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A guide to first-time buyer mortgages
Being a first-time home buyer can be exciting and daunting in equal measure – especially if you have to learn about mortgages too. But it doesn’t need to be painful 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, like a parent or guardian.
Always check with your mortgage lender if you’re not sure 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, start by working out how much money you have for a deposit, then find out how much you can borrow.
Applying for a mortgage will typically involve an affordability review and a credit check. The mortgage provider will look at your annual salary and other income, as well as your outgoings like household bills and debts from loans and credit cards. Plus, they’ll check your credit history to find out whether you’re a reliable borrower or whether you’ve missed payments in the past.
If you opt for a variable rate mortgage or fixed-rate mortgage of less than five years, the lender will also ‘stress test’ your ability to repay your mortgage in the future – in other words, would you be able to keep up your payments if something changed, like a rise in interest rates? They’ll use all the information they’ve collected on your finances to decide how much you can borrow.
Once you’ve found out how much you can 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 mortgage and as reassurance that you can afford the financial commitment. It’s possible to have only a 5% deposit and get a 95% mortgage, but there are risks in having to borrow such a large amount, as our guide to 95% mortgages explains.
The more you can 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 to get more competitive mortgage rates, which might mean lower monthly payments.
The table shows how much you’d need to save for a deposit on a £150,000 home.
|Cost of property||Deposit percentage||How much needed|
Which type of first-time buyer mortgage is best for me?
The right type of mortgage for you as a first-time buyer depends on your personal circumstances. To help you find the right fit, we’ve put together a breakdown of the different types or mortgage:
- Fixed-rate mortgages - This is when the interest rate on your mortgage is fixed for an agreed time – anywhere between 2-15 years, but most commonly between 2-5 years. A fixed-rate mortgage offers stability, so you can budget for a set period. When a fixed-rate term ends, you’ll normally move to the bank’s standard variable rate mortgage, which tends to have a higher interest rate than other products. This is the perfect time to remortgage by switching your existing mortgage to a better deal.
- Standard variable rate mortgages (SVRs) - Set at the lender’s basic rate of interest. SVRs don’t come with discounts or reduced interest rates, and the lender can choose to change the rate of interest they charge.
- Tracker mortgages – These 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%. But these rates can 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 capped or ‘collared’ mortgage is a type of loan where the interest rate won’t fall below a set limit. These are much less common than other deals.
- Offset mortgages – These are available to people who have a savings account and mortgage with the same provider. They allow you to use your savings to offset the interest you’re being charged on your mortgage, meaning 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 off your mortgage sooner.
These can be more complicated than other mortgages, so you should be careful you understand the financial commitment, as well as the impact any change to your savings (particularly negative changes) can have on your mortgage.
How much can I borrow as a first-time buyer?
The amount a first-time buyer can borrow depends on several things. A mortgage provider will work out how much you can afford to pay back each month by looking at:
- Your credit rating and history
- Your salary, along with any additional income
- Your outgoings
- How much deposit you have
The cost of the home you want isn’t considered at this stage. Mortgage providers will use your information to work out how much you can realistically afford and give you a mortgage limit based on that information. This will give you a solid guide 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 be very careful not to stretch yourself too far. Only borrow an amount that you can realistically afford to repay, and ideally leave some extra money left over for savings or unexpected expenses.
Read our guide to What affects mortgage eligibility for more information.
The purchase price of your first home
It’s useful to have an idea of how much you’ll be able to borrow, as this will give you an indication of the price range you should be looking at when you’re house-hunting. You don’t want to be in a position where you’ve found the home of your dreams but can’t afford to buy it.
Any mortgage offer will be based on the purchase price of the property. If you’re buying a house to improve, the mortgage you take out will be based on its current value, not its potential. So, although you might be able to get a smaller mortgage, you have to consider whether you can afford the renovations.
When should I apply for a first-time mortgage?
Before you start looking at properties, it’s advisable to get an ‘agreement in principle’ from one or two lenders. This isn’t a guaranteed mortgage offer, but it gives you a good idea of what you could buy. It’s likely that estate agents will ask you to get an agreement in principle before you can start making offers.
Getting an agreement in principle only needs a soft credit check, so your credit score won’t be affected. They’re also commitment free, which means that you’re under no obligation to take the mortgage if you change your mind. An agreement in principle is usually valid for up to 90 days.
Once you’ve got your agreement in principle, you can start searching more seriously and think about making offers. When you’ve found the home you’re interested in buying, you can agree the finer details and get an official mortgage offer.
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 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 people under 40 years old, this scheme aims to offer 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).
What else should I consider when getting a mortgage for my first home?
We’ve covered the main points for first-time buyer mortgages, but here are a few other things to bear in mind when you’re buying a new home:
- Location - When you’re searching for a property, think about what matters to you most in a neighbourhood. Do you want somewhere with good transport links? Is an area with a low crime rate important to you? Or do you want to be near pubs, restaurants and entertainment venues?
