Last updated: 23/03/2022 | Estimated Reading Time: 11 minutes
A guide to first time buyer mortgages
You've always wanted to get on the property ladder. And now, after years of saving, you've finally got enough money to put a deposit down on your first home. But getting your first mortgage can be a confusing and daunting task, especially if you don't know what to look out for. This guide will help you to know when to start applying for mortgages, what you can afford and what type of mortgage is best for you.
In This Guide:
- What are first time buyer mortgages?
- How much money do you need?
- When should you apply for your mortgage?
- Are there any schemes to help first time buyers?
- What type of mortgage is right for me?
What are first time buyer mortgages?
First time buyer mortgages are the same as standard mortgages but will often have added incentives designed to help first time buyers to get on the property ladder. These incentives could be cash rewards or high loan-to-value ratios. An LTV is the amount you can borrow as a proportion of the value of the home. The higher the LTV, the less you will need for your deposit. For example, if you were offered a mortgage of £190,000 for a property valued at £200,000, your LTV would be 95%. The remaining 5% - £10,000 - would be what you need to pay as your deposit.
As with all mortgages, there will be a mortgage term - an agreed length of time over which you will be expected to pay back the loan. These are typically around 25 years, although can be shorter or longer depending on your provider. You will also need to pay back your mortgage in monthly instalments. Any missed payment could result in your home being repossessed.
How much money do you need?
In order to apply for a mortgage, you will first need to put down a deposit as a percentage of the value of your new home. Normally, you will be expected to pay between 5% to 20% of the value of the property. The more money you can save for your deposit, the lower your loan will be. You will also benefit from more competitive mortgage offers with lower interest rates if you can stump up a larger initial deposit.
There are also further costs involved when buying your first home that might not be obvious at first. They are not cheap and can drive the total costs up by as much as 10% of the property's value.
This is a tax that is put on all transactions involving the sale of property and land. The level of tax you pay is proportionate to the value of your home. However, first time buyers are exempt from paying tax duty if the property you are buying is less than £300,000. If your first home costs between £300,001 and £500,000, you will pay 5% in stamp duty. For properties over £500,000, the level of stamp duty will go up in line with the value of the property.
When buying a home, you will need to get the property checked by a surveyor to ensure it is structurally stable. These typically start at around £400 but can be more depending on the value and size of the property.
The new property will need to be valued before you get a mortgage. Valuation fees will go up depending on the value of the property but can cost anywhere between £150 to £1,500. However, some mortgage lenders will not charge you for a valuation.
Mortgage Arrangement Fee
This is a fee to cover the costs of your lender arranging the mortgage for you. Again, not all lenders will charge you for this, although if they do it can cost as much as £2,000.
You will need to hire a solicitor when buying a new home to cover all the legal arrangements such as the contracts and tax registrations. Solicitors fees will usually cost between £800 and £1,500.
You may also want to use a broker to help you decide which mortgage to choose. They typically charge around £500 for this service but can sometimes charge as much as £1,000
In most cases, you will need to hire a professional moving company to transport your furniture and belongings to your new home. These companies charge on average between £50 and £60 per hour for local moves, and between £450 to £1,000 for long-distance moves. However, if you have a friend or family member who owns a van you could ask them to help instead. Or if you don't have many belongings and are moving just around the corner, you could probably do this yourself!
You will probably want to make your new house as homely as possible, which will involve buying new furniture and appliances. Your new property may also require some work done, and whether you choose to do this yourself or hire professionals is up to you.
When should you apply for your mortgage?
It is sensible to get a pre-agreement for a mortgage from one or two lenders before you start searching for your new home. This will give you a better understanding of what you can afford. The size of your mortgage is determined by the size of your deposit, but it is also dependent on various other factors.
When you apply for a mortgage, your lender will carry out a background check on your financial history to determine the viability of offering you a loan. They will look at your credit rating, your income and your outgoings. They will also check how much you can offer for a deposit and how much you can afford to pay back each month. Considering these plus other factors, they will be able to give you an estimation of how much your mortgage can be.
Be aware that some lenders will carry out a hard credit check when looking into your financial situation. These can slightly lower your credit rating, so it is advisable to only get a mortgage agreement from one or two lenders.
Any mortgage offer will typically last between 30 and 90 days. Once you have found an agreement, you will have a clearer idea of your budget and can begin booking in viewings to search for your first home.
Are there any schemes to help first time buyers?
We all know that house prices have rocketed over the last 50 years, making it much more difficult for first time buyers to get on the property ladder today than it was for previous generations. Luckily, the government has introduced a few schemes that are designed to help people buy their first homes and start moving up the property ladder.
