A mortgage guide for first time buyers
Buy your first home with the right facts and the right mortgage for you.
How do I compare mortgages?
Once you’ve found the home you would like to purchase, you’ll need to obtain financial support from a lender in the form of a mortgage (if you cannot afford to pay for it outright). You’ll apply for your desired loan amount, and your lender will decide to grant you the loan or reject your application.
Because of the competition in the market, there are thousands of different mortgage products available. So deciding which one to apply for can be tricky unless you follow a procedure like the one below.
A good baseline way to compare the various types of mortgages is to compare the key facts which lenders are required by law to provide, these would be:
- The basic features of the loan such as interest and comparison rates, interest type, term of the mortgage, mortgage amount and repayment frequency.
- The total amount you’ll pay back over the course of the loan.
- The establishment and ongoing fees applicable to the loan.
- How much you’ll repay each month and each year.
- How much extra you’d pay if your rates increased by a 1% p.a.
- The difference putting an extra £200 a month towards your mortgage would make on the mortgage term.
These key points of comparison can help you sort through the advertising and get through to the bare essentials a loan has. It doesn’t explain all of the major features a mortgage might come with, so be sure to also get acquainted with these further below.
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What types of mortgages are available for first-time buyers?
There are a number of different types of mortgages out there for first-time buyers, the right one for you depends on your personal circumstances.
This option is popular with many first-time buyers as it means your interest rates would be fixed for the term of the deal which can be between 2 and 10 years. With fixed rate mortgages your repayments will also stay the same each month, which might appeal to those who like to budget and know how much they’re spending each month.
This is a type of variable mortgage, meaning your interest rate and repayments can go up or down depending on the lender or market. A cap simply allows you to only pay up to a certain amount each month but you also receive the advantages of low interest rates.
This is another type of variable mortgage where the interest rate you will be charged is discounted on the lenders standard variable rate. For example, if your lender has a SVR set at 4% and you have a discount of 1% you will pay 3% interest.
The interest rate can change overtime if the standard variable rate goes up and down.
This type of mortgage ‘tracks’ the interest rate of the Bank of England to then set margin above or below it. It is a type of variable mortgage as the interest you will be required to pay on your mortgage will rise and fall in line with this base line interest rate.
Interest-only loans will see none of your repayments go towards the capital you owe the lender, but rather completely to the interest that’s due. This means your loan will never get smaller, but also means your repayments will be smaller than with an equivalent capital and interest loan.
If paying off a home is your aim, interest-only loans may see the process lengthened, and may see you pay more interest than with an equivalent principal and interest loan.
Common loan features
Even once you’ve chosen what loan type you’re after, there are a number of features in addition to the interest rate and fees you’ll pay which will complete the comparison phase. Some of the more common features offered on a home loan are explained below:
- Offset. An offset feature wrks by linking your savings accounts to your mortgage and allows any funds in the account to cancel out, or ‘offset’ some of the interest due on the outstanding mortgage amount.
- Additional repayments. Many loans offer the option to put extra money towards paying off your mortgage, and extra repayments can help to reduce the loan term quicker and the interest you pay. Some variable rate loans and most fixed rate loans will have a maximum amount of extra funds you can put towards your loan each year, while others may not allow any amount of additional repayments to be made.
- Borrow back. If you have overpaid on your mortgage you can borrow back and withdraw the money previously overpaid to use for whatever you like. This allows for flexibility to get access to funds in the event you need them but make sure you read the fine print, as some mortgages will have a minimum amount you can redraw at any one time.
- Mortgage portability. Selling a property and then buying another usually requires the closing of one mortgage and the opening of a new one. mortgage portability is an option that allows you to keep your loan and simply transfer it over to the new property, meaning you can avoid paying fees such as application fees or cancellation costs. This option typically has a number of requirements, such as keeping the mortgage amount the same and carrying out the exchange and settlement of both properties on the same day and same time. Learn more about porting your mortgage.
