Purchasing your first home and getting on the property ladder can be an exciting time. However, the process of securing a mortgage for the first time can be overwhelming and confusing. In this guide, we share everything you need to know about first-time buyer mortgages.
If you have any questions, feel free to contact our award-winning advisors, who will be happy help.
Let’s get into it…
What are the different types of UK mortgages?
There are several different types of mortgages available in the UK, each with unique features and benefits. Here’s a brief summary of some of the most common types:
- Fixed-rate mortgages: In this type of mortgage, the interest rate is fixed for a set amount of time, typically 2 to 5 years. This means that the monthly repayments will stay the same during this period, even if interest rates change.
- Tracker mortgages: A tracker mortgage tracks the Bank of England base rate, meaning that the interest rate will go up or down in line with any changes to the base rate. This type of mortgage is typically a good option for those who expect interest rates to remain low or to fall.
- Discount rate mortgages: A discount rate mortgage offers a discount on the lender’s standard variable rate for a set period of time, typically 2 to 3 years. After this period, the interest rate will usually revert to the standard variable rate.
- Capped rate mortgages: A capped rate mortgage is similar to a tracker mortgage but with an upper limit or “cap” on the interest rate. This means that the interest rate will not exceed the capped rate, even if the Bank of England base rate rises above it.
- Offset mortgages: An offset mortgage allows the borrower to offset their savings against their mortgage balance. This can reduce the amount of interest charged on the mortgage and result in a lower monthly repayment.
- Shared ownership mortgages: Shared ownership mortgages are designed for those who cannot afford to buy a property outright. With this type of mortgage, the buyer purchases a share of the property, typically between 25% and 75%, and pays rent on the remainder.
- Help to Buy mortgages: Help to Buy is a government-backed scheme designed to help first-time buyers and home movers purchase a property with a 5% deposit. There are two main components to the scheme: Help to Buy: Equity Loan and Help to Buy: ISA.
These are just some of the many different types of mortgages available in the UK, and the best option for a particular buyer will depend on their personal circumstances and financial situation.
What are interest-only and repayment mortgages?
Interest-only and repayment mortgages are two different types of mortgages that determine how you pay back the loan to the lender.
- Interest-only mortgages: With an interest-only mortgage, you pay only the interest on the loan each month and not the capital or the amount you borrowed. This means that the monthly repayments are lower, but you will still owe the full amount of the loan at the end of the term. In order to repay the capital, you will need to have a separate investment plan in place, such as a savings account, stocks, or a life insurance policy.
- Repayment mortgages: With a repayment mortgage, you pay back both the interest and the capital each month. This means that your monthly repayments will be higher, but at the end of the term, you will have fully repaid the loan and will own the property outright.
You need to consider both types of mortgages carefully before choosing the one that is right for your individual circumstances and financial situation. Repayment mortgages are typically the most popular option in the UK as they provide a guaranteed way to repay the loan and own the property outright, but they also have higher monthly repayments.
Interest-only mortgages can be more suitable for those who have a separate investment plan in place to repay the capital, but they come with more risk and are often not recommended for those who are not experienced with investments.
How much can I borrow with a first-time buyer mortgage?
The amount that you can borrow with a first-time buyer mortgage depends on several factors, including your income, outgoings, credit history, and the value of the property you want to purchase.
Typically, lenders will lend a multiple of your income, which can range from 2 to 5 times your annual income. For example, if you earn £30,000 per year, you may be able to borrow between £60,000 and £150,000.
Lenders will also consider your monthly outgoings, such as rent, bills, and other debts, to determine your ability to repay the mortgage. They may also carry out a credit check to assess your credit history and to ensure that you can afford the loan.
Finally, the lender will consider the value of the property you want to purchase and may place restrictions on the maximum loan-to-value (LTV) ratio, which is the ratio of the loan amount to the value of the property.
It’s important to note that these are general guidelines and that the exact amount you can borrow will depend on your individual circumstances and the lender’s policies. It’s always a good idea to get advice from a financial advisor or mortgage broker for a more accurate estimate of how much you can borrow.
What deposit do you need for a first-time buyer mortgage in the UK?
