First time buyers
For first-time buyers, figuring out the challenges and hurdles of purchasing a new property can be confusing, and complex. If you are a prospective first-time homeowner with questions about how to manage your mortgage, the following Know Your Money FAQ guide might be able to help. Below, you'll find everything from advice about deposits to eligibility requirements. Just click a section header to read more.
First time buyer mortgages quick facts:
First time buyers must be able to prove their earning levels and ability to meet their monthly repayments in order to secure a mortgage. They will usually need to be able to demonstrate that they have successfully managed credit products in the past too.
There are government schemes designed to help first time buyers obtain a home loan with low deposit levels. These include the 'Help to Buy' schemes and shared ownership.
Some banks offer special mortgages for first time buyers which allow higher than usual Loan to Value (LTV) levels, meaning a smaller deposit is needed.
A 'guarantor' arrangement involves a third party agreeing to meet the mortgage repayments if the borrower defaults. It is often used to help first time buyers secure home lending.
First time buyers can often take out mortgages for extended periods such as 35 years in order to lower their monthly repayment costs. They can sometimes then overpay to bring the term down.
How much deposit will I need?
Most mortgage providers now offer first-time buyers the chance to access 5% deposit deals, meaning that they benefit from a 95% LTV (loan to value) ratio. Government efforts to help more young buyers onto the property ladder have encouraged this, and things like the Help to Buy scheme have done a lot to improve young people's access to the property markets.
But while low high LTV rates are available, your options could be limited if you are restricted by a 5% deposit. Saving that bit more and switching to a 10% deposit instead could increase your options and allow you to access a better deal in some cases. Lower deposit levels generally lead to higher interest rates and less flexibility.
When saving for your deposit, don't forget you will need money for other property purchase costs as well, including the arrangement fees and, if you're looking at property over £125,000, stamp duty.
Can I get a loan for my deposit?
Although it is possible to use an unsecured personal loan, or credit card loan to boost your deposit, this is a risky decision. Not only are mortgage lenders less likely to approve applications that require the use of a loan to pay for the deposit, but the amount you're allowed to borrow may also be reduced because your outgoing expenses will be greater.
Similarly, as a first-time buyer, borrowing extra money for a deposit on top of paying for your mortgage can add another layer of financial risk to your lifestyle during an already turbulent time.
Recent government efforts to encourage home-ownership have created an exception to this rule. The Help to Buy Equity Loan scheme offers a comparatively low-risk loan for first-time buyers looking at new-build homes.The government will lend you up to 20% of the cost of your new build home and you won't be charged any loan fees on this sum during the first five years of owning your new property. Interest rates do come into force after this point, but they are lower than many commercial rates.
How much can I borrow?
Lenders follow the general rule of lending around 4x an individual's annual salary. For joint applicants, the guide is either 3x the collective salary or 4x the first salary plus 1x the second.
However, following the Mortgage Market Review (MMR) by the Financial Conduct Authority - the regulator for financial services in the UK - lenders are now also obliged to take into account your personal expenses so that they only lend what you can really afford to pay back. If you have other debts to pay, high bills, or other outgoings such as childcare, then you will be able to borrow less.
To use our mortgage calculator to work out exactly how much you could borrow click here.
How long can I borrow for?
The most common term for new mortgages is 25 years. However, 35 year mortgages and even 40 year mortgages are also widely available. A longer mortgage term may be beneficial if your deal allows you to make overpayments, as many do. In this scenario, you could pay extra on your monthly repayments to effectively reduce your term when you're feeling flush, but then revert back to the smaller amount when times are a bit tighter.
This means a 35-year mortgage may offer more security to a first-time buyer with fluctuating wages. However, keep in mind that there may be higher arrangement fees or interest rates attached.
How much will my mortgage repayments be?
The price of your mortgage repayments will be determined by a number of factors, including how much you're borrowing, the interest rates and term of your mortgage and more.
To get an idea of how much your repayments will be at different borrowing and interest rate levels you can use our repayment calculator. For more accurate quotes that are tailored to your personal circumstances, seek the advice of a mortgage broker or consult multiple different lenders.
How will lenders decide if I am eligible for a mortgage?
Lenders are under strict regulatory obligations to ensure that they only lend to borrowers who can reasonably afford to pay it back. Under new rules imposed by the Financial Conduct Authority they will not only check your income and weigh up whether you have had any financial difficulties in the past, they will also look at your other spending commitments such as other loans, childcare and even your usual entertainment budget.
