First-time buyer mortgages
Buying a home is the biggest purchase most of us will make. And getting a mortgage can feel pretty daunting – complex, expensive, huge. It can be hard to know where to begin.
The good news? You can start right here. In this guide you’ll get an overview of:
- the basics of a mortgage
- a typical application
- the different types of mortgage
- support for first time buyers
Mortgages: a basic introduction
It’s a big loan to help you buy a property
A mortgage is a loan you take out to buy a property. You usually borrow the money from a bank or building society, aka the lender. But the lender doesn’t own your home. You do.
You need a deposit to get one
To get a mortgage, you’ll need a big upfront payment, called a deposit, which is usually a minimum of 5% of the total price of the property you want to buy. The bigger the percentage you come up with upfront, the less of the loan you have to pay off over the mortgage term. Plus, many mortgage rates reduce for every 5% you can put down in your deposit.
Your mortgage can be between 5 and 40 years (most go up to 35). The number of years you take to pay back your loan is called your mortgage term. It’s usually best to take the shortest term you can afford. The shorter the term, the more you pay off each year and the sooner you become mortgage-free.
A shorter term usually means bigger monthly payments, as you have to pay off more of the loan each month. But it might mean a lower total cost over the life of your loan – ie the total you’ll have paid at the end of your term, as you’ll probably have paid less in interest. A mortgage broker will be able to help you work out the best term for you.
Interest vs repayment
You can choose how to pay your mortgage back:
Interest-only: (though this is near impossible for first time buyers) every month you only pay the interest on your loan. Your monthly payments will be lower, but they won’t make a dent in the loan itself. At the end of the term, you’ll get a bill for the total loan amount, which means you’ll either need to have saved up in the meantime, or sell your home to pay it back.
Capital and interest, aka repayment: every month, you pay an amount off the debt itself (the capital) and the interest as well. Month on month, your balance (the amount left on your loan) will go down and by the end of your term, you’ll have paid the loan off in full.
Fixed rate vs variable rate
You can also choose the type of interest rate you’d like applied to your loan. Broadly, there are two types: - Fixed rates, that guarantee exactly what you pay over a particular length of time, eg 3 years or 5 years - Variable rates, that tend to be cheaper (though that’s not always the case) but are less predictable
What if I can’t pay it back?
A mortgage is ‘secured’ against the property you’re buying. That means if you stop paying back the loan, the lender can repossess your home. Usually, they’ll step in to try to help you pay it back first – if they can’t, they may repossess your home to get back the money.
Freehold vs leasehold
There are three main ways to own a property:
Freehold: you own the land and everything on it (eg the building you’ll live in, the garden, garage, etc).
Leasehold: you own your property, but not the land it sits on. When your lease runs out, you have to pay the freeholder to add years to it. The maximum amount of time you can have on a lease is 999 years – then once the lease drops to below 85 years fewer lenders start offering mortgages on those properties. There are often cost implications in leasehold too, with ground rent and service charge to pay, and charges if you want to extend the lease. If you’re buying leasehold, it’s a good idea to seek legal advice to understand all the costs involved.
Share of freehold: you’ll be a leaseholder, but part of a group of leaseholders that together control the freehold. You’ll often find this is the case in a block of flats – when it’s time to make decisions about the building or the garden, you can get together and vote on it. And like in leasehold, there may well be service charge and ground rent costs on top of your mortgage.
What’s a mortgage in principle?
If you don’t have a specific property in mind, that’s OK. You can still start thinking about your mortgage in broad terms, and apply for a mortgage in principle to give you peace of mind that your budget is accurate and to give estate agents when you start bidding on a new home. But you won’t be able to apply for a mortgage until you’ve found a specific home to secure the loan against.
Extra support for first time buyers
If it’s your first time buying, you can get government support to help you buy your home, especially if you have a limited deposit.
In a nutshell
A mortgage is a long-term loan. It’s designed to help you buy a property. It can sound complex and scary but it doesn’t have to be.
Before you apply for a mortgage: deposit, LTV & credit score
Saving for a deposit (and your ‘LTV’)
You can buy with a 5% deposit, but that’s where rates are at their highest and lending rules at their strictest. If you can get to a 10% deposit, that will make a real impact on those rates and rules.
That’s because if you have a bigger deposit, lenders need to lend you less money – which they like because that means less risk for them. So lenders will reward bigger deposits with lower interest rates for you.
If you’re struggling with a deposit, you can explore schemes like shared ownership and Help to Buy.
Some lenders will want to see evidence (like bank statements) of how you saved your deposit.
What is LTV?
LTV means loan to value – it’s the size of your mortgage as a percent of the total property value.
Example: Say you want to buy a property worth £250,000. You have a deposit of £20,000 already, so you need to take out a mortgage of £230,000.
