Credit will be secured by a mortgage on your property. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE. Written quotations are available from individual lenders. Loans are subject to status and valuation and are not available to persons under the age of 18. All rates are subject to change without notice. Please check all rates and terms with your lender or financial adviser before undertaking any borrowing.
First-time buyers face many challenges on their journey to becoming a homeowner. First-time buyers will need to navigate their way through understanding how much they can afford to borrow, how much lenders will be prepared to give them, the different types of mortgages available, how mortgage interest and fees work, who is involved in the house buying and mortgaging process and the raft of acronyms involved in mortgage products. That’s alongside saving for a deposit and understanding the Government schemes and help available to make your home ownership dream a reality.
First-time buyers need to start by understanding how much they can afford to borrow. There are two key steps to this:
List out your income and expenditure, you can use a spreadsheet or a budgeting app.
Use our mortgage repayment calculator to get an indication of how much your mortgage might cost each month.
Make sure you remain realistic about how much you could pay for a mortgage each month and consider the impact that a change in interest rates might have. Our calculator can show the change an increase in interest rate will have on your monthly payments. While you can fix your mortgage interest rate, this will only be for a set period of years and a mortgage is a longer-term debt, often of 25 years or more. You could find your second mortgage comes at a different interest rate.
Mortgage lenders are required to complete mortgage affordability checks to make sure that any loan they give you is affordable. This includes a review of your income and outgoings to determine whether you have enough cash each month for the mortgage. Lenders may use independent data to determine what they deem is reasonable for some items of expenditure such as travel and food costs etc based on the number of adults and children in your household, others may use your actual information based on bank statements. Any existing costs of credit such as loan repayments or credit cards will also be included, and some lenders may choose to also include a factor for the risk of any available credit you might have access to.
Lenders will also stress-test your affordability using a higher mortgage rate – this is to show you can withstand future potential rate increases. This rate can be in the region of 8%.
Use our how much can I borrow calculator to get an indication of what you could borrow. It’s based purely on salary multiples so you will still need to go through the lender’s affordability requirements, which may differ.
A deposit is a percentage of the value of the house you want to buy. The minimum deposit usually required is 5%, however you can get Guarantor Mortgages that allow a friend or family member to provide a deposit on your behalf.
If you want to get the best mortgage rates, then the general rule is the higher the mortgage deposit the lower the mortgage rate. The table below is an example of how rates reduce as your deposit increases. In the example, a further £27,000 would be required to achieve a reduction in costs over two years of £4,400. It will be for you to decide if you want to wait and save the additional money for a larger deposit and benefit from a better rate or if you’d prefer to get onto the housing ladder sooner rather than risk further rising house prices.
|5% deposit||10% deposit||20% deposit|
|Total amount repayable||£20,300.33||£19,148.84||£15,581.32|
|Money saved with greater deposit||£0||£1151.49||£4,719.01|
Source: Moneyfacts.co.uk 13 April 2021, first-time buyer mortgages fixed for two years. Based on a property worth £176,900.
A deposit gives the lender security. Firstly, that you have had the financial commitment to save a deposit. Secondly, the lender secures the mortgage against the value of the house you are buying. If you gave no deposit at all, the value of the house fell and you stopped paying the mortgage, the lender would have an outstanding debt greater than the value of the house. The lender uses the deposit to mitigate the risk of losing money.
LTV or loan-to-value relates to the loan percentage that you will require compared with the value of the house. So, if you have a 5% deposit you will need to borrow a further 95% to buy the house.
To calculate your LTV, you need to know how much you need to borrow and the value of the house you want to buy. Use our free Loan to value (LTV) calculator today.
Here are four ways to give your mortgage deposit a boost.
The Lifetime ISA offers savers a 25% bonus for all savings made up to £4,000 per year. That means you can earn up to £1,000 from the Government for each year you save £4,000, plus any interest paid by the bank or building society on the account. These ISAs can only be used towards a first-time house deposit or your pension. To qualify, you will need to be aged between 18 to 39. Find out how Lifetime ISAs work.
There was also a similar scheme called the Help to Buy ISA. This is closed to new account holders, but existing account holders can continue to save until November 2029.
A Help to Buy equity loan is available to first-time and second-time buyers in England and Wales to buy a new build property. This is where the Government will add up to 20% of the property’s value. You will need at least a 5% deposit to qualify. The Government loan is a five-year interest free loan, after which it will incur interest. You will need to repay the loan and when you do, the amount to be repaid will be the percentage LTV you borrowed at the value of your property at the time, not when you purchased the property. So, if your property has increased in value, so will the amount of your Government loan.