As with most financial products, lenders will consult your credit profile and assess how you've fared with financial products in the past. This can determine not only whether or not you'll be offered a mortgage, but also under what terms.
First-time buyers that have a limited credit history may have difficulty in proving they are a safe borrower. However, there are steps you can take to prove your credit worthiness, such as taking out a credit card and demonstrating your ability to make payments each month.
How can I prepare to get my first mortgage?
If you are looking to buy your first home soon, there are some things you can do to improve your chances of being approved for a mortgage.
First off, it's important to ensure that your current account and any credit cards or loans are operated smoothly from here on, with no charges for unarranged overdrafts or missed payments.
Importantly, you may struggle to apply for a mortgage if you have had no credit activity in the past, as lenders want to be able to see evidence that you're able to manage your money. In other words, if you haven't used a credit card before, it could benefit you to take one out and use it for some of your spending - ensuring that you pay off the full balance each month.
Finally, check your credit profile to ensure that it doesn't feature any anomalies or fraudulent activity and make sure any financial arrangements you might have with anyone else are not damaging your eligibility to borrow.
What type of mortgage should I opt for?
The most important decision to make when it comes to the type of mortgage you take out is whether you opt for a repayment or an interest-only mortgage.
First-time buyers may be tempted to take an interest-only deal in order to reduce their payment burden in the first few years of the mortgage, thereby alleviating the burden of the many other costs involved in setting up your first home. However, if you choose an interest-only deal it is important to put aside money whenever you can to make it easier to move to paying off the capital on the mortgage at a later date.
Where your interest is concerned, you will need to choose between a variable, fixed and tracker rate. More information on these and other subsets of mortgage products are available with Know Your Money's dedicated guide to mortgage types.
When should I apply for a mortgage?
Most experts recommend applying for your mortgage before you begin to search seriously for a property. This should help to ensure that you only look for houses that meet your available budget and avoid the risk of eyeing up anything that you won't realistically be able to buy.
Your lender will give you an agreement in principle, outlining what they are prepared to lend you. This is not set in stone and the exact details of the loan will be confirmed at the point you find the house you want to buy.
What do I need to apply for a mortgage?
To apply for a mortgage, you will need proof of identity, such as a driving licence or passport; proof of address, such as a utility bill or the electoral roll; and proof of your income, which is usually your last three wage slips.
If you are self-employed things are a little bit more complicated and you will need to provide more information to prove that you can afford to make the mortgage repayments. In most cases, this will be the past three years of tax return documentation - usually your SA302s, along with the past three months of bank statements and, in some cases, a referral from your accountant.
How long does it take to get a mortgage?
It's important to factor in some time for the mortgage to be processed as it's not possible to predict an exact set of circumstances that will apply to all applicants, so allow some extra time in case it's needed.
You might find that your application process takes longer if the lender is dealing with a busy period, or if your application is trickier than most because it includes a self-employed assessment, or a difficult credit situation. What's more, if you choose to go for a 5% deposit, this might also increase the length of the mortgage application process as the lender's risk is that bit higher they may take extra steps to secure their investment.
What are the steps involved in getting a mortgage?
- Agreement in principle:A lender may initially give you an agreement in principle which is an indication of what they are likely to lend you. It can be useful for proving to a prospective seller that you are will be able to buy your first property. At this stage the lender will verify your identity and perform initial (or 'soft') credit checks.
- Selecting a solicitor or conveyancer: Lenders will ask you to tell them early in the transaction which solicitor or conveyancer will be carrying out the legal work on your house, undertaking local searches, drawing up contracts, and transferring money on your behalf. Prices vary greatly. Shop around for the most competitive rates.
- The full mortgage application: Once you are ready to purchase a property you will then complete the lender's full application. The lender will then perform a full credit check and analyse your outgoings.
- Reference checks: As well as the checks on your credit profile, your lender may seek a reference from a previous lender or landlord. They may also want a written reference from your employer and bank (or accountant if you're self-employed).
- Valuation of the new property: The lender will have the property valued to ensure that it is worth the price that you have agreed to pay for it. If it isn't worth the price they may want to adjust the amount they are willing to lend to you, or could pull the mortgage altogether. You can opt to have your own survey completed or upgrade to a more detailed survey than the lender's basic one.
