First Time Buyer Advice
Congratulations! You are ready to take the first step on the property ladder. Exciting times. And it can also be a confusing time- there is so much terminology surrounding property purchase, and so many different products available that it’s easy to get confused and overwhelmed.
Before you find your dream home, we recommend having a chat with an independent mortgage consultant. That way you will get a clear idea of your budget, based on what you can reasonably afford to repay every month.
At Reeds Financial, we will steer you towards the right kind of mortgage for first time buyers and help you understand the other elements you need in place too. It’s our job to know the difference between repayment, fixed rate, variable rate and so on, and we will help you find a deal within your means as well as directing you through the property buying maze.
You will have questions about the process so please don’t ever be afraid to ask. We have tried to answer some of them here but do call us if there’s anything at all you want to know. We are here to put your mind at rest.
First-Time Buyer Advice.
To buy your first house, you’ll need to apply for a mortgage. This is a form of borrowing that is used to cover the remaining cost of a house or flat after your deposit has been paid.
In this guide, we’ll explain how a mortgage works for first time buyers and explain how to get started.
What is a mortgage?
A mortgage is a sum of money borrowed from a lender to cover the remaining cost of your house or flat after you've paid your deposit.
There are generally two types of mortgages:
Repayment Mortgages
The most common type, where each month, you pay back a combination of the capital and interest. If you keep up with your payments, you'll fully pay off your mortgage by the end of the term.
Interest Only
This type of mortgage allows you to pay only the interest each month. The entire amount must be repaid as a lump sum at the end of the mortgage term.
How do first-time buyer mortgages work?
Mortgages for first-time buyers usually function much like regular mortgages. In addition to the step-by-step process outlined below, you might have the chance to use a government scheme to increase your deposit or reduce the amount you need to borrow.
Get a mortgage in principle
A mortgage in principle, or decision in principle, indicates the highest loan amount a lender is ready to offer, considering your income and expenses. Alongside your deposit, it provides an estimate of the property price within your affordability range.
Secure the mortgage
After identifying a suitable property, proceed to submit a comprehensive mortgage application to the lender for a thorough evaluation and approval. The mortgage provider typically requires a valuation to ensure that the property's assessed worth aligns with the amount it's prepared to lend.
Repay the mortgage
Once your mortgage is approved by the lender and you acquire the property, you'll commence making regular monthly repayments that encompass both principal and interest. These payments continue over the agreed loan term until the mortgage is completely repaid.
Remortgage at the end of the initial deal
Many first-time buyers opt for fixed-rate mortgages, typically lasting 2, 3, or 5 years, to secure better rates. As the initial period approaches its conclusion, it's advisable to explore remortgaging for an improved deal.
Who qualifies for a first-time buyer mortgage?
You are considered a first-time buyer if you, along with anyone you're buying with, are acquiring your initial residential property. If you've previously owned a house or flat, whether in the UK or abroad, you might not qualify for many schemes intended to assist first-time buyers in entering the property market. This applies regardless of whether you owned the entire property or a share in it, such as under a shared ownership scheme or as a joint tenant. Additionally, inheritance of a home, even if it was later sold and you never lived there, may disqualify you from first-time buyer status.
Similarly, if someone else (like a parent or guardian) who already owns their own home is buying the house for you, you won't be categorized as a first-time buyer. Keep in mind that rules and criteria may vary among different schemes, so it's essential to review any fine print before applying.
What deposit do I need for a first-time buyer mortgage?
The percentage of your property's value that your deposit represents is crucial, indicating the level of risk for the bank or building society providing the loan. For instance, if your first home is valued at £250,000 and you've saved £25,000 in cash as a deposit, that's a 10% cash deposit.
In this case, you would need to borrow £225,000 through a mortgage from the bank, resulting in a loan-to-value (LTV) ratio of 90%.
On the other hand, if you've saved £50,000, creating a 20% deposit, the mortgage you require (with an 80% LTV) is lower, representing less risk for the lender. A larger deposit typically grants access to more competitive mortgage rates. Although it's possible to secure a mortgage with a 5% deposit, saving more can offer advantages.
For instance, with a 10% or 15% deposit, you generally have a wider range of mortgage options at lower interest rates. This could lead to significant savings over the duration of your mortgage.
What are the latest schemes available for first-time buyer mortgages?
Several schemes are in place to assist first-time buyers. One such initiative is the First Homes Scheme, providing a 30% discount on the market value of new build homes. However, it's exclusive to eligible first-time buyers, with priority given to key workers and army veterans.
Moreover, many mortgage lenders are willing to lend to home buyers with just a 5% deposit through the 95% mortgage scheme. In this scheme, the government guarantees a portion of the loan. However, specific eligibility criteria exist, such as it being applicable only to property purchases valued up to £600,000.
What are the different mortgage types?
Within the two mortgage repayment methods (interest only and repayment mortgages), there are different types of mortgages.
The different types include:
Fixed Rate.
Fixed-rate mortgages maintain a consistent interest rate for a predetermined duration. This ensures that monthly repayments remain constant, offering protection against potential increases in interest rates. These fixed-rate deals typically span two to five years, although it's feasible to secure a fixed term of 10 years or even longer.
Tracker.
With a tracker mortgage, you'll typically be subject to an interest rate linked to the Bank of England base rate, although it commonly tracks a few percentage points above. The base rate signifies the interest rate at which mainstream banks borrow money. As it fluctuates, your monthly repayments will also experience corresponding increases or decreases.