That makes your LTV:
230,000 / 250,000 = 0.92
x 100 = 92%
The higher your deposit, the lower your LTV. So if you put down a 10% deposit on your home (without using any schemes to buy it) that’s a 90% mortgage, or 90% LTV.
Help from your parents
Your parents can lend you money for the deposit, gift you money, and act as loan guarantors. A tiny handful of lenders even let you take out a 100% loan on a property, if your loved ones provide 10% of the price as a security.
Be warned that some lenders won’t accept borrowers who are using a loan to fund their purchase, even if that loan is from their parents. That’s why a gift that doesn’t need to be repaid can be better – some lenders will need to see a letter from your parents saying the gift is actually a gift! A broker can help you figure out where to apply.
Your credit score
Your credit record is the history of how you’ve managed your money in the past. It’s written up as your credit report, and summarised in one number: your credit score.
Before they agree to lend money to you, a lender will run a credit check on you to read your report and see your score. This will only ever be with your permission, and after they’ve already run their basic affordability checks.
They’ll get to explore things like your debts, store cards and credit cards you’ve opened, where you’ve applied for loans before, whether and how you paid all those back… almost everything you’ve done that’s to do with credit (ie borrowing money).
It’s worth checking your report yourself, before you approach lenders for a mortgage. Sometimes tiny mistakes in there, like a wrong address history, can pull down your credit score – but these are fixable.
Credit reports are worked out by credit reference agencies, or CRAs. There are three of these in the UK – Experian, Equifax and TransUnion (previously CallCredit). It’s worth getting a report from all three, as each is worked out a little differently. A mortgage broker will be able to help you understand your credit report if that would be useful.
Once you get it, work through this credit score checklist to make sure your score is as good as it can be before you apply for a mortgage.
Your mortgage application, in brief
Get your deposit ready
You’ll need to make an upfront payment on the place you want to buy – at least 5% of the property’s total value, ideally 10% and up.
A mortgage calculator can help you check what you can afford.
Get a broker on the case (or go it alone)
You’ll almost always get your mortgage from a bank or building society. You can search deals from these lenders online yourself, or you can get a mortgage broker to do it for you. If you use a broker, make sure they’re “whole of market” – which means they look at every deal out there – and watch out for commission costs. Your lender or broker has to advise you on your mortgage – here’s what they have to tell you.
(Don’t worry, this isn’t your last chance to get a broker, you can get one any time before you apply for the mortgage.)
Choose a mortgage deal, and apply for an agreement in principle
An agreement in principle (AIP) is a document you’ll get from a lender, saying they’re happy to lend you the money for your mortgage.
Before they give you one, the lender may need to see some documents from you, and do a brief check of your income and credit score to see if you can afford to pay back the loan.
Before you get an AIP, you can get a mortgage in principle (MIP) from a lender or broker with no credit search or documents needed. An MIP is a certificate showing roughly how much you can borrow.
Here’s more on MIPs and AIPs. Legally you don’t have to get either, but an AIP can speed up the full application you have to do later.
Submit a full mortgage application
When you’ve found a property, it’s time to submit your full mortgage application.
Now, you get a solicitor on board – they’ll need to be named in your mortgage application.
When you submit your application in full, lenders will confirm the details you’ve already provided, look at your documents and make some final checks before they – hopefully – accept your application.
Get a property survey
The lender sends a surveyor to check the property, and you can send your own too. Their job is to check the property is worth the agreed price, and works for the lender as a security against the loan they’re giving you.
Then if you need to, you renegotiate the property price (ie the loan amount too).
The lender makes you an offer
You’ll get your official offer from the lender in writing, and sign the mortgage contracts.
Your solicitor sends the seller their money, and you’ll get the keys to your new home.
Fixed rate or variable? The different types of mortgages
There are lots of different mortgage deals out there, but mostly, they fall into two different categories: fixed rate and variable rate.
Here, ‘rate’ refers to the interest rate you have on your mortgage. The interest rate is what determines how much interest you pay, on top of repaying the amount you’ve actually borrowed (aka ‘the capital’).
Each rate will run for a set period, eg 2 or 5 years (though you can get rates than run over the whole term of your mortgage, like a lifetime tracker rate). At the end of the period, the lender will automatically switch you to their standard variable rate, or SVR. SVR is basically the lender’s own rate – they can set it as high or as low as they like, and increase it whenever they want to.
It usually comes with no ‘early repayment charge’ (a fee for for switching to another rate, paying more of your mortgage each month, or paying off your mortgage early). But for many first time buyers, that’s not enough to balance out the cost and lack of security. If you’re headed towards an SVR, it’s almost always worth looking at remortgaging.
Fixed rate mortgage
The interest you pay on your loan is ‘fixed’ – guaranteed to stay the same – for a period of time. This period can range from 2 to 10 years. During that time you know exactly what your monthly payments will be.