The deposit required for a first-time buyer mortgage in the UK typically ranges from 5% to 20% of the property value. Some lenders may offer mortgages with a lower deposit, such as a 3% deposit mortgage, but these typically come with a higher interest rate.
Having a larger deposit can make it easier to get accepted for a mortgage and can also result in a lower interest rate. This is because the larger the deposit, the lower the amount the borrower needs to borrow and, therefore, the lower the risk to the lender.
It’s important to note that the exact deposit required can vary depending on several factors, including the type of property being purchased, the lender’s policies, and the buyer’s personal circumstances.
What are the criteria for a first-time buyer mortgage?
The criteria for a first-time buyer mortgage can vary between lenders, but there are some common requirements that you’ll need to meet in order to be eligible for a mortgage.
- Income: Lenders will look at your income to determine your ability to repay the mortgage. You’ll typically need to have a regular income from employment or self-employment, and your salary may need to be above a certain threshold.
- Credit history: Lenders will carry out a credit check to assess your credit history and to determine whether you have a good track record of repaying debts. Poor credit history can make it more difficult to get a mortgage.
- Affordability: Lenders will consider your monthly outgoings, such as rent, bills, and other debts, to determine whether you can afford the mortgage payments. They may also look at your spending habits and may carry out an affordability assessment.
- Property value: The value of the property you want to purchase will also be a factor in determining your eligibility for a first-time buyer mortgage. Lenders may place restrictions on the maximum loan-to-value (LTV) ratio, which is the ratio of the loan amount to the value of the property.
- Deposit: Most first-time buyers will need to have a deposit, typically 5% to 10% of the property value, to be eligible for a mortgage. There are government-backed schemes, such as Help to Buy, that can help first-time buyers purchase a property with a smaller deposit.
What do you need to do before applying for a first-time buyer mortgage?
Before applying for a first-time buyer mortgage, there are several steps you should take to prepare:
- Check your credit history: Your credit history is an important factor in determining whether you are eligible for a mortgage, so it’s a good idea to check your credit report before applying. You can get a free credit report from one of the main credit reference agencies in the UK.
- Make sure you’re on the Electoral Roll: Being on the electoral roll helps to prove your residence which in turn strengthens your credit rating. Check to see if you’re registered on the electoral roll here.
- Determine how much you can afford: Consider your income, monthly outgoings, and other debts to determine how much you can afford to pay each month for a mortgage. Use a mortgage affordability calculator to get an estimate of how much you can borrow.
- Save for a deposit: Most first-time buyers will need a deposit, typically 5% to 10% of the property value, to be eligible for a mortgage. Start saving as early as possible to build up your deposit.
- Shop around for a mortgage: Compare different mortgages to find the one that is right for you. Consider factors such as interest rates, fees, and repayment terms. Consider getting advice from a financial advisor or mortgage broker.
- Get pre-approved: Some lenders offer pre-approval, which is a preliminary assessment of your eligibility for a mortgage. This can give you an idea of how much you can borrow and can help you narrow down your search for a property.
- Get your paperwork in order: When you’re ready to apply for a mortgage, you’ll need to have some important documents and information ready, such as proof of income, ID, and details of any debts or outgoings.
By following these steps, you can ensure that you’re well prepared and have a good chance of being approved for a first-time buyer mortgage.
How much does a first-time buyer mortgage cost?
The cost of a first-time buyer’s mortgage depends on several factors, including the interest rate, fees, and the term of the mortgage.
Interest rates on mortgages can range from a few per cent to over 5% per annum, and the rate you get will depend on your individual circumstances and the lender’s policies. Some lenders offer fixed-rate mortgages, where the interest rate stays the same for a set period, while others offer variable-rate mortgages, where the interest rate can change over time.
In addition to the interest rate, you may also have to pay fees associated with the mortgage, such as arrangement fees, valuation fees, and legal fees. These fees can add several thousand pounds to the cost of the mortgage, so it’s important to factor them in when comparing mortgage options.
Finally, the term of the mortgage, which is the length of time you have to repay the loan, can also impact the overall cost of the mortgage. A longer term may result in lower monthly payments, but it will also increase the amount of interest you pay over the life of the mortgage.
