Buying your first property is a big decision, so it’s important that you understand the journey you are about to embark on. At first, it might seem quite a daunting affair, but it doesn’t need to be difficult. Here we’ll provide you with some hints and tips specific to first time buyers, to help you understand the process and make the right choices for your circumstances. You might be thinking there’s little point in reading this guide as you’re planning on using one of our fantastic mortgage advisers to help you out – whilst that wouldn’t be the worst plan in the world, arming yourself with the basics before speaking to one of our advisers will certainly help you get the most of your first consultation meeting.
Why get a mortgage?
The reason most first-time buyers decide to get a mortgage is because they want to buy a property, and don’t have access to the funds to be able to buy a property outright. But why not be patient, why get a mortgage? Surely you can just save up until you have enough money to buy a house? That would certainly be an option, but unfortunately, property prices historically have risen significantly and so unless you’re prepared to wait many years, saving up a large sum of money may not be the right solution. A mortgage can help you get onto the property ladder sooner, and by spreading the cost of your mortgage over a period of time, it can make your monthly payments manageable.
What is a mortgage?
A mortgage is a loan that you take out from a bank, building society or specialist lender to purchase a property. The mortgage is secured against the property, meaning that if you do not repay the mortgage, the lender can take back the property. This helps to reduce the risk to the lender, and this helps them to charge lower interest rates for your mortgage keeping your repayments lower and potentially allowing them to lend you more money.
What are the different types of mortgages?
There are a few different types of mortgages available to first time buyers and it’s important to find the one that is right for you. The main types of mortgages are:
- Repayment mortgage: this is the most common type of mortgage. With a repayment mortgage, you repay the loan over a set period of time, usually 25 to 35 years. The payments you make pay the interest charged by the lender, as well as paying off the outstanding loan (sometimes referred to as the capital). This mean that come the end of your mortgage term you own your home outright.
- Interest-only mortgage: with this type of mortgage, you only pay the interest on the loan each month and do not pay off any of the loan itself, As a result at the end of the term you don’t own your home. As such this type of mortgage would rarely be recommended to you as a first-time buyer.
There are also a range of different types of mortgage product available, each have their own pros and cons:
- Fixed rate mortgage: with a fixed rate mortgage, the interest rate you will be charged will stay the same for the entire length of the deal. This can give you security and comfort in knowing what your repayments will be for a fixed period, usually between two to five years.
- Tracker mortgage: with a tracker mortgage, your interest rate will be set to follow some form of economic indicator, usually the Bank of England’s base rate, plus a certain percentage, for example your deal may be set at the “Bank of England rate plus 1%”. This would mean if the Bank of England base rate was 0.5% your mortgage would be 1.5%. However, it’s important to be aware that because your deal “tracks” the Bank of England base rate, your repayments could go up or down if the Bank of England changes its base rate.
- Variable rate mortgage: a variable rate mortgage is similar to a tracker mortgage in that your interest rate can go up or down, however in this instance the rate is set by the lender and so can be more unpredictable. Lenders usually put you onto their standard variable rate when your deal ends. However, it’s possible for you to fix back in for a new deal if you wish, either with your existing lender, or a new one if better rates are available elsewhere. This is known as a remortgage.
It is important to remember that fixed rate mortgages can offer peace of mind from the possibility of increasing interest rates which is often important to first-time buyers, whereas on a tracker or variable rate deal, if interest rates do go up so will your repayments.
What is a first-time buyer?
A first-time buyer is someone who has never bought a property before. In this case that could be a single person who has never owned a home (anywhere in the world), a couple where neither person has ever owned a home, or someone who has previously owned commercial property like a shop or office but not a residential property.
Understanding your credit rating
When applying for a mortgage it is important to be aware of your credit rating. Your credit rating is a score that reflects your current financial situation and how reliable you are when it comes to repaying debt, which is based on how you have repaid debt in the past.
Firstly we’d recommend getting hold of a copy of your credit report. You can get a copy of your credit report relatively inexpensively online from a variety of companies.
It’s important to check your report thoroughly to make sure it’s correct and that there’s nothing in there that you don’t recognise. If you do find any mistakes, make sure you contact the credit rating company straight away to get them corrected.
If you have a good credit rating, this will show lenders that you’re a low-risk borrower and could mean you’re more likely to be offered a better mortgage deal. However, even if your credit rating is not perfect, don’t worry – there are still mortgages available for first time buyers with bad credit.
There are a few things you can do to improve your credit rating:
- Register for the electoral roll;
- Keep your application for other credit to a minimum in the run-up to your application for a mortgage;
- Never withdraw cash on a credit card;
- Make sure you pay any lending commitments or credit card payments you have on time;
- Be patient: CCJ ‘s and defaults can stay on your credit file for up to six years. However, this does not mean all is lost, by working to improve your credit rating you can show lenders that you’re committed to turning things around;
- Stay out of your overdraft;
- Avoid payday loans;
- Consider closing unused credit cards.
How much deposit will I need?
The amount of deposit you’ll need as a first-time buyer will depend on the overall cost of the property you’re buying, as well as the lender’s requirements. Generally, you’ll need to provide at least 5-10% of the property’s value as a deposit, although some lenders may require a larger deposit (up to 20% or more).
Government schemes:
If you’re a first time buyer there are various government schemes available to help you get on the property ladder:
- LISA (Lifetime ISA): a Lifetime ISA (LISA) lets you save up to £4,000 a year towards your first home (or for retirement if not used for a home), with the government adding a cash bonus of up to £1,000 a year on top. (Rates and allowances can be subject to change. Please check on the government website for the latest guidance.)