Help to Buy
If you have saved enough for a deposit of 5% of the value of your property or more, you could be eligible for the Help to Buy equity loan scheme. This government scheme is available to first time buyers as well as homeowners wanting to purchase a new build' property.
Under the scheme, if the value of the home you want to buy is below £600,000, the government will offer you a loan of up to 20% of the purchase price. It is possible to borrow up to 40% if you live in London.
For the first five years of the term, no interest will be charged on your repayments. After this, you will be charged 1.75% interest which will rise further in line with inflation. The scheme will be available until 2021.
Right to Buy
If you currently rent your home from your local council or housing association, you could be eligible for the Right to Buy scheme. This will allow you to buy your home at a discounted rate, the level of which depends on your area and the type of property you live in.
To qualify for the scheme, you must have been renting your property from a local council or housing association for at least three years. However, these three years do not have to be consecutive, meaning if you rented from the private sector at any time in between renting from the public sector you could still be eligible.
Also known as the Share to Buy scheme, this allows you to take out a shared ownership mortgage. You could be eligible for this if you are a first time buyer and you earn under £80,000 a year. If you live in London, you could be eligible if you earn under £90,000 a year.
The scheme works by you getting a mortgage for a share of your home - it can be between 25% and 75% of the full value of your property. The remaining share will be owned by the landlord or government, which you will pay discounted rent on. You will be able to buy a larger share in the home, or even full ownership, once you can afford to.
This is not a government scheme but is offered by most mortgage providers to help first time buyers get on the property ladder. If you can't save quite enough money for your deposit, you could take out a joint mortgage with your partner, family member or friend. By putting your money together to offer a larger deposit, you can take out a mortgage together.
You could either be joint tenants, where you will both own an equal share of the home, or you could be tenants in common, where one person owns a larger share than the other. If you take out a joint mortgage, you should seek legal advice to sort out what will happen if either you or the other tenant decides to leave or sell the property.
Again, this is not a government scheme but provided by most mortgage providers. A guarantor mortgage will allow you to take out a mortgage for your first home even if your financial situation is not deemed suitable by your lender. You can use a guarantor, usually a parent or family member, who will sign to promise that they will cover any missed repayments. You can even take out a guarantor mortgage if you have no deposit. Your guarantor will not own a share of the property, although their name will be on the title deeds.
What type of mortgage is right for me?
There are a few different mortgage types to choose from for first time buyers. The amount you pay on your monthly mortgage repayments will depend on what type of mortgage you have. While there are advantages and disadvantages for most, there are some (SVRs) that you should avoid.
With a fixed rate mortgage, the interest you pay will stay the same for a set amount of time. They usually run between two and five years but can also last as long as ten years. With these mortgages your monthly mortgage repayments will stay the same. This gives you security and peace of mind that you won't miss any repayments as long as your financial situation doesn't worsen.
However, although fixed rate mortgages are protected from any interest rate rises, you will not benefit from any fall in interest rates either. Also, they are usually set slightly higher than variable rate mortgages.
Once the term on your fixed rate mortgage has finished, you will be automatically rolled on to your lender's standard variable rate. These are usually some of the most expensive mortgage rates on offer, so it's important that you consider remortgaging once you are nearing completion of your current term.
Standard Variable Rate
These mortgages are usually uncompetitive, and will be your lender's default rate which you will be automatically placed on once your fixed rate mortgage deal finishes. As a variable rate, your monthly repayments can go up or down. The interest you pay is pegged to your mortgage provider's basic interest rate. SVRs should be avoided, as you can almost always find much more competitive mortgage rates elsewhere. The only advantage to SVRs is that you can leave at any time without paying any exit fees.
This is another variable rate mortgage that can go up or down. It will track the Bank of England's base interest rate, so if the Bank of England raise their interest rates, you will end up paying more. But if they lower their interest rates, you pay less. You should make sure that you can afford to cover any increases before choosing a tracker mortgage. They usually last between two and five years, but you can also find tracker deals that last for your whole mortgage.
This is a variable rate mortgage that is tracked at a lower level to your lender's SVR. The discount will only apply for a certain amount of time however, usually between two to five years, after which you will be paying interest at the standard variable rate. The interest you pay on your discount rate mortgage will go up and down depending on the SVR.
These variable rate mortgages also move in line with your lender's SVR. However, they are capped at a certain level, meaning you have security that you won't be paying what you can't afford if interest rates rise dramatically. However, the rate is generally set higher than other variable and fixed rate mortgages, and the cap itself is usually set at a high level too.
These mortgages work by offsetting your loan with your savings account. For example, if your mortgage is worth £200,000 but you have savings of £30,000, you will only have to pay interest on £170,000 of your mortgage. These could be beneficial to you if you have a large amount of savings. However, your mortgage lender must be the same bank as your savings account holder to take out an offset mortgage.