First-time buyer mortgages

A mortgage is a loan taken out to buy a property. The amount you borrow is secured against the value of the property and is paid back over the term of your mortgage – typically 25 years. The amount you need to borrow depends on the size of your deposit against the purchase price of your property.

If you've never owned a home, then you’re considered a first-time buyer. However, there may be occasions when one mortgage lender classes you as a first-time buyer, while another doesn’t.

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).

On the other hand, 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.

The amount a first-time buyer can borrow depends on a number of factors. A mortgage provider will work out how much you can afford to pay back each month by taking into account your credit rating and history, your income and expenses, and how much money you have for a deposit. As a first-time buyer, you’ll also need to consider how an increase in interest rates (see below) might affect your ability to pay back your mortgage.

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. As a general rule, the lower the LTV, the lower the rate of interest you might be charged.

Generally, a first-time buyer is expected to put down a deposit of at least 10% of a property’s purchase price. It’s possible to have only a 5% deposit and still secure a 95% mortgage, but there are risk in taking out 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 home. You’ll then be in a better position for more competitive mortgage deals, which might include lower monthly payments. 

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 – a 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).

Mortgage lender fees tends to cover a booking fee, administration fee and valuation fee. Stamp duty is another cost to consider – and this would cost a home mover £2,500 on a property worth £250,000. The government’s website lets you calculate how much stamp duty you’d have to pay depending on your circumstances.

Legal costs, which 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.

The right type of mortgage for you as a first-time buyer will depend on your circumstances. It’s important to first understand the difference between a fixed-rate mortgage and one with variable terms.

A fixed-rate mortgage is when the interest rate payable on your mortgage is fixed for an agreed length of time. This is typically for two or three years, but you can find deals for as long as ten years. So, a fixed rate mortgage could offer some stability to help you budget in the short-term.

Variable mortgages, meanwhile, have interest rates that can decrease and increase, and this could impact your monthly payments. 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.

Examples of variable rate mortgages include:

• 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 – 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%. Discount rate mortgages are also subject to change, as the SVR can move – it’s just the discount amount that is fixed – so if the SVR increases to 5%, you’d pay a 4% rate of interest.
• 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.

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. 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.

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:

• Help to Buy ISA – the government could add a 25% boost to your savings, up to a maximum bonus of £3,000 on savings of £12,000
• Lifetime ISA – if you’re aged between 18 and 40, the government could add a 25% boost to your savings of up to £4,000 each 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).

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.

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 may receive an introducer’s fee from L&C for 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.