First-time buyer mortgages

If you’re a first-time home buyer, there are special first-time buyer mortgages and schemes like Help to Buy and Shared Ownership that are specifically tailored to help get you onto the property ladder.

There’s no getting away from it, buying your first home is a big deal and likely to be one of the largest financial decisions you will ever make. With that in mind, it is absolutely imperative you research it thoroughly and understand all your options before leaping in.

Who is a first-time buyer?

A first-time buyer is anyone who has never owned a home before. If you’ve previously bought a property or inherited one, you’re not considered a first-time buyer, even if you’re buying a property jointly with someone who is.

Should I rent or buy?

The term “Generation Rent” has been bandied about a lot over recent years. It refers to the generation of young adults who find themselves forced to remain in rented accommodation and unable to get onto the property ladder because of high house prices.

While many see renting as a waste of money, it isn’t necessarily a bad thing and affords you a certain amount of freedom compared to owning your own place. In most cases, however, it’s far more expensive than taking on a mortgage – see our full guide on renting vs. buying. To give you an idea of how rates compare, according to rental referencing firm HomeLet, the average monthly rent is now £918. Data from Halifax shows the average monthly mortgage payment is £669. That’s a difference of £249 per month and £2,988 per year.

Of course, the primary problem for renters is being able to scrape together a deposit in the first place: according to financial publisher Moneywise, the average UK deposit for a first-time buyer is around £33,400 – which is a lot of money when we spend on average 27% of our gross salary on rent.

That said, more and more lenders are now offering 95% loan-to-value (LTV) mortgages, stamp duty has been cut for first-time buyers on the first £300,000 of properties worth up to £500,000, and the government has extended its Help to Buy scheme beyond the original 2021 end date (albeit with greater limitations such as regional price caps).

How much can I borrow?

If at this point you’re erring more towards buying than renting, you need to calculate exactly how much you can borrow. Doing this will help inform your decisions when it comes to house hunting. At the most basic level, assuming a deposit of around 5% to 20%, banks and building societies will usually offer up to four or four-and-a-half times your gross (pre-tax) annual earnings. A larger deposit might give you access to mortgages that are five times your gross annual earnings – though few lenders offer these.

Following changes brought into effect by the Financial Conduct Authority (FCA) in 2014, lenders must take your “affordability” into account. They’ll look in depth at how much you can afford to repay considering your monthly income and outgoings. If you have high expenditures like a car loan, credit card bills, etc. then the bank or building society might not be willing to lend you as much money.

Affordability also takes into account whether you’d still be able to repay your mortgage if the interest rate increases to around 8%, or should your circumstances change. This is known as affordability stress testing.

Finally, your credit score and history will affect how much the bank or building society is willing to lend you. Lenders don’t see the same score you do, but each has its own points system that is determined by your credit file.

If you had bad debts in the past, you might simply be charged a higher rate of interest or you could be turned down altogether. The same applies if you have a very brief credit history as lenders will see little evidence you can meet payments. Being turned down for any credit product will have a hugely negative impact on your credit score, which in turn reduces your chances of being accepted for credit products in the future.

Find out how to improve your credit score

How much deposit do I need?

In short, the larger your deposit, the better deal you will get when you approach a bank or building society for a mortgage.

Lenders separate their products by the loan-to-value (LTV) ratio, which is based on how much money you need to borrow to afford a property.

To work out your LTV, divide the amount you need to borrow by the value of the property and multiply the result by 100.

For instance, if your first home has a value of £200,000, and your deposit is £10,000, you’ll need a mortgage of £190,000. Divide £190,000 by £200,000 (which comes to 0.95) and multiply that by 100 (95). The LTV is therefore 95%, a value that more and more lenders now offer. If you increased your deposit to £20,000, the LTV would go down to 90%.

As the LTV goes down, so does the interest rate because the lender sees you as a less risky investment. The lower the interest rate, the sooner your repayments go towards paying off the mortgage debt as opposed to just the interest. This could equate to thousands of pounds saved over the duration of your mortgage.

Mortgage LTVs ordinarily range from 50% to 95%, with thresholds every 5%. So, the interest rates for a 95% mortgage will be higher than a 90%, and the rates on a 90% mortgage higher than on an 85% mortgage and so on.

The bigger mortgage deposit you can save, the better. If that seems like a long way off but you want to buy a property sooner rather than later, you may need to look at buying a cheaper home or spread the cost over a longer term. You’ll be paying the debt off for longer, but the monthly payments will be more affordable.

Alternatively, look into one of the government’s schemes such as Help to Buy Equity loan or Shared Ownership.

What type of mortgage shall I get?

What mortgage you go for ultimately depends on your personal circumstances and set of priorities. There are countless different mortgage types all with pros and cons, but, generally speaking, there are two main types of payment options: repayment or interest-only.

Repayment mortgages

A repayment mortgage is most common and is, in many ways, preferable to an interest-only. As the name suggests, your payments go towards paying off the actual mortgage as well as the interest. As such, your monthly payments will be higher, but provided all has gone to plan, by the end of your mortgage term, you’ll be mortgage-free and own your property outright. Pretty much all first-time buyers will be offered this kind of mortgage.