- Repayment frequency. Each repayment you make will get you closer to paying off your mortgage, and the frequency at which you make them is another choice you can make with most mortgages. Most allow for weekly, fortnightly and monthly repayments, so you can choose to pay it off in a way that suits your income.
What is the best mortgage for me as a first-time buyer?
With property being so expensive in many parts of the UK, it’s no wonder this is a popular question. While there’s no one ‘best’ type of mortgage for first-time buyers, there are a couple of features which might be more appealing to borrowers trying to get into the market.
- A high maximum LTV. An LTV simply refers to the amount you can borrow as a percentage of the property value, and is usually limited at 80%, or as much as 95%. A 95% LTV means you can borrow 95% of the value of the property, requiring you to come up with at least a 5% deposit. An LTV of 80% would see you require a deposit of 20%.
- Guarantor options. Some providers offer first-time buyers the chance to secure their mortgage by getting a parent or family member to act as a guarantee against the property. This might be a good option for you if you only have a small deposit or even no deposit at all but have a family member who is able and willing to meet your monthly mortgage repayments if you are unable to do so.
- Minimal fees and low rates. If you’re struggling to afford a property, you might want to keep costs down as low as possible. This means mortgages with minimal upfront or ongoing fees, and one with a low interest rate.
- Good customer service. If this is your first property and first home loan, you might want some expert advice to help you manage your loan better and be there in times of stress or emergency. For this reason you might want to select a lender with a proven track record of having great customer service.
First-time buyer schemes
There are shared ownership schemes available to those who are struggling to become homeowners. These allow you to buy a share in a property through a housing association, and pay rent on the part of the property you don’t own.
The UK government have initiated help to buy schemes which allows you to borrow up to 20% of the value of your home (40% in London) interest free for five years.
Schemes for first-time buyers in Scotland
Schemes for first-time buyers in Wales
Schemes for first-time buyers in Northern Ireland
Schemes for first-time buyers in London
Do first-time buyers have to pay stamp duty?
If you’re a first-time buyer in England or Northern Ireland, you will pay no stamp duty on properties worth up to £300,000, which could see you saving up to £5,000.
This means for properties costing up to £500,000, you will pay no stamp duty on the first £300,000, but you will pay stamp duty on the remaining £200,000. If the property you’re buying is worth over £500,000, you’ll pay the standard rates of stamp duty and won’t qualify for first-time buyers relief.
As of October 2018, first-time buyers under Shared Ownership schemes can now claim first-time buyers stamp duty relief on homes worth up to £500,000.
It’s also worth noting if you chose to pay stamp duty in stages and were previously not eligible for the relief, you can now claim this tax back. Unfortunately, if you chose to pay stamp duty on the market value of the property, your entitlement to claim the relief has not changed.
What is Stamp Duty?
Stamp Duty is a land tax that applies if you buy a property or land over a certain price in England, Wales and Northern Ireland. The current threshold is £125,000 for residential properties and £150,000 for non-residential land and properties. Stamp duty is set as a percentage of the property price.
Tips to be approved for a mortgage as a first-time buyer
Save a larger deposit
For some first-time buyer schemes, you’ll be eligible to apply with a deposit worth just 5% of your property’s value.
However, if you can save a larger deposit, you’ll improve your chances of being approved for a mortgage and may even be able to access better interest rates.
Here are some ideas to help you save a bigger mortgage deposit.
- Help to Buy Isa. If you transfer savings in this account and put the money towards a mortgage deposit, the government will top up your funds by 25%. You can make an initial contribution of £1,200, then £200 a month, up to a maximum of £12,000.
- Lifetime Isa. The government will also pay a top-up on savings stored in this account. You’ll get a 25% bonus on a maximum of £1,000 per year, available every year until you turn 50. The bonus is paid when the money is put towards a mortgage deposit or your retirement fund. If it’s withdrawn for any other reason, you’ll pay a penalty charge.
