How do first time buyer mortgages actually work?

Buying your first home is exciting and also downright scary. After all, this is one of the biggest financial decisions you’ll ever make so you need to get it right before you start to climb up the property ladder!

If you’ve never owned a home in the UK or abroad, then you qualify for a first time buyer mortgage. You could be buying alone, through a government scheme such as the Starter Home initiative with a new build mortgage, or with a friend or partner. Whatever your financial circumstances you stand the best chance of getting the right first time buyer mortgage when you have a good affordability status and credit report.

How much deposit do I need?

As a first time buyer, you’ll often be quoted a figure of 10% when you ask about deposits, but there are schemes such as the new build first time buyer mortgage that only require a 5% deposit. The truth is, the bigger your deposit, the better the deals you’ll have access to.

That’s because you represent less of a risk to any lender. The more of your property you own outright, the smaller the loan you need. However, you’ll also need to factor in additional costs such as mortgage arrangement fees, Stamp Duty if the property you’re buying costs over £300,000, and solicitors or conveyancer's fees and disbursements.

If saving for a deposit seems to be an impossible task then there is help available. You can take out a Help to Buy Isa or a Lifetime ISA where the Government will top up your savings with a 25% bonus to help you get on the property ladder.

How much can I borrow?

Before you approach a mortgage lender or speak to a mortgage adviser, use our calculator to see how much you could be able to borrow as a first time buyer.

When you’re applying for a mortgage, the lender will assess your affordability by looking at your monthly income, expenses and outgoings and will also check your credit report to see if you have a history of reliable borrowing. You’ll also be subject to affordability stress testing which assesses whether you’d be able to afford repayments at an interest rate of 8%.

Based upon their assessments, they’ll calculate the maximum Loan to Value or LTV that they’re prepared to loan as a percentage of the value of the property you want to buy. LTV for first time buyers is on average 82% meaning you’d need a deposit of 13% of the value of your purchase.

If you’re turned down for a mortgage based upon your credit score, then talk to us. We can offer a range of specialist products that can help you get on the property ladder and rebuild your credit rating at the same time. We can also offer help to self employed people with only one year’s worth of accounts.

What types of mortgages are available?

The mortgage products available to you as a first time buyer will depend on your priorities and circumstances.

Most first time buyer mortgages are straight repayment loans, where all your payments go to paying down the debt until you eventually own your home outright. Interest only mortgages aren’t generally offered to first time buyers despite their low up front costs. That’s because you only pay off the interest on the loan, meaning that when the 25 year term ends you’ll still owe the original amount.

When it comes to mortgage types, you’ll generally be offered a fixed rate, variable rate or offset mortgage. A fixed rate mortgage is ideal for first time buyers as you’ll pay the same amount every month for the length of the deal. You will pay penalties if you exit early or overpay but the rates are usually lower than a variable rate deal and you can shop around for a remortgage when the fixed term period is up.

Variable rate deals include tracker mortgages and discounted rate mortgages. While the base rate is low, these mortgages can be economical but your repayments can go up as well as down. You can also choose an offset mortgage where interest on your savings is offset against your mortgage but you’ll need to calculate whether this is better than simply paying down your mortgage.

I’ve heard about Help to Buy - what is it?

The Government has a number of schemes to help first time buyers take those all important first steps up the property ladder.

The Help to Buy equity loan scheme tops up a 5% deposit with a 20% loan which allows you to apply for more affordable 75% LTV mortgages. This loan is fee-free for the first 5 years, and is only available on a new build mortgage. Another Help to Buy option is the Shared Ownership scheme. In this scenario, you initially buy between 25% and 75% of your property and pay rent on the remaining share. You can then buy out the rest of the property at market value.

If you’ve lived in a council-owned property for a minimum of three years, you may qualify to buy through the Right to Buy scheme. This allows you to buy your property at a discount.

The Starter Home scheme is targeted at buyers between 23 and 40 and allows eligible first time buyers to get on the property ladder by buying a new build at a 20% discount. A specialised new build first time buyer mortgage is available with as little as 5% deposit.

Are there any other options for first time buyers?

There are a couple of mortgage options that can help you get on the ladder if you’re struggling to save for a deposit. These are a joint mortgage and a guarantor mortgage.

A joint mortgage involves you buying a property with a friend, family member or partner. The benefits are obvious - you’ll have a larger deposit and your joint incomes may let you look at much larger properties than you could afford alone. You have the option to be joint tenants where you both own an equal share of the property, or tenants in common which means you may own differing amounts.

Talk to your mortgage adviser before taking out a joint mortgage and seek independent legal advice. This gives you the opportunity to agree on the precise kind of financial relationship you want to have and establishes what happens if one or the other of you wishes to sell or rent their share.

A guarantor mortgage, on the other hand, means that a third party - usually a family member - guarantees to cover your mortgage payments if you can’t. Again, this kind of mortgage can be a great way to get help to buy your first home but everyone involved needs to be clear on their legal rights and expectations.

What else do I need to consider when applying for a mortgage?

It’s always a good idea to be clear on the additional costs involved in buying a property and one of the biggest can be Stamp Duty. First time buyers are exempt from this tax on the first £300,000 of any property purchase, so if you’re buying a home that costs less than that, you won’t pay any Stamp Duty at all.

If you buy a property worth between £300,000 and £500,000 then you’ll only pay Stamp Duty on £200,000 which is a saving of £5,000.

But Stamp Duty isn’t the only additional cost when you’re arranging a mortgage. You’ll also be expected to pay an arrangement fee which can range from zero to thousands so check with your mortgage adviser. You’ll also pay a booking fee which can be a few hundred pounds and is generally not refundable if the purchase falls through or you decide on another mortgage. You can roll these fees into the mortgage itself but you’ll also pay interest on them.

You could also be liable for valuation fees, because your lender will need to verify that you’re paying a fair price for the property. Other fees that you need to consider are conveyancing fees and the cost of a survey. There are ways of keeping these fees down by using a conveyancing service rather than a solicitor, and by opting for a cheaper home buyer's report rather than a full structural survey.

How do I find the best mortgage deals for first time buyers?

Finding the best first time buyer deals is a snap when you talk to us at The Mortgage Hut. We are ideally positioned to identify the best deal whatever your circumstances because we have access to deals that aren’t available on the high street. If you’d like to talk to one of our highly trained and knowledgeable advisers then why not call The Mortgage Hut today on 0300 303 2640 or make an enquiry here.

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