Standard variable rate (SVR).
The standard variable rate (SVR) is an interest rate determined by your lender, typically a few percentage points higher than the Bank of England base rate. If you currently have an SVR mortgage, it's likely that you're paying more than necessary. Moving to a fixed- or tracker-rate deal often results in cost savings, and there is usually no early repayment charge.
Discounted variable rate.
A discounted variable-rate mortgage shares similarities with a tracker mortgage, yet it differs in its connection. Instead of being tied to the Bank of England base rate, it is linked to your lender's standard variable rate (SVR). This mortgage is established at a set percentage below your lender's SVR, which is subject to changes at their discretion, leading to fluctuations in your monthly repayments.
Interest-only.
An interest-only mortgage permits you to make monthly payments covering only the interest on the loan. Repayment of the borrowed amount, also referred to as the 'capital', is deferred until the end of the term. Consequently, your monthly payments are lower compared to a repayment mortgage. It's crucial, however, to make arrangements to settle the original loan at the designated time.
Offset.
An interest-only mortgage allows you to make monthly payments covering only the interest on the loan. Repayment of the borrowed amount, also referred to as the 'capital', is deferred until the end of the term. Consequently, your monthly payments are lower compared to a repayment mortgage. It's crucial, however, to make arrangements to settle the original loan at the designated time.
Selecting the right mortgage as a first-time buyer depends on your unique situation and preferences.
On the other hand, tracker mortgages and discounted variable rate mortgages may offer potential savings if interest rates decrease, but they can become costlier if rates rise.
Before making a decision, it's crucial to assess your financial situation, long-term plans, and seek advice. Consider factors such as affordability, repayment options, and the potential impact of interest rate changes to determine the most suitable mortgage type for you.
What type of mortgage is best for first-time buyers?
Selecting the right mortgage as a first-time buyer depends on your unique situation and preferences.
Fixed-rate mortgages provide assurance, ensuring a consistent monthly repayment for a predetermined period and shielding you from interest rate fluctuations.
On the other hand, tracker mortgages and discounted variable rate mortgages may offer potential savings if interest rates decrease, but they can become costlier if rates rise.
Before making a decision, it's crucial to assess your financial situation, long-term plans, and seek advice. Consider factors such as affordability, repayment options, and the potential impact of interest rate changes to determine the most suitable mortgage type for you.
What should I consider before applying for a mortgage?
Here are some of the factors to consider before applying for a mortgage:
Building a deposit.
Save as much money as possible for a deposit so you can borrow less and secure a better mortgage rate.
Credit rating.
Improve your credit score to be eligible for the most favourable borrowing terms from lenders
Mortgage fees.
Make sure you have funds available to cover application fees, surveys and legal costs
Mortgage type.
Decide between fixed-rate, variable-rate or other options based on your preferences and the deals on offer.
Initial period.
Decide on the duration of any introductory rate or discounted period, typically 2, 3 or 5 years
Mortgage length.
Decide on the duration of any introductory rate or discounted period, typically 2, 3 or 5 years
Affordability.
Assess whether the monthly repayments fit within your budget and financial stability.
Early repayment.
Review terms and conditions regarding overpayments or clearing the mortgage early.
Mortgage portability.
Check if the mortgage is portable in case you want to move house.
Got a Question?
We got answers
Our friendly advisors are always happy to help with your mortgage enquiries, so call us for a no-obligation chat.
We can even provide you with the advice you need to secure an Agreement in Principle, so you can move one step closer to securing your dream home.
Speak to one of our friendly mortgage consultants now on 0203 835 6263.
What is a first time buyer mortgage?
It is true that you can find some mortgage deals online or by going into your bank or building society. But talking to an independent adviser, like Reeds Financial, gives you access to the whole of market, so every mortgage available. You will receive free, impartial advice and we can also talk you through the rest of the buying process and let you know what else you’ll need in place. You don’t want any nasty – or costly - surprises to hold you up.
Is it easy for a first-time buyer to get a mortgage?
Mortgage providers can be less keen to loan to first time buyers but the majority of them recognise that you need to start somewhere and so have specific products tailored to first time buyers. Generally, you will need to provide proof of earnings to show you can comfortably cover the repayments, demonstrate a good credit history and have a deposit saved up. A mortgage broker will have experience of applying for a mortgage for a first-time buyer and will be able to guide you through the process.
How much deposit will I need?
The more you can save the better. The absolute minimum is 5% of the purchase price, which means the lender will loan you the other 95%. (It is possible to get 100% mortgages, but they come with a much higher risk). If you have more than 5% saved, you will have more mortgage options and your monthly repayments are likely to be lower. Your mortgage adviser can help you understand deposits and show you the mortgages available to you.
What are the risks with having a mortgage?
A mortgage is likely to be the single biggest loan – and therefore debt – that you ever have. The risk is your ability to repay. Because the lender owns the property until you repay them entirely, they could repossess it if you cannot make the regular payments. Your mortgage adviser will make sure you are aware of the risks before you enter into any agreement.
I am self-employed. Can I get a mortgage?
Yes, you can. If you re self-employed or freelance, the best thing you can do is speak to an independent specialist. Reeds Financial are experts at helping the self-employed buy their own home and we can steer you towards the best deal for you and advise you on what you’ll need in place to be able to secure a mortgage. Take a look at our Self Employed Mortgages page for more details.
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ANY PROPERTY USED AS SECURITY, WHICH MAY INCLUDE YOUR HOME, MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE