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A guide to first-time buyer mortgages
Being a first-time home buyer can feel daunting enough on its own, but, when you also have to learn about mortgages, it can seem even more difficult. However, it doesn’t need to be if you plan well. Here are the key facts on mortgages for first time buyers, to help you if you’re looking to buy your first home.
What is a first-time buyer?
Typically, you’re considered a first-time buyer if:
- You’ve never owned a residential property either in the UK or abroad, or
- You only own – or have only owned – a commercial property with no living space attached to it (for example, a pub with upstairs accommodation).
You’re probably not a first-time buyer if:
- You’re buying a property with someone who owns, or has previously owned, a home
- You’ve inherited a home, even if you never lived there and it’s since been sold
- You’re having a property bought for you by someone who already owns their own home, such as a parent or guardian.
Always check with a lender if you’re unsure whether you qualify as a first-time buyer.
How does getting a mortgage work if you’re a first-time buyer?
When getting a first-time mortgage, you should start by finding out how much you’re able to use as a deposit, and how much you can borrow. When you apply for a mortgage, it will typically involve a review of your salary, as well as any other income or outgoings. It may also include an affordability and eligibility review, which looks at your spending habits, so that your lender can be sure you’re responsible with money and can handle borrowing such a large sum.
Once you’ve found out how much you’re able to borrow, you’ll have an idea of the type of first home you can afford.
First-time buyer’s deposit
Generally, a first-time buyer is expected to put down a deposit of at least 10% of a property’s purchase price. Lenders require a deposit to secure the loan, as well as offer reassurance that you’re reliably able to afford the financial commitment. It’s possible to have only a 5% deposit and still secure a 95% mortgage, but there are risks in having to borrow such a large mortgage as our guide to 95% mortgages explains. The more you’re able to save for a mortgage deposit, the more equity (or ownership) you’ll have in your first home. You’ll then be in a better position for more competitive mortgage rates, which might include lower monthly payments.
What is a guarantor mortgage?
A guarantor mortgage works similarly to other guarantor loans. It involves adding a guarantor to your mortgage agreement: someone who’ll become responsible for making the repayments, should you be unable to do so.
This type of mortgage can be useful if you have little or no deposit, are struggling to find a suitable lender or want to increase the amount you can borrow, for a house you wouldn’t normally be able to afford.
You should be very careful when considering a guarantor mortgage, as the person acting as the guarantor is making a massive commitment on your behalf. If you are unable to meet your repayments, they will be liable to pay them for you. If they are then unable to pay, their own home could be at risk of being repossessed. Therefore, you should make sure that you’re able to meet your repayments comfortably, and the guarantor is fully aware of, and willing to support with, the potential repayments, too. You may wish to seek extra legal advice if considering a guarantor mortgage.
What is shared ownership?
If you’re unable to afford a home, you may be able to buy a share of one through the Shared Ownership scheme. You’ll then pay rent on the remaining share, which you could buy in the future, once you’re able to afford it.
You may be entitled to join a Shared Ownerships scheme if your household earns less than £80,000 a year (£90,000 if living in London) and you’re a first-time buyer.
You should consider a shared ownership mortgage carefully. By splitting the ownership, you may find that you’re restricted if you decide to sell or make improvements to your home. You’ll likely find that the pool of people you’re able to sell to is smaller, while any improvements will have to be approved by the housing association. Other restrictions can include a ban on subletting a room, to smaller things such as owning a pet.
If you’re unsure about anything, it’s always best to seek legal advice for reassurance, to avoid any nasty surprises once you’re already tied into a mortgage.
What is a joint mortgage?
A joint mortgage is simply a mortgage you take out with someone else. This could be a family member, friend, spouse or partner. A joint mortgage is the responsibility of both people, which means that you’ll both be liable for any missed repayments, or making up the balance if one of you is unable to do so.
While joint mortgages are usually just for two people, some lenders will allow up to four people to take out a mortgage. Just keep in mind that, the more people you share the responsibility with, the more people you’re liable for.
Which type of first-time buyer mortgage is best for me?
The right type of mortgage for you as a first-time buyer will depend on your circumstances. We’ve put together a breakdown of the different types of mortgage, to help you find the right fit for you:
- Fixed-rate mortgages - this is when the interest rate payable on your mortgage is fixed for an agreed length of time – anywhere between 2-15 years, with the most common set between 2-5. A fixed-rate mortgage offers stability, allowing you to you budget effectively for a set period. When a fixed-rate term ends, you’ll normally move to the bank’s standard variable rate (see below) and these tend to come with higher interest rates than other products.