- Shared Ownership: a way of buying a property where you part-own and part-rent it from a Housing Association. You will usually need a deposit of between 5-10% and will then pay rent on the remaining share. You can purchase more shares in the property over time until you own it outright.
- Right to Buy: this gives tenants the chance to buy their rented home at a discounted price.
You can also take advantage of gifted deposits which is where friend or family can gift you part of their savings to put towards your deposit. Alternatively there are guarantor mortgages available where a family member or friend guarantees to repay the mortgage if you are unable to.
Find out how much you can borrow
You can get a rough estimate for how much lenders might lend you using our handy first-time buyer mortgage borrowing calculator. For a better idea of what you’ll be able to borrow, we recommend you get in touch. Your personal mortgage adviser will be able to give you advice on how much you’ll be able to borrow. Additionally, your mortgage adviser will be able to provide you with an Agreement in Principle (AIP) which is confirmation of the maximum amount you could borrow from a specific lender. Once you’ve got an Agreement in Principle, you’re ready to make an offer on your first home! (It’s worth pointing out how that an AIP or Decision in Principle (DiP) does not represent a binding offer from the lender.) If you already know how much you’re likely to borrow, but want to get an idea about the potential repayments then you’re in luck, we’ve got a handy calculator for that too.
Making an offer on a property
Your mortgage broker can help you put offers forward for your new home and negotiate on your behalf.* Once your offer has been accepted your solicitor will need to carry out checks on the property known as searches, these are to ensure that there’s no hidden problems with the property that could affect your purchase.
*The service promoted here is not part of The Openwork Partnership offering and are offered in our own right. The Openwork Partnership accept no responsibility for this aspect of our business. This service is not regulated by the Financial Conduct Authority.
Arranging a valuation
After the searches have been completed and any issues raised have been dealt with, you’ll need to arrange and pay for your mortgage valuation, although in some cases your lender may cover the costs of the valuation for you. A mortgage valuation is a type of survey where a professional looks at the property on behalf of the lender to ensure that the property is a good security to lend against in doing so ensuring it’s worth the amount you are borrowing. There are however other more comprehensive survey types for example a Homebuyers Report which is more detailed and looks at the condition of the property, or alternatively a Full Survey which is the most detailed and looks at everything including the condition of the property, the land it’s built on and any potential problems.
What documents will you need for your mortgage application?
Your mortgage adviser will be able to provide you with a list of the documents you’ll need to submit as part of your mortgage application. Most lenders will require:
- A copy of your ID (i.e. passport or driving licence)
- A recent utility bill or bank statement
- 3 months bank statements
- Your last 3 months payslips (if employed)
- Your P60s for the last 2 years (if employed)
- Accounts/SA302’s (if self employed)
- Details of any existing credit agreements or loans
Once you’ve submitted your mortgage application, your lender will carry out a number of checks on your eligibility and the property you’re buying. This process can take anywhere from 2-8 weeks, so it’s important to be patient.
What fees are involved?
Mortgage Product Fee: This is a one-off fee that you’ll have to pay when you take out your mortgage. It’s usually charged by the lender and can be anywhere from nothing to £2,000.
Mortgage Broker Fee: our mortgage brokers don’t work for a single lender, instead they compare the deals across thousand of mortgage products and then give you their advice on which mortgage deal is right for you. The broker fee is to cover their time and professional expertise in providing you with this advice. Belle Maison Mortgage Solutions are a fee charging company. However, there is no charge for the initial consultation and no obligation to proceed after the initial consultation. Should you wish to proceed then the fee and the timing of payment will be agreed with you.
Arrangement Fee: This is another type of fee that’s charged by lenders, and it’s for the costs involved in setting up your mortgage. It can be between £99 and £999.
Solicitors Fees: A solicitor is a professional who will work with both you and the lender when drawing up your mortgage agreement. Solicitors fees vary depending on where in the UK you live, but they can be between £300-£1,000 or more.
Valuation Fee: When your mortgage is in place, you’ll usually need to pay for a valuation of your home (and sometimes additional valuations). These are carried out by professionals called ‘surveyors’ and the cost ranges from around £150-£500 depending on the type of valuation you have done.
Stamp Duty: Stamp Duty is a tax that’s charged on all property purchases in the UK. For first time buyers there is no stamp duty on properties worth up to £300,000. If you’re buying a property over £300,000 there will be stamp duty to pay of 5% on the amount between £300,000-£500,000 and 10% on the amount over £500,000. (Rates subject to change.)
First Time Buyer Mortgage Jargon Buster:
- Loan: this is the actual amount that you will be borrowing.
- Term: the number of years over which you will repay your mortgage.
- Deposit: When you buy a property, lenders require that it is ‘secured’. A deposit acts as security against the purchase and helps reduce the risk to the lender in case you cannot repay your mortgage. Lenders tend not to lend up to 100% of the cost of a property (so-called ‘loan to value’ or LTV) and usually require that borrowers can afford a deposit equivalent to between 5-20%.
- Mortgage provider: this is whatever company or institution that gives you your mortgage. They will hold security over your home until you have cleared all monies owed to them.
- LTV: LTV is an abbreviation for Loan to Value, which refers to the percentage of the value of your property that you are borrowing. For example, if you got a mortgage to buy a £100,000 home and took out a mortgage worth 80% of the property value (£80,000). The LTV would be 80%.
- APRC: this stands for Annual Percentage Rate of Charge and is an average measure of the total cost associated with a mortgage over the full term. Many lenders now use this as their primary way of advertising mortgages as it provides consumers with an easily comparable figure that gives a good indication of your monthly repayments.
- Conveyancer: a legal professional who deals with the transfer of property ownership between sellers and buyers.
Post approved by The Openwork Partnership on 13 February 2023