The current scheme will operate until March 2021. A new scheme will run from April 2021 to March 2023. The new scheme will come with maximum limits on property prices for different regions.
Guarantor mortgages allow a friend or family member to use their savings as your deposit. These are held in an account by the lender and are not accessible until you have paid off an agreed sum or after a set period of years. There is also the option for those who own their property outright to use some of its equity as security for the lender and therefore acting as your deposit.
Guarantors also agree to be responsible for making repayments should you fail to do so. If they do not keep this commitment, then their savings or property will be at risk.
Fixed rate bonds usually offer higher rates of interest as long as you are happy to tie your funds up for a period of time.
Regular savings accounts can also help you set aside money every month, but be careful of the headline rates presented, often these appear to be high, but as you can’t add a lump sum from day one you may earn less interest than in an alternative account.
Read more about the returns from regular savings accounts.
If you are saving for a large deposit you should be aware of the Personal Savings Allowance (PSA) and if you need to pay tax on your savings interest. The PSA allows basic rate (20%) taxpayers to earn £1,000 in interest and higher rate taxpayers (40%) £500 in interest before paying tax on this.
For example, £75,000 saved for one year in a savings account paying 1.75% would earn £1,312.50 in interest. A basic rate taxpayer would have to pay 20% tax on the £312.50. A higher rate taxpayer would have to pay 40% tax on £812.50 of interest.
All the interest you earn across all savings accounts and investments in any single tax year is included in the tax calculation.
You can also save £20,000 per year into an ISA tax-free. Interest rates are usually lower than non-ISA based accounts. Therefore, you should calculate how much you can deposit into a savings account before paying tax and then place any remaining into ISAs.
Here are two ways to help make your mortgage more affordable.
Shared ownership mortgages are used to buy a shared ownership property. These are usually offered by housing associations and you will need to meet certain criteria to qualify, such as a minimum and maximum salary, type of occupation, for example key workers, and have a connection to a locality. You should be able to buy between 25% and 75% of the property and pay the housing association rent on the remaining share.
The advantage is that your deposit and overall level of borrowing is lower, making the mortgage more affordable for you.
You could choose to extend your mortgage term from the usual 25 years to 30 years or even longer with some lenders. This will reduce your monthly mortgage payment reducing your outgoings and helping your affordability. As an example, a 25-year mortgage for £100,000 at 80% LTV on a two-year fixed deal at 1.41% would be £395.72 per month for a repayment mortgage, while over a 30-year term this reduces to £340.82.
Lenders need to be as sure as possible that if they give you a mortgage you can pay it back. They do this by checking your affordability and completing credit checks about you, and your partner if you are getting a joint mortgage.
You should start by establishing what your credit score is today. You can get a quick indication of this using a credit check service. You should then apply for a free copy of your credit file from all three main credit reference agencies, TransUnion, Experian and Equifax.
Read our credit check guide to find out what a good credit score is.
Once you have your credit report, you should check this for any errors and ask lenders to correct these. You can also make a notice of correction via the credit reference agency.
You will need to make yourself as appealing as possible to future lenders and a higher credit score should mean more lenders will be willing to lend to you (subject to the factors already outlined in this guide so far). Improving your credit score can take many months, it is not a quick process.
Read more about improving your credit score.
Some of the basics you need to cover are:
Lenders will use your credit score and your history of managing finances to decide if you are creditworthy.
Evidencing your income when you are self-employed or have worked as a contractor is different from those in salaried occupations. The good news is there are many lenders who accept the self-employed for mortgages and a few who offer specialist self-employed mortgages. Usually, you will need to provide your business accounts for between one and three years.
Read more about self-employed mortgages.
A mortgage is a long-term financial commitment usually of 25 years or more. While a mortgage has one of the lowest interest costs of any form of personal lending, all that interest will add up over multiple decades of repayments. Therefore, it is still important to find the best interest rate you can.
A mortgage is secured against the house you intend to buy. This is how the mortgage lender reduces the risk of giving you a mortgage, as it means that they have the right to repossess and sell the property should you fall behind with your mortgage payments. The theory is the house sale will cover the loss of the monies lent to you. If the sale of the house does not recoup these losses, then the bank or building society could choose to make you pay back the remainder.
First-time buyers will need to decide whether to choose an interest-only or repayment mortgage and whether to fix their interest rate for a set period of time or accept the risks of a variable rate mortgage. There are also a range of specialist mortgages that can be helpful depending on your circumstances.
