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Everything you need to know as a first-time buyer

Getting a mortgage as a first-time buyer is often one of the most daunting aspects of buying a home.

Not only is a mortgage probably one of the largest loans you’ll ever take out, but there are also many different types of mortgages to choose from.

Getting the right one for you is key, so you should always speak to a mortgage advisor or broker.

But this guide explains everything you need to know about first-time buyer mortgages and the deposit you’ll need to buy your first home.

What is a first-time buyer?

A first-time buyer is someone who has never owned a residential property before, either in the UK or abroad.

That includes:

  • Never having purchased a residential property before, in the UK or abroad.
  • Never having owned a property through inheritance, in the UK or abroad.
  • Never having owned a buy-to-let property before, in the UK or abroad.

Who qualifies as a first-time buyer?

Qualifying as a first-time buyer means you’ll be entitled to additional stamp duty relief when you purchase your first home.

While existing or previous property owners can claim stamp duty relief on the first £250,000 of a property’s purchase price, first-time buyers can claim £425,000 – to to a maximum purchase price of £625,000.

To be classed as a first-time buyer and be entitled to that stamp duty relief, you must have never previously owned a property in the UK or abroad.

If you’re buying with someone else, you must both be classed as first-time buyers to qualify for the relief.

How much deposit do first-time buyers need?

Most lenders will require a first-time buyer deposit equal to 10% of your property’s purchase price.

The larger your deposit:

  • The better the interest rate you’ll be able to secure with a lender
  • The more of your home you’ll own from day one
  • The less you’ll need to borrow, meaning your repayments will be lower
  • The less chance of falling into negative equity if house prices fall

However, saving a deposit is almost always the biggest challenge you’ll face as a first-time buyer and it’s possible in some cases to buy with a 5% deposit.

95% mortgages

If you are aiming to buy your first home with a 5% deposit, you’ll require a mortgage covering the other 95% of your property’s purchase price.

This is known as 95% loan-to-value (LTV) and while lenders do offer these kinds of mortgages, they are much rarer than those on offer to first-time buyers with a 10% deposit or more.

Mortgages for 95% LTV purchases also come with higher interest rates, as the lender is taking on more risk.

The higher your LTV, the greater the risk of you falling into negative equity, too.

Negative equity occurs when property prices fall, with homes secured with a large mortgage ending up being worth less than the mortgage itself.

This can make remortgaging or selling extremely difficult.

Shared Ownership

Another way to purchase your first home with a 5% deposit is through the Shared Ownership scheme.

This sees you purchase a percentage share in either a new build property or an existing Shared Ownership home.

You then pay a reduced market rent on the share you don’t own.

Because your deposit is relative to the share you’re buying, it usually means you’ll need save a much smaller amount to get on the property ladder.

To use the Shared Ownership scheme, you’ll need to qualify and there’s much more information on how it works in our guide.

How much can you borrow as a first-time buyer?

How much you can borrow as a first-time buyer will largely depend on:

  • How much you earn
  • How much debt you have
  • Your outgoings
  • Your credit history
  • Your projected loan-to-value (LTV)

Most lenders will calculate your borrowing potential as between four or 4.5 times your annual salary.

So, if you earn £30,000, you might be able to borrow between £120,000 and £135,000 as a mortgage.

If you’re buying with someone else, your combined salaries will be used.

The best way to get an initial idea of what you could borrow is through an online mortgage calculator.

How long does it take for a first-time buyer to get a mortgage?

In most cases, getting a first-time buyer mortgage approved takes between two and six weeks after you’ve submitted your full application.

Some mortgages for first-time home buyers can take longer, however, if the lender has concerns over affordability and needs to carry out further checks.

How to get a mortgage as a first-time buyer

Before applying for a first-time buyer mortgage, it’s helpful to understand the stages you’ll go through:

1. Get a mortgage agreement in principle

The first thing to do when looking to get a first-time buyer mortgage is secure an agreement in principle (AIP).

An AIP tells you how much a lender may be willing to loan you based on a successful application.

AIPs can be obtained online and only require some basic information on your earnings and outgoings.

It’s important to remember that an AIP is not a full mortgage application and only an indication of what you can borrow if your income and credit history meet your lender’s approval.

