.