- The mortgage offer: Once the lender is comfortable with the valuation and the other checks they will make you a formal offer which is typically sent to you and to your instructed solicitor. Once you sign and return this, there is a formal commitment between yourself and the lender.
- Exchange and completion: After receipt of the formal offer, your solicitor will agree upon a date to exchange contracts with the seller's solicitor. This is the time that you will pay a percentage of the purchase price as a non-refundable deposit and make a commitment to pay the rest on completion of the contracts.
Are there special deals for first time buyers?
Mortgage lenders sometimes make special deals available to help first-time buyers take their first steps onto the housing ladder. These can include low deposit requirements (high loan to value or LTV ratio); government-backed schemes coupled with their own offers, such as waived fees; discounted interest rates within an initial period of the mortgage term; and the ability to link a guarantor to the account who will cover your repayments should you fail to do so.
For instance, the government Help to Buy scheme helps to boost small deposits by offering interest-free loans of up to 20% of the property's value if the buyer is willing to put down at least 5%. This 20% loan is interest-free for five years, after which a small rate of interest starting at 1.75% begins.
To compare first time buyer mortgages on Know Your Money click here.
How does a mortgage guarantor work?
Mortgage guarantor arrangements can be particularly useful for first-time buyers who have low earnings or limited credit history. A third party - usually a parent - signs a legally binding agreement that they will cover your mortgage repayment in the event that you can't pay. This gives lenders the peace of mind they need to deal with people who haven't had the experience of paying a mortgage in the past.
How can I check my credit rating?
The better your credit rating is, and the bigger your deposit, the more options you'll have when looking for a great mortgage deal. In the UK there are three main credit reporting agencies: Equifax, Experian, and Callcredit. These organisations hold information about your financial history which they pass on to the companies you apply to take out financial products with.
You can request to see the information that each credit agency holds about you for a small one-off admin fee per agency. Alternatively, the agencies offer a monthly subscription service which allows you to log in online and view your information whenever you choose, as well as providing you with notifications when changes are made to your records.
It is worth reviewing your credit report as it will show up instances where you have financial products that are linked to other individuals. In addition, the reports can, on occasion, hold inaccurate information, so checking what's there will give you the chance to fix it. Either of these factors could prevent you from getting a mortgage so give yourself the chance to take steps to rectify your records.
Should I use a mortgage broker?
Mortgage brokers are able to access deals from multiple lenders - sometimes the whole of the market - and can act on your behalf to find and facilitate the best mortgage for you. There may be a cost for their services but this could be offset by the savings on offer, especially as some brokers can access deals that are not available to the general public.
If you decide to speak to a mortgage broker, then you must ensure they have been authorised by the Financial Conduct Authority (FCA) or be an agent for an authorised firm. The FCA is the UK's regulator that ensures companies are giving financially sound advice and selling products responsibly.
To speak with an FCA-regulated mortgage adviser click here.
What is Help to Buy and how does it help first time buyers?
The Government's Help to Buy scheme is currently live and offers mortgage guarantees, Help to Buy ISAs and equity loans.
Help to Buy mortgage guarantees are designed to make high LTV mortgages more commonly available for those struggling to raise large deposits. Lenders aren't always comfortable offering such high LTV mortgages, so to encourage this, the government has stepped up to guarantee a percentage of the loan.
Taking a home with a value of £200,000 as an example, the buyer would put up £10,000 as 5% of the property's value and the bank or commercial lender would provide the remaining 95%. But crucially from the lender's perspective, £30,000 of this would be covered by the government's guarantee.
Help to Buy equity loans can be used to buy new build properties only. You again put up a 5% deposit but this time, the government will lend you a further 20% of the purchase price free of interest payments for five years. After five years you pay an annual admin fee on the loan and you repay the loan in full after 25 years when you sell your home, or when your mortgage term completes - whichever comes first.
Help to Buy ISAs have also been introduced, as of December 2015. This scheme helps first-time buyers to save up a deposit for their new home by topping up their monthly savings with tax-payer money. With a special Help to Buy ISA account, first-time buyers can make an initial deposit of £1,000 and then save up to £200 per month. The government will then contribute up to £50 per month to the account, up to a maximum overall contribution of £3,000 on £12,000 worth of saving.
For more information on Help to Buy you can read our guide to home buying assistance schemes.