Ultimate Guide – First-Time Buyer Mortgages

The thought of buying your first home will probably have you feeling excited. However, you may feel overwhelmed or daunted by the prospect of the complexity of buying a house or flat.

Buying a home is likely the most expensive purchase you will make in your entire life. You will need to save a deposit, arrange a mortgage, and prepare for expenses that are often out-of-mind.

With our guide to first-time buyers, you can prepare for your search for a home and mortgage. You might even realise that it’s not as complicated or daunting as you first thought.

Saving a deposit

It can take years to save a deposit for a house, so it is best to plan well ahead and start saving as soon as possible. The best approach is to put money away each month. The larger the deposit you can save, the lower your monthly payments will be, and better interest rates may be available to you.

In general, a few mortgage lenders will accept a 5% deposit, but 10% is the standard. If you can put down a deposit of 25%, you will get access to the best deals and interest rates.

For more helpful advice, please read our guide to saving a deposit.

Arranging a mortgage

A mortgage is a loan from a bank, building society, or specialist lender, and you will pay back the loan and interest. In addition to paying back the mortgage, you may have to pay a valuation fee and arrangement fee.

You can speak to a mortgage broker to find the most competitive deals. There are whole of market mortgage brokers, as well as brokers that will only recommend mortgages from select lenders. An estate agent’s mortgage broker will give you restricted advice and a bank or building society mortgage advisor, will only recommend their products.

The amount you can borrow used to be based on a multiplication of your annual salary. However, since 2008, stringent affordability tests have been introduced to ensure you can afford the mortgage and the effects of changing interest rates.

To apply for a mortgage, you will need:

  • Proof of income (payslip)
  • Bank statements
  • Outgoings (household utility bills)

Although it isn’t a mortgage guarantee, an agreement in principle may be given by the lender, so that you have proof to estate agents and home sellers that you are serious.

You have a better chance of approval when you make a mortgage application if you:

  • Save a more significant deposit
  • Have a steady job
  • Register on the electoral roll
  • Build a good credit history
  • Close unused credit card accounts

If you are self-employed, you should prepare three years of accounts and have copies of your tax returns.

What are the different mortgage types

Below we discuss the various types of mortgages offered to first-time buyers:

Fixed-rate mortgage: Interest is fixed for a period of time, after which you will pay interest based on the lender’s standard variable rate (SVR). These mortgages are popular because you have the same monthly payment, which makes financial planning easier. Interest rate chargers by the Bank of England or your lender will not affect you, and your payments will stay the same.

Discount mortgage: These track the lender’s SVR but at a lower rate. The bigger the discount, the shorter the discount period will last.

Tracker mortgage: These track the Bank of England’s benchmark interest rate. Once the deal ends, you will typically move onto the lender’s SVR.

Offset mortgage: These link your savings and current accounts to your mortgage, so you only pay interest based on the net balance.

Standard variable rate mortgage: Payments can go up and down with these, and there are no particular benefits. Rates follow the Bank of England Bank Rate, but the lender can make changes to their SVR independently. As soon as you can, it would help if you looked to move to a better deal.

Guarantor mortgage: Help from parents or relatives, who take on the lending risks, can help you get a mortgage. However, they will have to cover payments if you can’t make them.

Questions to ask your lender include:

  • Can I overpay?
  • Can I borrow back if I overpay?
  • Are payment holidays available?
  • Can I move to a different lender once the mortgage deal ends?
  • What happens if I want to move house?

First-time buyer schemes

Government home ownership schemes are on offer in England, Wales, Scotland, and Northern Ireland, although they may vary across each.

Help to Buy: These help people buy a home when they only have a deposit of 5%. These apply to newly-built homes in England of up to £600,000. The equity loan from the government will be 20% or 40% if you are inside London.

Right to Buy: Council tenants in England, Wales, and Northern Ireland can buy their home at a discounted rate, as long as they have lived in the property for three years.

Shared ownership schemes: You can own part of the home, and usually, the housing association owns the other part. You will buy between 25% and 75% and pay rent on the part you don’t own. You can buy the remainder later if you can afford to. To be eligible, you must earn less than £80,000 per year or £90,000 in London. Please read our guide to shared ownership

Stamp duty

Stamp Duty Land Tax (SDLT) is a tax you must pay in England, Wales, and Northern Ireland when you buy a home or land over a specific value. First-time buyers pay no fee on the first £300,000, on homes worth up to £500,000.

You will pay a 5% tax on the portion of the home between £300,001 to £500,000.

Please read our guide to Stamp Duty for more advice.

Other mortgage expenses

Other expenses to remember include:

  • · Mortgage arrangement fee
  • · Valuation fee (an assessment of the property value)
  • · Survey fee (an evaluation of if the property is structurally sound)
  • · Property solicitor fees (conveyancer)

The property solicitor handles parts of the sale, such as the Land Registry fees, Stamp Duty charges, and contract creation. 

Making an offer 

Before making an offer, you should ask these questions to assess if the home is right for you:

  • Why are you selling?
  • How long has the house been on the market?
  • What does the sale include?
  • Have other offers been made?
  • Have you found a new property?

It would help if you made your offer through the estate agent. First-time buyers may be asked to show their mortgage agreement in principle.

Exchanging contracts and completion

To begin the buying process, you will instruct your solicitor to start the legal work. They will agree on the terms of the sale, the purchase price, and the date of completion. The mortgage lender will likely ask you to insure the property as part of the process.

 Your solicitor will transfer the money to the seller. On completion day, you can pick up your keys, once the money arrives in the seller’s bank account.

Top tips for first-time buyers

  • Start saving your deposit as soon as possible
  • Work out your budget, including income and outgoings
  • Get your paperwork ready, including identification, banks statements, and bills
  • Don’t take out cash on a credit card
  • Don’t make lots of credit applications in a short period
  • Speak to a mortgage broker
  • Research the area you want to live