YOU’VE finally scraped enough money together for a deposit, but how do you find the best mortgages for first time-time buyers?
We round-up how to find the best low deposit mortgage deals.
Getting your foot on the property ladder is an achievement – here’s how to find the best mortgage deals[/caption]
What is a first-time buyer?
A first-time buyer, as the name suggests, is someone who has never owned a residential property in the UK or abroad.
So if you have been renting or move out of your parents to buy a home, you are most likely a first-time buyer.
It can be a bit more complicated than that though.
If you are buying with someone who has previously owned a home then you may not be considered a first-time buyer.
Similarly, you may not be classed as a first-time buyer if someone buys the property for you, or if you have previously inherited a home.
Can I get a mortgage as a first-time buyer?
Most people will need a mortgage to buy their first home.
Many mortgage lenders will have their own range of first-time buyer mortgage rates that offer larger loans with smaller deposits, such as 95% mortgages.
You will have to pass a tough application process though which will include a check of your credit score and an assessment of your age, job, lifestyle, income and expenditure – as well as how likely you are to be able to afford the loan in the future.
It can also be harder if you are newly self-employed, as lenders like to see evidence of money regularly coming in so they know the mortgage will be repaid.
What is a first-time buyer mortgage
First-time buyers can technically apply for any residential mortgage.
However, the best rates are usually reserved for those with larger deposits.
Instead, lenders offer a range of dedicated first-time buyer mortgage rates.
These typically require a lower deposit.
If you are searching for 5% mortgage products then it sounds like you’re looking for 95% mortgage deals.
This is where you will require a 5% deposit as a first-time buyer or you may need to put 10% down.
The idea is that a first-time buyer will have a smaller deposit so can get on the property ladder more easily if they can get approved for a product such as a 95% mortgage deal.
How do first-time buyer mortgages work?
The first thing you need when looking to get a mortgage to help you onto the property ladder is a deposit.
Work out the typical price of property you want and what you can afford to save.
If you wanted to buy a £200,000 property, you would need to save £10,000 to get a 5% deposit or £20,000 for 10%.
A mortgage lender may then be able to provide a loan for the remaining amount.
Your income and credit report would be assessed during a mortgage application and the lender will want to know information about your age, job, as well as your spending habits.
They will also “stress test” your ability to repay the mortgage to see whether you could afford it if rates increased.
If approved, you will need to make monthly repayments that combined paying back the capital and interest that is charged on the loan.
What is an LTV ratio?
The loan to value or LTV ratio is the percentage that your bank or building society is lending you to buy your home.
First-time home buyer mortgages generally have an LTV of 95% or 90%.
That means a mortgage lender will lend up to 95% of the value of a property.
A 95% LTV mortgage on a £200,000 property would be £190,000.
You would have to make up the difference with a £10,000 deposit.
Generally, the larger the LTV the higher the interest rate and monthly repayments, so if you could bring your costs down if you can save for a bigger deposit.
How much income do I need for a £250,000 mortgage?
Lenders will have different income requirements when you apply for their first-time buyer mortgage rates.
Traditionally, lenders have allowed borrowers to get a mortgage of up to 4.5 times their income.
This would suggest you need income of £55,500 to get a £250,000 mortgage.
The calculation may be different when there is more economic uncertainty though, or if a lender believes you cannot afford such a large loan.
Income is just one factor and they will also check your credit report and will want to know about your, age, employment history, lifestyle and how you spend your money.
What are the different types of first-time buyer mortgages?
There is a lot of choice when it comes to finding the best mortgage deals for first-time buyers.
You could apply for a fixed rate mortgage. This sets an interest rate that is fixed for an agreed period such as two, five or even 10 years.
Your monthly repayments would remain the same for the whole deal period.
Alternatively, a tracker mortgage sets your rate a certain percentage above or below an external benchmark. This is usually the Bank of England base rate, or a bank may have its own figure.
If the base rate rises so will your mortgage, but if it drops then your monthly repayments will be reduced.
There are also discount rate mortgages that set repayments based on a lender’s default standard variable rate (SVR), or capped home loans that are linked to the SVR but won’t go above a certain level.
In both these cases your repayments can change if the SVR is moved up or down.
Another alternative is offset mortgages which lets borrowers use their savings from the same provider to reduce interest being charged on their loan.
The more savings you have, the less interest you will pay on your mortgage, which should lower your monthly repayments and help pay off the debt sooner.
Which type of mortgage is best for me?
Fixed, tracker, discount and offset mortgages have their own pros and cons.
A fixed rate gives you more security as you know how much your mortgage will be each month for a defined period.