- Standard variable rate mortgages (SVRs) – this is a lender’s basic rate of interest. SVRs don’t come with discounts or reduced interest rates, and the lender can choose to change this rate. SVR tends to be the rate you roll on to once a fixed deal ends.
- Tracker mortgages – these products have variable interest rates that follow an external rate, typically the Bank of England’s base rate. They don’t match the rates they follow, but are set a certain percentage above or below.
- Discount rate mortgages – similar to tracker mortgages, these track (at a lower level) a lender’s SVR by a set amount. For example, if the SVR is 4% and the discount is 1%, you’ll be charged an interest rate of 3%. However, these rates are subject to change, and while the level of discount won’t change, the rate of interest might.
- Capped mortgages – these are also linked to the lender’s SVR, but the rate won’t go above a set level. Alternatively, a collared mortgage is a type of loan where the interest rate won’t fall below a set limit. These products are much less common than other deals.
- Offset mortgages – these are available to those who have a savings account and mortgage with the same provider. They allow you to use your savings as a way to offset the interest you’re being charged on your mortgage. With your two services connected, you won’t pay interest on your mortgage to the same value as the savings in your account. The more in savings you offset, the more you’ll save in interest, which means your mortgage payments will cost less. Offset mortgages typically allow you to make regular or lump sum overpayments, which can help you pay your mortgage off sooner. These can be more complicated than other mortgages, so you should be careful to understand the financial commitment, as well as the impact any change to your savings (particularly negative changes) can have on your mortgage.
Which schemes are available to help first-time buyers?
The government supports a range of schemes for first-time buyers.
Help to buy: Equity Loan – the government lends you up to 20% of the cost of a newly built home. As part of this scheme, you’d need to raise a 5% cash deposit leaving you with a 75% repayment mortgage. You won’t be charged interest on the 20% government loan for the first five years of owning your home. Find out more on how the government’s Help to buy scheme works.
Other schemes that could be worth looking into include:
- Lifetime ISA – if you’re aged between 18 and 40, the government could add a 25% boost to your savings (up to a maximum boost of £1,000 per year) until you’re 50
- Right to buy – also known as right to acquire, this programme gives tenants who rent from a council or local housing association the chance to buy the home they live in
- Starter home scheme – available to those under 40 years old, this scheme aims to give first-time buyers one of around 200,000 new homes priced 20% less than their market value
- Shared ownership – allows you to co-own a property with a landlord (typically a council or housing association).
How much can I borrow as a first-time buyer?
The amount a first-time buyer can borrow depends on several factors. A mortgage provider will work out how much you can afford to pay back each month by reviewing:
- Your credit rating and history
- Your salary, along with any additional incomes
- Your outgoings
- Your deposit amount
The cost of your desired home isn’t considered a factor at this stage. Mortgage providers will use your information to calculate how much you can realistically afford, and provide you with a mortgage limit based on that data. This will then give you a solid guide as to which homes you can afford.
As a first-time buyer, you’ll also need to consider how an increase in interest rates might affect your ability to pay back your mortgage.
As with any loan, you should take great care not to stretch yourself too far when borrowing money. Only borrow an amount that you can realistically afford to repay, and ideally leave some extra money left over for savings or other unexpected expenses.
When should I apply for a first-time mortgage?
The first stage of applying for a first-time mortgage should be to get an “agreement in principle”. While this isn’t a guaranteed mortgage offer, it allows you to have a better idea as to what’s possible for you to buy. You’ll likely find that estate agents require you to get an agreement in principle before you can start making offers.
Securing an agreement in principle only requires a soft credit check, which means that it won’t affect your credit score. They’re also commitment free, which means that you’re under no obligation to take the mortgage ‘agreed in principle’ if you change your mind.
Once you’ve got your “agreement in principle”, you should then begin searching more seriously and consider offers you’d like to make. When you’ve found the home you’re interested in buying, you can agree the finer details and secure an official mortgage offer.
Compare first-time buyer mortgages
We’re here to make your search for a mortgage as easy as possible. Compare mortgages with us and we’ll ask you how much deposit you have, how much the property costs and the period of time you want to repay the mortgage. We’ll then compare from a range of lenders and give you a list of results in order of interest rate, with the lowest first.
If you prefer to speak to someone about your options, you can call London & Country Mortgages Ltd on 0808 292 0811 – they’ll be more than happy to help.