There is an option to get a mortgage where your repayment each month only covers the interest on your loan and you never repay back any of the amount you have borrowed. This is called an interest-only mortgage. They are not as common for first-time buyers as repayment mortgages. If you decide you want to explore an interest-only mortgage, then you will need to have evidence of a way to repay back the loan at the end of the mortgage term. You should also speak to a mortgage broker who can help you to check if this is a suitable option for your circumstances and if so find a lender who can offer this type of mortgage.
A repayment mortgage is more common. This is when you pay back your interest and some of the original mortgage amount you borrowed from the lender each month. Over time the amount you have borrowed reduces, as well as the interest accrued. When you overpay your mortgage, you amplify this effect, reducing the overall interest you pay and the duration of your mortgage.
A fixed rate mortgage will retain the same interest rate for the duration of the initial rate, after which it will revert to the lenders’ standard variable rate (SVR) or existing borrower rate. This means you will pay the same amount for your mortgage every month during the entire duration of your deal, which can range from two years to 10 years. The fix protects from any increase in interest rates. After the initial term has finished, you will need to remortgage to a new deal or you will start paying interest at the lenders’ SVR or equivalent rate, which is usually a higher rate and therefore a lot more expensive every month.
A variable rate mortgage is where the interest rate can be changed by the lender. Variable rate mortgages can be tracker mortgages, standard variable rates, discount and capped mortgages.
Generally, there are more fixed rate mortgages available than variable rate mortgages.
Mortgages that offer a fixed rate or a discounted rate for a set period of years may have a condition applied called an ‘early repayment charge’, or ERC for short. This is a fee that the lender charges if you repay your mortgage early – this could be by switching lender, moving home if the mortgage is not portable or by making more than the allowed overpayments. Usually, this fee is a percentage of your mortgage balance and can decline for each year of your mortgage. This can range from 1% to 5%.
Read more about mortgage fees.
A tracker mortgage rate is usually aligned to the Bank of England base rate, although other rates to track against can be selected by the lender. This means that when the Bank of England base rate or tracking rate changes, so does your mortgage interest rate and your monthly payment. This can go up or down and the degree of change will be led by the amount of the increase or decrease of the rate you are tracking.
While it is unusual, some lenders have used their own rate to track the mortgage against, effectively allowing them to increase or decrease the rate at their own will.
Read more in our guide to tracker mortgages.
It would be unusual for a first-time buyer to use a standard variable rate (SVR) mortgage due to the fact they usually have a higher rate of interest. They are mostly used as a default product for when an introductory mortgage deal has come to an end.
Lenders can manage their SVR rates and usually increase or decrease these alongside changes in the Bank of England base rate – but not always and not to the same degree of reduction or increase.
Read more in our guide to SVRs.
The rate for a discounted variable mortgage is calculated by reducing the lender’s standard variable rate (SVR) by a discount rate to achieve the interest rate you will pay during the initial period. Here is an example, your lender has an SVR of 5.00%, the discount mortgage has a discount rate of 1.00%, the initial rate you will pay is 4.00% for the introductory period. Lenders should tell you what the initial rate is, the discount rate used and their SVR. The discount rate remains the same during the introductory period, but if the lender changes their SVR, then the initial rate you are paying could change. After the introductory period is over, these mortgages revert to an SVR or equivalent.
Discount mortgages can sometimes come with a collar. A collar is the lowest the initial rate would be allowed to go, even if the discount calculation made it lower. Using the earlier example, the lender changes their SVR from 5.00% to 4.00%, the discount rate of 1.00% then makes your initial rate 3.00%. However, the lender has decided the collar on this mortgage is 3.25%. You would then pay 3.25% from then on unless the rate increased.
A capped mortgage places a maximum amount of interest a borrower might pay on the mortgage. There also used to be capped mortgage deals, but this is now extremely rare and currently there are none available to first-time buyers with a deposit of 20%.
You can also choose your mortgage based on the flexibility it can offer you. Options include being able to make overpayments, take payment holidays, making underpayments, borrowing back any funds you have overpaid and porting your mortgage.
Making an overpayment means you pay more than you need to into your mortgage account. You can overpay either monthly or as a lump sum and this could be a one-off or a regular occurrence. The advantage of making overpayments is that you will reduce the amount of overall interest you will pay and your mortgage term.
However, you will need to check how much your mortgage will allow you to overpay each year. Often this is capped at no more than 10% of your mortgage balance.
Some lenders will offer payment holidays of usually between one to six months. During this period, the interest will continue to be charged on your mortgage and you may find your mortgage payment increases once your holiday has ended. You will need to apply for a payment holiday and be accepted, you cannot just stop paying.