- Gifted deposit. You might roll your eyes if you’re not lucky enough to have anyone willing to help fund your mortgage deposit, but the fact remains that a lot of first-time buyers are receiving financial assistance from family members. Many see it as an intelligent investment. After all, it stops their children wasting money on rent and potentially reduces their own inheritance tax bill (provided they live for seven years after making the gift).
You can apply jointly for a mortgage with up to three other applicants.
When you do this, the income of all applicants is considered jointly, meaning you’ll be eligible to borrow a larger amount for a property. Assuming everyone is pitching in, you’ll find it easier to save a larger deposit too.
Your credit scores will also be considered jointly. This could improve your chances of being approved for a mortgage, provided your co-applicants have a better credit score than you. If they have bad credit, it could harm your application.
There are some downsides to a joint application. For starters, you’ll all have to agree when you want to sell the property. Also, if a co-applicant stops making mortgage repayments, you’ll be equally responsible for the shortfall.
As such, you should only jointly apply for a property with someone you trust.
Improve your credit score
Even after saving a suitable deposit, a lot of first-time buyers are still denied a mortgage because of a bad credit score.
It’s important to start working to build your credit score now so it’s in a good state when the time comes to make your mortgage application.
Your credit score improves when you make timely repayments on your debts and bills. If you’re not already paying bills by direct debit, it’s worth setting a couple up. Consider applying for a credit-builder credit card, making small purchases on it and paying if off in full every month.
More importantly, ensure that no repayments are missed and that none of your financial accounts go overdrawn. This can decimate your credit score and ruin your chances of being approved for a mortgage.
If your credit score is looking worse for wear, explore the options for first-time buyers with bad credit.
Reduce your outgoings
Lenders will check your recent bank statements to ensure you’ll be able to comfortably afford your mortgage repayments. The bigger the gap between your income and your regular outgoings, the more eligible you’ll appear.
For this reason, it’s worth seeing what you can do to reduce your outgoings.
Cancel unnecessary direct debits and standing orders. Pay off as many debts as you can, especially those you’re paying interest on. Haggle over the cost of your utility bills.
It’s also worth closing any accounts that give you access to additional credit you’re not using. Many lenders perceive this additional credit as an additional opportunity for you to get into unsustainable debt and this could count against you when making a mortgage application.
Make corrections to your credit report and the electoral role
Make sure your correct name and address is registered on the electoral role. This is a quick task, which can have a significant impact on your mortgage application.
Check your credit report for errors too. You can view your report and amend errors by contacting any of the UK’s three major credit reference agencies.
Make intelligent decisions regarding your property and mortgage lender
The cheaper the property and the less you’ll have to borrow from a lender, the easier you’ll find it to be approved for a mortgage.
Most mortgage lenders will let you borrow a maximum of 4.5 times your annual income for a mortgage, provided you can comfortably afford to make the monthly repayments.
When hunting for a property, consider what you need and what you’re likely to be approved for. We’d all like a guest bedroom, but many first-time buyers would find it far easier to be approved for a mortgage if they sacrificed this.
If you enlist expert help when choosing a mortgage provider, this will make it easier to be approved.
A professional mortgage adviser will not only be able to point out the best available deals, but also recommend the lenders most likely to work with someone in your situation.
This will save you from making multiple applications to multiple lenders, only to be rejected. Doing this will harm your credit score, making it tougher to be approved by other lenders in the future.
Best first-time buyer mortgage lenders
If you’ve never taken out a mortgage before, you may be feeling overwhelmed by the amount of choice available, with hundreds of lenders offering thousands of different deals. Although this highly competitive mortgage market is good for borrowers, it means that narrowing down your options isn’t always straightforward.
House prices have grown rapidly over the last 20 years so it’s become increasingly harder to get onto the property ladder. The average first-time buyer deposit was 23% of the purchase price in February 2019, according to trade body UK Finance. This equates to nearly £49,000 based on the average loan size.