2. Mortgage term and deals for first-time buyers

Before you apply, you’ll need to think about your mortgage term and start exploring the deals that are on offer for lenders:

Your mortgage term

Your mortgage term is the time it would take you to repay your mortgage in full through monthly repayments.

The average mortgage term in the UK is now 30 years, although shorter terms are available and even longer terms with some lenders.

The longer your mortgage term, the lower your monthly repayments will be.

However, a longer mortgage term means you’ll pay more interest.

Most lenders have age caps, which dictate you can’t be any older than a certain age when your term comes to an end.

For example, if a lender’s maximum age cap was 65 and you take out a mortgage with them at the age of 35, your maximum term would be 30 years.

Mortgage deals

Your mortgage deal is the interest rate your lender offers you for a set period of time – usually two to five years, but sometimes longer.

There are usually thousands of mortgage deals on offer across many different lenders so there’s a lot to consider.

Speaking to a mortgage broker is often the best way to establish the right deal for you and your circumstances.

3. Your mortgage repayment terms

There are two potential ways you can repay a mortgage during its term – by paying back the capital and interest or paying back just the interest:

Repayment mortgages

Repayment mortgages are the most common way to repay your loan over its term.

With a repayment mortgage, each monthly payment you make pays down some of the capital you’ve borrowed and some of your lender’s interest.

This means when you reach the end of your term, you’ll have paid down all capital and interest and you’ll own your home outright.

Interest-only mortgages

Interest-only mortgages generally come with lower monthly payments because you only pay off your lender’s interest during the term of the loan.

This means when you reach the end of your term, the capital you’ve borrowed is still outstanding and must be paid.

Interest-only mortgages are rare for residential first-time buyers and more common for landlords, who often sell their property at the end of the term to pay off the capital they owe.

4. Your mortgage interest rate

Depending on the mortgage deal you choose, your introductory interest rate will either be fixed or variable for a set period of time:

Fixed rate mortgages

With a fixed rate mortgage, you’ll pay a set interest rate for a certain period of time – usually two to five years.

Unlike variable rate mortgages, fixed rates aren’t affected by changes to a lender’s Standard Variable Rate (SVR) or the Bank of England’s base interest rate.

However, fixed rates do usually come with early repayment charges – meaning if you pay off your mortgage early or sell your property during your deal, you’ll have to pay a penalty.

The main benefit of a fixed rate mortgage is knowing what your monthly repayments will be, so you can budget effectively.

Variable rate mortgages

Variable rate mortgages include:

  • Tracker mortgages – these interest rates track the Bank’s base rate, meaning your monthly repayments can go up or down in line with base rate changes
  • Discounted rate mortgages – the interest rate for these mortgages is set at a discount off the lender’s Standard Variable Rate (SVR), meaning your repayments can go up or down in line with changes to the SVR

The main benefit of variable rate mortgages is that the interest rate is often cheaper than a fixed rate deal.

However, this is because you’re taking the risk that the Bank rate or your lender’s SVR will rise in the future, pushing your payments up.

Once your fixed or variable rate mortgage deal comes to an end, you’ll move on to your lender’s Standard Variable Rate (SVR) unless you switch to a new deal or move to a different lender.

5. Mortgage fees for first-time buyers

As well as your property’s purchase price and all the other costs that come with buying a home for the first time, you’ll also need to consider mortgage fees:

Arrangement fees

Sometimes called a booking fee, application fee or product fee, the mortgage arrangement fee is usually the biggest charge.

Some mortgage deals come with no arrangement fee, but you’ll probably pay a higher interest rate for not having one, with the most attractive interest rates commanding fees up £1,000 or more.

Your lender will usually allow you to add the arrangement fee to your mortgage, but this can affect your borrowing or push you into a higher loan-to-value (LTV) bracket.

You’ll also pay interest on the fee if you add it to the loan rather than paying it up front.

Valuation fees

When you apply for a mortgage, your lender will carry out their own valuation on the property you’re buying. This is to make sure it’s worth what you’re paying for it.

Valuation fees vary from lender to lender and are affected by the value of the property you’re buying but are often around £300 and must be paid up front.

Further reading…

If you are a first-time buyer and need advice on buying your first home, contact your local branch today.

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