In some cases, a lender may agree to a short period where you underpay your mortgage. Like payment holidays, you need to request to do this and you will continue to be charged interest during the period.
Some mortgages not only allow you to overpay but to then borrow up to the value of these overpayments back at a later date.
This means your mortgage is portable from one property to another. If you think you may move before the end of the mortgage term you have selected, then this is an important feature to have. Being able to port your mortgage could help you to avoid early repayment fees for leaving your mortgage when you sell your property.
Read more about flexible mortgages.
This type of mortgage allows you to use your savings to reduce the overall amount of your mortgage borrowing and thereby reduce your interest costs. This doesn’t mean your savings are used up, they remain available to you subject to the terms and conditions of the savings account. And, with rates of interest on savings below mortgage rates, it makes sense to reduce your cost of borrowing as you will struggle to get as great a return on your savings.
Here’s how it works:
Every month you make your usual mortgage payment, your savings then act as an overpayment, reducing your interest cost and helping you to pay off your mortgage early.
However, offset mortgages can come at higher rates of interest than traditional mortgage types. This means that any reduction in interest made using your savings could be offset or be even more expensive than the interest rate you pay on your remaining mortgage balance. You will need to look at the total cost of interest over time between the offset and a traditional mortgage to see if it would work for you.
Moneyfacts tip: You could drip-feed overpayments from your savings to a traditional mortgage at a lower rate of interest than an offset mortgage and still reduce your interest costs and pay off your mortgage sooner.
Read more about offset mortgages.
A mortgage that calculates with interest daily is the most effective on interest costs.
The amount of interest you pay can be calculated on a daily, monthly, quarterly or annual basis. The more frequently the interest is calculated, the lower your total interest costs. For example, your mortgage calculates interest daily, you make an overpayment, and this reduces your total mortgage immediately, the following day your interest cost is calculated again at a reduced level to the day before. If your mortgage interest was calculated less frequently, then your interest would remain at the level prior to your payment and would continue until your interest calculation was next due.
If your mortgage calculates interest at any other point other than daily, then you will need to carefully time your overpayments to the start of the calculation period.
A few months before your mortgage deal is due to finish, you should look at the remortgage deals available from your current lender and others. If you do not act, then you will move to the lender’s SVR or equivalent rate and this is usually at a higher cost of interest.
If you are looking for a first-time mortgage that isn’t an SVR then you will have to pay mortgage fees. We explain what fees you might encounter and how much they could cost you.
The most notable and often sizeable of your mortgage fees is the product or arrangement fee. In recent times, the average fee has reduced. When comparing mortgages, you should look at the total mortgage cost for the term of the deal. This will show the impact of a higher fee with a lower interest rate compared to a low fee and a higher interest rate. In some cases, the former is cheaper!
Some lenders will ask for a booking fee to be paid so they can ‘reserve’ a fixed rate or specific mortgage deal for you. Often this is when a lender has limited funds to lend and needs to try to make sure any applications made have the greatest chance of completion. Booking fees are usually a few hundred pounds and are non-refundable if your mortgage does not go ahead.
This is the fee the lender charges to check that the declared value of the property you are looking to get a mortgage against is accurate. Some mortgages will include free valuations as part of their package. Where valuation fees are not free, then these may be a flat fee or a percentage of the property’s value.
Moneyfacts tip – the rules in Scotland are different. Here, sellers are responsible for providing a home report that includes a valuation. You should check if your lender will accept this.
Read more about buying a home in Scotland.
When you buy a house, you will need a solicitor to make sure you legally own the property at the end of the process.
A solicitor will also perform a series of checks about the property you want to buy. These are called searches and include:
The conveyancing process (the legal term for this process) can take six weeks or longer.
Some lenders will provide legal fees at no cost as part of their mortgage package to you. While this is a financial benefit, it can mean you are in less control of this part of the process and, if you need to buy quickly, you may prefer to be able to choose and then manage your solicitor directly.
Your solicitor can also manage the payment of your Stamp Duty or equivalent tax.
Our guide includes all the information you need to increase your chance of getting a mortgage.
Lenders may give you the option to add some or all of these fees to the cost of your mortgage rather than paying them upfront. While a few thousand pounds might not seem much as a percentage of your overall borrowing, it will increase the interest costs on your mortgage and therefore your monthly mortgage payment.
Stamp Duty is a tax applied by the Government when you buy a property in England and Northern Ireland. First-time buyers of a residential property are exempt from Stamp Duty on properties up to £300,000. Properties of over £300,000 up to £500,000 will have Stamp Duty applied at 5% of the amount over £300,000.