What costs are there when taking out a first-time buyer mortgage?
There are several costs associated with taking out a first-time buyer mortgage in the UK, including:
- Deposit: Most first-time buyers will need to save a deposit, typically 5% to 10% of the property value. This deposit will be used as collateral against the mortgage and will reduce the amount you need to borrow.
- Mortgage fees: There may be various fees associated with the mortgage, such as arrangement fees, booking fees, and application fees. These fees can add several thousand pounds to the cost of the mortgage, so it’s important to factor them in when comparing mortgage options.
- Valuation fee: A valuation fee is typically required to assess the value of the property you are buying. This fee can range from £150 to £1,000 or more, depending on the value of the property.
- Legal fees: You will need to pay for a solicitor or conveyancer to handle the legal aspects of buying a property, such as transferring ownership and checking the property title. Legal fees can range from £500 to £1,500 or more, depending on the complexity of the transaction.
- Stamp Duty: If the property you are buying is over £125,000, you may be required to pay stamp duty, which is a tax on the purchase of a property. The amount you need to pay depends on the purchase price and the type of property you are buying.
- Moving costs: There are various costs associated with moving, such as removal costs, utilities connection fees, and redecorating costs.
- Maintenance costs: Once you own a property, you will need to budget for ongoing maintenance and repair costs, such as painting, gardening, and repairs to appliances.
These are general guidelines, and the exact costs of a first-time buyer mortgage will depend on your individual circumstances and the lender’s policies.
How do I apply for a first-time buyer mortgage?
Here are the steps you can follow to apply for a first-time buyer mortgage in the UK:
- Determine your budget: Before you start looking for a mortgage, it’s important to determine how much you can afford to borrow. This will help you to find a mortgage that fits within your budget and will prevent you from overstretching financially.
- Get pre-approved: Some lenders offer pre-approval, which allows you to find out how much you can borrow before you start looking for a property. Pre-approval can give you an advantage when bidding on a property, as it demonstrates to the seller that you are a serious buyer.
- Compare mortgage options: There are many different mortgage options available to first-time buyers, so it’s important to compare the different options and find the best one for your individual circumstances. You can use a mortgage broker, a financial advisor, or an online mortgage comparison website to compare mortgage options.
- Gather your documents: To apply for a mortgage, you will need to provide a range of documents, including proof of income, bank statements, and ID. Your lender will be able to advise you on the specific documents you need to provide.
- Submit your application: Once you have gathered all the necessary documents, you can submit your mortgage application. You will typically need to provide information about your income, employment, and debts, as well as details about the property you are buying.
- Wait for a decision: Once you have submitted your application, the lender will assess your application and make a decision. This process can take several weeks, and you will be notified of the decision by the lender.
- Complete the mortgage: If your application is approved, you will need to complete the mortgage. This typically involves signing the mortgage agreement and providing the deposit.
It’s important to note that these are general guidelines and that the exact process of applying for a first-time buyer mortgage will depend on the lender’s policies.
Do I need to use a mortgage advisor for my first mortgage?
You don’t have to use a mortgage advisor for your first mortgage, but using an advisor can help you to find the best mortgage for your individual circumstances. Here are some of the benefits of using a mortgage advisor:
- Expertise: A mortgage advisor has the expertise to help you find the best mortgage for your individual circumstances. They can help you to compare different mortgage options, understand the terms and conditions, and find the best deal for you.
- Time savings: Applying for a mortgage can be a time-consuming process. A mortgage advisor can handle the process on your behalf, saving you time and hassle.
- Access to exclusive deals: Mortgage advisors often have access to exclusive deals that are not available to the general public. These deals can offer better interest rates, lower fees, and more favourable terms and conditions.
- Improved chances of approval: A mortgage advisor can help you to present your application in the best possible light, increasing your chances of approval. They can also help you to find a lender that is more likely to approve your application if you have a less-than-perfect credit history.
Some mortgage advisors charge a fee for their service, so it’s important to factor in this cost when considering your options. At PM Financial, our award-winning advisors offer all clients a free mortgage review. If you’ve got any questions about a mortgage, want to see what mortgage rates are available for you, or you would simply like to have a chat about your options – our expert advisors are here to help!