If you’re lucky enough to be able to save up a big enough deposit and afford the mortgage repayments there are plenty of mortgage lenders who will consider lending to you. But, if not, there are a number of specialist mortgage types offered by a more limited number of lenders that are designed to help.
Below, we’ve highlighted some of the lenders offering the best options we found at the time of writing but the best mortgage deal for you will depend on your circumstances and what’s available at the time. It’s a good idea to speak to a mortgage broker who can look at the whole market to help you find the best deal. Some products are also only available through brokers.
How does the mortgage application process work?
Before you apply for a mortgage, it’s important that you understand the different types available and how interest on them is calculated. From this, you can work out how much you can borrow based on your savings and your income, using online affordability tools.
Speak to a mortgage broker
Speak to a mortgage broker, who will search the market for a deal that is best suited to your situation. But make sure you check that they are on the Financial Services Register first, which will ensure they are properly authorised.
Find your property
The next important step is to find a property within the budget you have set out. Once you’ve found this perfect home, go back to the lender and begin the mortgage application. This will involve detailed research into your finances, including earnings, expenditure and a full credit check with a credit reference agency.
What documentation will I need?
What is required will vary between lenders, and may also vary depending on your personal circumstances but the points below are a good starting point:
- Utility bills.
- Proof of benefits received.
- P60 form from your employer.
- Paylsips for the last three months.
- Passport or driving licence (to prove your identity).
- Bank statements of your current account for the last three to six months.
- Statement of two to three years’ accounts from an accountant if self-employed.
- Tax return form SA302 if you have earnings from more than one source or are self-employed.
- Self-employed people should look to provide information alongside their tax return, which supports what the SA302 says about their income, such as bank statements.
What if my mortgage application is declined?
There may be a few reasons the lender has declined your application. Firstly, it’s a good idea to check that all the information you provided is correct and that you’ve reviewed everything carefully.
If you’re not earning enough or you’re spending too much, the lender might have decided that you would not be able to afford your repayments. In this case, it’s wise to rethink the size of the mortgage you are applying for and how to budget your spending.
One major barrier for getting a mortgage can be your credit history, particularly if you have a history of missed payments, defaults or insolvency. Checking your credit report thoroughly before you apply can help spot any problems that might concern a lender.
If you do have credit issues, it’s a good idea to ensure all your debts are cleared and try to re-build your credit history by making reliable and regular repayments before applying again.
It’s also possible to get something called a guarantor mortgage if you cannot secure a mortgage on your own. This is when another person, usually a relative or close friend, agrees to accept responsibility for the debt in the event that you are unable to keep up repayments.
How long does it take to get a mortgage?
The entire mortgage process has several parts, including getting pre-approved, getting the home appraised and getting the actual loan. In a normal market, this process takes about 30 days on average.
During high-volume months, it can take longer, somewhere between 45 to 60 days, depending on the lender. If any financial issues are discovered in your record such as a low credit score, previous foreclosure or overwhelming debt, getting a mortgage may be a much slower process.
What deposit is needed for a first-time buyer?
Before looking at properties, you need to save for a deposit. Generally, this should be at least 5–20% of the cost of the home you would like to buy. For example, if you want to buy a home costing £150,000, you’ll need to save at least £7,500. We recommend saving more than 5% if possible, which will give you access to a wider range of cheaper mortgages available on the market.
Can you buy-to-let as a first-time buyer?
Put simply, yes, but you may be limited when it comes to getting a mortgage. The first question to ask is, are you a first-time landlord or a first-time buyer?
This is key as a large percentage of lenders need you to have owned your own residential property for at least six months before they will offer you a buy-to-let mortgage. Others will only ask that you own a property, so you could have another buy-to-let property while living in rented accommodation.
However, if you’re a first-time buyer or don’t currently own a property, your mortgage options will be limited.
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