All those buying must be first-time buyers. For example, if you are a first-time buyer and are buying a property with your partner who has purchased before, you will not qualify for the exemption and will need to pay the Stamp Duty.
Scotland and Wales have their own equivalent tax – in Scotland the Land & Buildings Transaction Tax and in Wales Land Transaction Tax. In Scotland, first-time buyers pay no tax on properties up to £150,000.
Stamp duty land tax, to give it the full name, is a tax paid to the Government when land or property is bought or transferred in the UK. Our stamp duty calculator shows you how much you can expect to pay on your next property purchase in England or Northern Ireland.
You will need to decide if you want to find your mortgage directly, either through approaching individual lenders, through a comparison website or through a mortgage broker.
You can find which mortgages are available to you by looking at lenders’ websites or by calling them. You will not only need to know if you are eligible for the mortgage, but also need to check if you will be approved by them. You can do this by obtaining an Agreement in Principle (AIP), which is where the lender checks if the mortgage is affordable and potentially your credit score. Some lenders will offer a soft check, which won’t leave a mark on your credit file. It is best to check what type of credit check is being conducted as too many hard checks may impact your ability to be accepted in the future.
Here is the outline process for getting a mortgage direct from a lender:
Going direct does place you in control of the process, but it can be time-consuming identifying which lenders you think are right for you and your circumstances. However, if you have a good credit score, a reasonably sized deposit and buying a property without any unusual circumstances, then more lenders will be likely to accept you.
A comparison site can help you in the first stages of going direct to a lender. They can save you time in comparing the interest rates, fees and total cost of borrowing based on your choice of mortgage type and LTV. Our charts above show you all of this information in one place. You can then use this information to go directly to a lender, or to a mortgage broker.
A mortgage broker is a regulated person who is qualified to give mortgage advice. The reasons to use a mortgage broker include:
A mortgage broker may charge you a fee for their advice and services. They should tell you what this fee is upfront and allow you to decide if you wish to proceed. Some brokers will not charge you a fee and instead will use the commission they earn from the lender to fund the cost of their services. Read more about why you should use a mortgage broker.
There is a set of documentation and evidence you will need to have as part of applying for a mortgage. These include:
• Your bank statements – usually the last three months’ will be sufficient
• Payslips – if you are employed you need to show your last three months’ payslips
• Accounts – if you are self-employed, you need to show your accounts for between one and three years
• Evidence of bonus and commission – if these are included in your affordability assessment, you will need to show these are received regularly
• P60 – for those employed, this shows your income and tax for the last full tax year
• SA302 – for the self-employed this is your tax return.
A mortgage that accepts first-time buyers isn’t really any different to other mortgages or a remortgage. The only difference is that the lender indicates they are happy to accept the lack of track record the buyer has in paying a mortgage and potentially a smaller deposit than someone remortgaging. Rates can sometimes be higher, especially at 90% and higher LTVs.
APRC stands for the annual percentage rate of charge. It takes into account, not just the initial rate, but also the product fees and other costs. This makes it easier to compare the costs of different mortgage products.
Find out more about the differences between APRs and APRCs.
The better your credit score, the greater your likelihood of getting your mortgage application accepted. However, you will also need to meet the lender’s requirements on affordability and their criteria.
Some additional costs you need to consider are:
1. Building insurance – this protects the construction of your property if it is damaged.
2. Contents insurance – this protects the contents of your home and sometimes garden and outbuildings.
3. Removal costs – this can range from a full removal service to hiring a removal van.
4. Storage costs – you may need to store items while waiting to move into your new home.
5. Furniture and electrical goods – even the basics can add up.
6. New locks and security – when you move into your new home, you may also want to change your locks and make sure the security such as window locks, etc is to the standard you require.
Lenders also have criteria for the types of properties they will lend against. For example, some will not give a mortgage on flats that are higher than a certain number of storeys, some may decline properties near to commercial properties and former local authority properties.
Increasingly, lenders are offering longer mortgage terms of up to 30 years. Remember the longer the overall term of your mortgage, the more you will pay interest costs. You may choose a longer term if this helps to make your monthly mortgage payments more affordable. Some lenders will not allow your mortgage term to go into your retirement or will ask you to confirm how you will pay for your mortgage during this time.
Our chart above shows you the best mortgage rates available tailored to your circumstances, including LTV, interest rate type and mortgage term. Our results will show you the total cost of your repayments, including the impact of any mortgage fees, making it easy to compare and find a potential mortgage.
How much can you borrow for a mortgage? Use our mortgage calculator and find out.
How much can you borrow for a mortgage? Use our mortgage calculator and find out.
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