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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 borrow. This will typically involve a review of your salary, as well as any other income or savings. It may also include a review of your spending habits, so that lenders 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 properties you can afford.
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
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.
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. 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 – 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.
Variable mortgages, meanwhile, have interest rates that can fluctuate, either decreasing or increasing, potentially impacting your monthly payments.
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 – 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.
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. It’s possible to have only a 5% deposit and still secure a 95% mortgage, but there are risks 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.
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.
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.
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).
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 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.
Frequently asked questions
What is a mortgage?
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. The term of your mortgage will be agreed with your lender, with terms commonly ranging from 25-30 years. The amount you need to borrow depends on the size of your deposit against the purchase price of your property.
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 – 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 tend to cover a booking fee, administration fee and valuation fee.
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.
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. Since the financial crash of 2008, interest-only mortgages are rarely offered to first-time buyers.
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.
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.
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.