- Mortgage application process - Once you’ve had an offer accepted on a house, you can make a formal application for a mortgage (you should already have an agreement in principle in place). The lender will check your financial credentials and carry out a valuation of the property you want to buy, to make sure it’s worth the price you’ve agreed with the seller.
- Monthly repayments - After you get the keys to your new home, you’ll need to start paying off your mortgage loan. Be aware that the first payment may be higher than subsequent payments as it includes interest for the days between the date you moved in and the end of that month, along with your standard monthly payment for the following month.
- Budgeting - Apart from your monthly mortgage payments, there are other costs when buying a first home. These include survey costs, solicitor’s fees and buildings insurance. You can find out more about these in our FAQs below. And don’t forget to factor in your regular monthly household bills that will need paying alongside your mortgage, such as gas and electricity, broadband, and food shopping.
- Economy - Events that affect economic growth, such as the coronavirus crisis, can have a big impact on the house-buying market. Mortgage providers may tighten their lending criteria or increase the deposit amount they require. However, if you can secure a mortgage, you can benefit from historically low interest rates.
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 (L&C) 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 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 guarantor mortgage?
With a guarantor mortgage, someone is added to the mortgage who’ll be responsible for making the repayments if you can’t.
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.
Be very careful when considering a guarantor mortgage, as the person acting as the guarantor is making a huge commitment on your behalf. If you can’t meet your repayments, they’ll be liable to pay them for you. If they can’t pay, their own home could be repossessed. So make sure you’re able to meet the repayments comfortably and that the guarantor is fully aware of, and willing to support with, the potential repayments too. You might want to get legal advice if you’re thinking about a guarantor mortgage.
What is shared ownership?
If you can’t afford a home, you might be able to buy a share of one through a 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 could be entitled to join a shared ownership 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 think carefully about shared ownership. By splitting the ownership, you might find 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 or owning a pet.
If you’re not sure about anything, it’s always best to seek legal advice to avoid any nasty surprises once you’re already tied into a mortgage.
What is a joint mortgage?
A joint mortgage is a mortgage you take out with someone else. This could be a family member, friend, husband or wife, or partner. Both people are responsible for a joint mortgage, which means you’ll both be liable for any missed repayments or making up the balance if one of you is unable to pay.
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.
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 get a mortgage of £180,000 and you’ll need a deposit of £20,000.
In most cases, if you can lower the LTV, you’ll normally lower the rate of interest you’ll be charged.
Should I buy a freehold or leasehold for my first home?
When you’re looking for a new home, it’s quite likely that you’ll come across the terms ‘freehold’ and ‘leasehold’. Freehold means you own the property and the land it sits on, so if you buy a house it will usually be freehold. With a leasehold, you own the property (not the land it’s on) for the length of your lease agreement with the landowner. Most flats and maisonettes are leasehold and you’ll have to pay fees including ground rent and service charges.
There are pros and cons to both options, but bear in mind that it can be very difficult to resell a property with a short lease and you might struggle to get a mortgage if the lease has less than 70 years remaining.
What other costs are there to consider?
Your deposit isn’t the only cost to think about when you’re buying a home. You’ll also need to budget for:
Stamp duty - This is a tax payable when buying a property. First-time buyers in England and Northern Ireland don’t have to pay stamp duty on the first £300,000 of properties costing £500,000 or less. In Scotland it’s on the first £175,000. There is no first-time buyer rate in Wales.
You could use our stamp duty calculator to get guidance about the costs you may need to pay.
Arrangement fee - This is the amount you pay to take out a mortgage. It typically goe up to around £2,000, but prices vary among providers. Most lenders will allow you to avoid this as an up-front cost by adding the arrangement fee onto the mortgage itself. While this might seem like a good idea, you’ll pay more in interest if you add it to your mortgage.
Valuation fees - Your mortgage provider will carry out a valuation of the property to reassure them that it’s worth the amount they’re lending you. Valuation fees vary between providers. You can expect to pay several hundred pounds, but rarely more than £1,000.
Survey fees - The cost of surveys can vary more significantly than valuation fees, depending on the level of detail you want, although 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 issues the home may face. This includes structural problems or restrictions around planning permission if you were looking to extend.
Broker fees - If you go through a mortgage broker, you may need to pay them a fee. These fees are typically several hundred pounds, but the broker may earn their fee through the commission provided by the mortgage provider. Take care to check for broker fees to avoid any surprises. We’re partnered with London & Country Mortgages Ltd (L&C) to provide fee-free advice to Compare the Market customers - you can call them on 0808 292 0811.
Legal costs - These could range from £500 to £1,500 or more. Find out more about the legal expenses relating to a property’s sale in our guide to conveyancing.
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 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.
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 think about 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.
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 overall. 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 penalties. This will give you the flexibility to pay extra each month if 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.
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What our expert says...
“It’s often worth waiting until you’ve built up your credit history to apply for a first-time buyer mortgage. If you don’t have a proven track record of repaying loans and paying bills on time, mortgage providers might be unwilling to lend to you as they can’t be confident you’ll pay them back. You should also make sure you’re registered on the electoral roll as lenders like to see proof of your address.”
- Daniel Evans, Mortgages expert