Almost all fixed rate mortgages come with an early repayment charge during the time that your rate is fixed. Your broker can help you decide what’s worth doing.
At the end of the period, you’ll automatically be switched to a standard variable rate (SVR). Usually, a few months before the end of your period, your lender will typically write to you to offer an alternative. You could also speak to a broker to see if they can find you a better deal with another lender.
Tracker mortgage (variable)
Tracker rates work by tracking – as you might have guessed – a particular interest rate, usually the Bank of England base rate, and adding a certain amount on top.
With a tracker mortgage, your monthly repayments will rise and fall as the interest rates do. So if the base rate goes up, your payments go up. If interest rates go down, so will your payments. You’ll need to consider how you’ll budget for increases in mortgage payments – your broker can help you with this.
Discounted rate mortgages (variable)
A discounted rate mortgage gives you a discount on your lender’s standard variable rate (SVR) for a fixed period, usually 2, 3 or 5 years.
They’re not the same as fixed rate mortgages. They’re still tied to the SVR, so if your lender raises interest even a little, that can increase your monthly repayments. And unlike a SVR, they usually do include a fee for paying off your mortgage early or remortgaging, though only during the discounted period.
The ‘true cost’ of a mortgage
When we talk about the ‘true cost’ of a loan, we’re factoring in the interest rate, fees, incentives – all the money you have to pay the lender, usually assessed over the first fixed period of the term.
Let’s say you want to borrow £200,000 over 25 years, and you’re comparing loans from two different lenders.
See how though the first interest rate looks lower, it’s actually a higher true cost over a 2 year fixed period:
|Interest||Monthly payment||Fees||Incentives (eg cashback)||True cost over 2 years|
Help to buy and shared ownership
Having a small deposit doesn’t mean you can’t buy. There are a few schemes from the government to help you onto the ladder and give you added support if it’s your first home.
Help to Buy
With Help to Buy, you can buy a home with just a 5% deposit, though you can still go for a bigger deposit with Help to Buy if you like. The government then gives you a loan for up to 20% of the property’s price (40% in London). This loan stays interest-free for 5 years.
More on Help to Buy
Shared ownership means you buy a percentage share in the property, and rent the rest from a housing association. It means you only need to come up with a deposit for the share you want to buy – which can dramatically lower the amount you need upfront.
Read the T&Cs Get as clued up as you can on any scheme before you go for it. For example, Help to Buy is only available for specific, new build properties. And the government will own a share in your home which you’ll need to buy back, in addition to paying off the loan.
Another example for shared ownership: some housing associations don’t give up sharing – they cap the percentage you can own of your home.
Make sure you know what you’re buying, get independent legal advice where you can and talk to your broker if you’re not sure.
Stamp duty relief for first time buyers
Stamp Duty Land Tax (aka SDLT or just “stamp duty”) is a tax you have to pay when you buy any UK property worth £125,000 and up.
As a first time buyer, you get some relief on stamp duty. As a first time buyer you’ll pay no stamp duty on a home worth £300,000 or less. For homes worth between £300,000–£500,000, you’ll pay no stamp duty on the first £300,000, then 5% on the amount after.
|Property price||Stamp duty for first time buyers|
|Less than £125,000||(no stamp duty anyway)|
|£125,000–£300,000||No stamp duty|
|£300,000–£500,000||No stamp duty on the first £300,000, then 5% on the amount above|
|£500,000+||No relief at this point|
Stamp duty is one of those costs you can easily forget as a first time buyer – along with things like valuation fees, legal fees and property survey costs.
If you’re buying in Scotland, there’s a different system called Land and Buildings Transaction Tax (LBTT).
When you’re gathering your savings and thinking about your deposit, make sure you budget for all the other costs of buying a new home too.
First time buyers: 4 top tips
Do your sums. Then do them again.
You’ll need a lot of money upfront for your deposit – especially if you want the best rates. There are also loads of extra costs involved when you buy rather than rent, like legal costs, lender fees, buildings insurance or service charge, buying new fixtures and fittings… so make sure you know what to expect.
This is the biggest purchase you’ll ever make, and there are lots of moving parts. It’s almost inevitable there’ll be some hiccups during the whole process. Don’t be tempted to rush through a deal that looks good or the first bank you speak to – make sure you take the time to find the best deal for you.
Have your documents ready
You’ll need to show proof of your identity, income and outgoings, and address to apply for your mortgage. So you’ll need high resolution scans of documents like your passport, bank statement and utility bills.
Here are all the documents you’ll need. Get these ready in advance and your application will move along much faster.
Finally, don’t forget the fees
On top of stamp duty (if you’re paying this tax) there are many potential add-on fees to factor in when you buy a home: arrangement fees, valuation fees, legal fees, booking fees… If you can afford it, keep back some of the money from your deposit to cover these.