About our broker partner service
Advice is provided by London & Country Mortgages Ltd (L&C) who are authorised and regulated by the Financial Conduct Authority (143002). L&C are not part of the BGL Group Limited of which Compare the Market Limited forms part.
Compare the Market receive a % of the commission our partner London and Country earns through customers who use this service. All applications are subject to lending and eligibility criteria. L&C will not charge you a broker fee should you decide to proceed with a mortgage.
Frequently asked questions
What is a loan to value ratio (LTV)?
Your loan to value ratio (LTV) is the amount you can borrow on a mortgage compared to the overall cost of a property. Mortgage lenders usually have a maximum LTV ratio they’re willing to offer you. For example, if you’re looking to buy a property worth £200,000 and the lender is only willing to lend you 90% of the property’s value, you’ll receive a mortgage of £180,000 and you’ll need a deposit of £20,000.
In most cases, if you can lower the LTV, you will normally lower the rate of interest you’ll be charged.
What other costs are there to consider?
Your deposit is not the only cost to think about when you’re considering a mortgage: You’ll also need to budget for Stamp duty.
Tax due on any first-time buyer’s property worth more than £300,000 in England and Northern Ireland – along with mortgage lender fees, property valuation costs and legal expenses. In Scotland, instead of stamp duty you’ll pay the Land and Buildings Transaction Tax (LBTT), while in Wales it’s the Land Transaction Tax (LTT).
Arrangement fees - This is the amount you pay to take out the mortgage. These typically run up to around £2,000, but prices vary between providers. Most lenders will allow you to avoid this as an up-front cost, by adding the arrangement fee onto the term of the mortgage itself. While this may seem like an attractive offer, you should be aware that the fee will build interest over your mortgage term, which means it’ll be more expensive overall.
Valuation fees - Your mortgage provider will expect you to carry out a valuation on the property, to reassure them that the property is worth the amount that they are lending you. Valuation fees vary between providers, but you can expect to pay several hundred pounds, but rarely more than £1,000.
Survey fees - Surveys can vary more significantly than valuation fees, as it depends on the level of detail you request. However, you shouldn’t expect to pay more than £1,000.
Surveys are different to valuations because they review the property’s structure, along with any hazards or issues the home may face. This includes structural problems or restrictions around planning permission if you were looking to extend.
Broker fees - If you went through a mortgage broker, you may need to pay them a fee. These fees are typically several hundred pounds, but they may earn their fee through the commission provided by the mortgage provider. Take care to check for broker fees to avoid any hidden surprises.
Legal costs - These will also need to be factored into your budget, could range from £500 to £1,500 or more. Our guide to conveyancing outlines the legal expenses relating to a property’s sale.
What’s the difference between repayment and interest-only mortgages?
A repayment mortgage is where you pay back both the capital (the amount you initially borrowed) and the interest with each monthly payment. It means that by the time your mortgage ends, you will have paid off the total loan.
An interest-only mortgage pays only the interest charges on your loan each month, but not any of the original capital borrowed. So, at the end of your mortgage term you still owe the lender the original cost of the property and you’ll need to show how you intend to pay that back. If you can’t repay the loan by the end of the term, you might need to sell your home. Since the financial crash of 2008, interest-only mortgages are rarely offered to first-time buyers.
How can I check if I’m eligible for a mortgage?
Our eligibility checker can help you see how likely it is you’ll qualify for a mortgage, before you apply for one. This could give you more confidence when applying for a mortgage and when speaking to a mortgage broker. What’s more, you can check your eligibility without impacting your credit score.
Should I consider a longer-term mortgage?
Many first-time buyers consider a longer-term mortgage because it lowers the amount you pay back each month, spreading the cost over a longer period of time. While the standard length (or term) of a mortgage is 25 years, an increasing number of mortgage lenders are offering longer-term mortgages – some up to 35 years in length.
If you’re considering taking out a longer-term mortgage, be aware that while your monthly repayments will be lower, you’ll be paying back a lot more in interest in total. And think about how old you’ll be when your mortgage term comes to an end. Will you be happy paying off a mortgage at that age? And are you likely to still be working and have enough income to afford the monthly payment? A mortgage lender should highlight and talk through these issues with you.
It’s worth checking if a mortgage deal lets you overpay without incurring penalties. This will give you the flexibility to pay extra each month should you have a pay rise, or even pay off a lump sum if you come into some money. This could help you to shorten the length of the mortgage and save on interest.