This can make it easier to budget.
You need to decide how long to fix for though, as you could fix for two years but then find it is more expensive to remortgage onto a new deal at the end of the term.
Alternatively, you could fix for five years but may miss out on cheaper rates that are released during that period.
In contrast, a tracker rate can be cheaper but there is a risk that your repayments get more expensive if rates rise.
On the other hand, if rates fall, your mortgage payments will also be cut.
You are tied in with a fixed rate mortgage and there may be high exit penalties, known as early repayment charges if you want to leave before the end of the deal term.
This may mean you miss out on an even cheaper rate.
In contrast, there are often no ERCs on tracker mortgages, so you can wait until you find a cheap deal if you aren’t ready to fix yet and are willing to risk rising rates.
Your mortgage lender or a mortgage broker can provide you with advice on which type of mortgage best suits your needs.
What is the best mortgage for a first-time buyer?
The best mortgage deals for first-time buyers tend to have lower rates, as this makes it easier to save for a deposit and get on the property ladder.
The smaller your deposit though, the higher your monthly repayments will be.
This is because mortgage lenders charge a higher interest rate for large LTV loans to reflect the amount and level of risk.
Choosing between a low deposit fixed rate and tracker mortgage is just one factor.
You also have to consider the rate and the cost of the mortgage.
Often the lowest rates will come with the highest fees, so it may be worth paying slightly more each month to reduce your upfront costs.
A mortgage lender or broker can help work this out, or you may be able to find a mortgage repayment calculator on websites such as the Money Advice Service.
What is the difference between repayment and interest-only mortgages?
There are two ways you can repay your mortgage.
A repayment mortgage includes the capital and interest in your monthly repayments.
This reduces the amount you have borrowed each month.
In contrast, an interest-only mortgage lets you only pay the interest.
This makes your monthly payments cheaper but the mortgage still remains unpaid once you come to the end of the term, which means you then have to find the money repay the full balance
Many borrowers were caught out by this during the housing market crash in 2008 – as they had been allowed to self-certify their own income and get interest-only loans, but then struggled to repay if they lost their jobs or their property fell in value.
Now borrowers are required to have a repayment strategy in place to get an interest-only loan, such as regular savings into an investment product, selling the property or remortgaging.
Lenders also have stricter and high income requirements for interest-only loans, so it is harder for first-time buyers to get one.
Should I consider a longer-term mortgage?
When a mortgage lender assesses your application they will typically work out your repayments and ability to repay over a long period such as 25 or 30 years.
You can ask for longer, with some lenders going up to 35 or 40.
The longer you set this term for the lower your monthly repayments will be, but you will pay more interest over time.
Therefore the mortgage will be more expensive overall.
This is different to the term of your mortgage deal. For example, you could get a two or five-year fixed rate for the first two or five years of a 30-year mortgage.
There is no requirement to stay with a lender for the full 30 years and once your deal term ends, such as after two or five years, you are free to remortgage and could at that point reduce or extend the term. You could also consider switching to another deal with your existing lender.
There may be a maximum term you can get when you apply depending on your age.
This is because lenders may have a maximum age they will lend to, so it may be harder to get a 30-year mortgage at age 45 as a lender may not feel comfortable still lending to someone in their 70s who may be retired and have reduced income.
In contrast, a 30 or 35-year term can make it easier for younger borrowers to get longer term mortgages as they can spread their monthly repayments and it is seen as more affordable.
How much deposit do you need for a first-time buyer mortgage?
First-time buyer mortgages tend to have lower deposits but remember the more you can put down, the lower your monthly repayments may be.
The amount of deposit you need will depend on the value of the property and the mortgage LTV.
So if you wanted to buy a £300,000 property and found a 5% mortgage deal, you would need a £15,000 deposit.
Who are the best mortgage lenders for first-time buyers?
First-time buyers can apply for mortgages from a range of banks and building societies.
Rates change all the time and the best lender will depend on if you are looking for a fixed rate or tracker deal.
Additionally, some may have low fees or even pay you cashback.
What should I consider when getting a mortgage for my first home?
The deposit, length of the deal and rate are important factors when assessing the best mortgage deals for first-time buyers.
Make sure you can afford the repayments each month.
There are other upfront costs to account for as well.
You may have to pay an application fee to your lender, which could be up to £2,000 and also to a mortgage broker if you use one.
Some brokers such as Compare the Market’s partner, L&C do not charge a broker fee.
There may also be fees if you get a survey on your property and for solicitors to manage the conveyancing process that completes the sale.
Both of these could cost from around £500 to £1,500, according to Compare the Market.
First-time buyers may also have to pay stamp duty depending on the property purchase price.
There is currently no stamp duty to pay for any type of buyer on the first £500,000 of a property purchase until the end of June.
First-time buyers will then benefit from an exemption on the first £300,000 of a purchase up to a maximum property price of £500,000.
When should I apply for a first-time mortgage?
It can take a few months to complete a mortgage application and there is no guarantee that you will be approved.
This may mean missing out on your dream home, so before you start looking for properties it is often best to get an agreement in principle (AIP) from a broker or lender.
This assesses your income and expenses to give you an idea of what you can borrow and therefore what you could afford to buy.
Additionally, getting an AIP only involves a soft credit check son won’t impact your credit rating.
Once you have an AIP, you can find the most suitable property for you and make an offer.
AIPs typically last for up to 90 days so there is no rush.
You can then do a full mortgage application once you have an offer on a property accepted.
Which schemes are available to first-time buyers?
Getting on the property ladder can feel like a daunting task but there are government-backed schemes out there to help first-time buyers have their own home.
Help to Buy equity loan: The government will lend you up to 20% of the value of a new-build home – or 40% in London – after you’ve put down a 5% deposit.
The loan is on top of a normal mortgage, but it can only be used to buy a new build property in England and is subject to regional house price caps.
Lifetime Isa: This is another government scheme that gives anyone aged 18 to 39 the chance to save tax-free and get a bonus of up to £32,000 towards their first home. You can save up to £4,000 a year and the Government will add 25% on top.
Shared ownership: Co-owning with a housing association means you can buy a part of the property and pay rent on the remaining amount.
You can buy anything from 25% to 75% of the property but you’re restricted to specific ones.
These won’t necessarily be the best mortgages for first-time buyers though so it is still important to shop around.
What is a guarantor mortgage?
It can be hard to get a suitable mortgage if you have a small income or the bank is worried about your ability to repay.
But you can boost your borrowing and chances of being accepted by adding someone else such as a parent to your loan as a guarantor.
A guarantor mortgage lets you add someone else to your mortgage who is responsible for making repayments if you can’t.
They may have to provide some of their savings or a security on their home.
This could make a lender more comfortable to approve a mortgage for you.
However, the guarantor’s credit rating and property are at risk if you fail to make your mortgage repayments, and it may make it more difficult if they need to get finance for themselves in the future.
What is a joint mortgage?
Buying a property with someone else can boost the amount you can get and your chances of approval.
This is because a bank will combine your incomes and assess the ability of both borrower’s to repay.
If you earn £30,000 a year the maximum you may be able to borrow based on 4.5 times your income would be £135,000.
But add in a partner earning the same and you could double your mortgage to £270,000.
This would still depend on you both passing the application, affordability requirements and stress tests.
A joint mortgage puts both your names on the loan so you are both responsible for repayments.
Some lenders will allow up to four people on a mortgage.
Should I buy a freehold or a leasehold for my first home?
When you buy a property it is usually either freehold or leasehold.
Freehold means you own the property as well as the land it sits on.
You are free to change your property as you wish and are responsible for its upkeep.
A leasehold means you own the property but not the land it is on. You have to pay ground rent and service charges with a leasehold that can be increased regularly.
Owning a leasehold can mean living on a nicely maintained estate, but you will often need permission to alter your property and may even need permission if you want to get a pet.
This typically applies to flats or new builds but has proved controversial, as developers have often sold the freehold rights to external companies or investors.
They can then set their own service charges and ground rents for maintenance of the communal areas, buildings, land and gardens.
It can also be harder to get a mortgage on properties once a lease has fewer than 70 years remaining, and they can cost a lot of money to extend.
How to get a mortgage as a first-time buyer?
Often when you apply for a mortgage you’ll need three months’ worth of bank statements and a good credit score in order to pass the affordability checks.
You may also need to provide documents such as utility bills, proof of benefits, your last three month’s payslips and passports to prove who you are and show evidence of your income.
Use a comparison website to compare deals from different providers based on the LTV and rates on offer.
You can enter your deposit and property value and filter deals by tracker and fixed rates.
It may be worth getting advice from a mortgage broker, as they can help prepare your application and have an idea of the most suitable and best mortgages for first-time buyers.
They may also be able to help with more specialist cases, such as if you are newly self-employed and have variable income.
Some brokers charge a fee but you may also find a free one.
Remember, too many mortgage applications or successive rejections may lower your credit rating, making it harder to get credit in the future.
This makes it important to get an agreement in principle, so you can get an idea of what you are most likely to be accepted for – and ensure the details you provide are accurate.