Interest-only mortgages

Unsurprisingly, an interest-only mortgage only requires you to pay off the interest during your mortgage term. Though the monthly payments are lower than a traditional repayment mortgage, you’ll be left with the original loan to pay off at the end of your term. So, if your original mortgage when you bought your first home was £100,000 and you’ve just been paying the interest on that loan for your 25-year term, at the end of the 25 years, you’ll still owe the lender £100,000. Interest-only mortgages used to be very popular because of the low monthly costs, but many over-55s who are nearing the end of their term are now finding themselves unable to pay off their mortgage debt. Interest-only mortgages are very rarely offered to first-time buyers, but it’s worth being aware of them.

There are also two main types when it comes to mortgage interest rates: fixed and variable.

Fixed-rate mortgages

Fixed-rate is exactly what it sounds like: you get a fixed interest rate for a certain period of time (usually 2, 5 or 10 years), which means your mortgage repayments will be exactly the same each month.

The downside of a fixed-rate mortgage is the penalties you’ll incur if you overpay too much within a given period (most allow a maximum overpayment of 10%) or exit the mortgage completely before the end of the fixed term.

Fixed-rate mortgages usually revert to the lender’s Standard Variable Rate (SVR) after the fixed discount period ends. In October 2018, the average SVR in the UK was 5.11% compared to the average two-year fixed rate (75% LTV) of 1.49%. To avoid getting hit by larger larger monthly repayments you’ll need to look around for a remortgage deal before yours ends. Start looking around six months before your current deal ends as most mortgage offers last between three and six months, and the remortgage process itself can take up to two months.

Variable-rate mortgages

Variable-rate mortgages are the opposite – the interest rate, and thus your monthly repayments, can go up or down. They can start at a lower interest rate initially and are usually dependent on the base rate, which is the interest rate set by the Bank of England (BoE).

The base rate can go up or down at any time. Following the financial crash in 2008, the base rate plummeted from 5.75% down to just 0.5% in early 2009. Following some fluctuation, it later dropped again to 0.25% in 2016 and has been on a very gradual rise since then, currently standing at 0.75%.

If you had a variable rate at the time of the crash, your repayments would have been slashed, whereas if you were on a fix, they would have stayed the same.

As the base rate and thus interest rates in general start to creep up again, most first-time home buyers opt for fixed-rate mortgages in an attempt to guarantee your low rate for the duration of your offer.

To complicate things further, there are a few varieties of variable-rate mortgage:

• SVR mortgages fluctuate at the discretion of the lender; they decide if, when, and how much to increase (or decrease) the interest rate. This is usually triggered by a change in the base rate but won’t necessarily move by the same amount.
• Tracker mortgages are explicitly linked to the Bank of England base rate. So, your mortgage interest rate might be 2% plus the BoE base rate of 0.75% for a total of 2.75%. If the base rate goes up to 1%, your tracker mortgage rate would then be 3.75%.
• Discounted rate mortgages are based on the lender’s standard variable rate, but with a discount applied for a fixed period of time. The best discounted rate is usually slightly better the best fixed-rate deal, but with the caveat that your monthly repayments could go up or down.

Obviously, the main risk of a variable-rate mortgage is that your monthly repayments could go up dramatically in the (unlikely) scenario of a major interest rate hike.

Help to Buy and other government schemes

There are currently three main government schemes aimed at helping first-time buyers purchase their first property: Help to Buy: Equity Loan, Help to Buy ISAs and Help to Buy: Shared Ownership.

Help to Buy: Equity Loan

The Help to Buy: Equity Loan is a government loan aimed at first-time buyers and home movers with a minimum 5% deposit. The government can lend up to 20% of the property value, which is fee-free for the first five years only. Your 5% cash deposit combined with the 20% loan means you can apply for a 75% LTV mortgage. Without the loan, you’d be limited to 95% mortgages which have higher interest rates.

The scheme is solely available on new-build properties and is open in its current form until April 2021. From then until March 2023, it’ll only be available to first-time buyers and will include regional property price caps.

Help to Buy ISA

Help to Buy ISAs work much the same way as your typical cash ISA except that the government will boost your savings by 25%.

That means that for every £200 you save (the monthly maximum, apart from the first month where you can deposit £1,200), the government adds £50. The maximum bonus you can get is £3,000, which you won’t receive until you withdraw the cash for your new home deposit.

Help to Buy: Shared Ownership

With the Shared Ownership scheme, you have the option to buy between 25% and 75% of the property – and pay rent on the remaining share that you don’t own. On new builds, you pay rent to the property developer – on resold social housing, the housing association owns the rest.

You can purchase the remainder of the property but will need to pay the current market value for it. So, if your home’s gone up in value (which you’d hope it would), you’ll end up buying it at an escalated price.

For full information on all the schemes, see our Help to Buy guide

Stamp duty for first-time buyers

Stamp duty land tax, to give it its full name, is the tax collected by the government on both leasehold and freehold property sales. Ordinarily you have to pay stamp duty on a residential property or piece of land over £125,000.

But there’s some good news here: as of November 2017, first-time buyers are exempt from paying stamp duty on the first £300,000 on properties worth £500,000 or less. That’s a £5,000 saving.

If your new home costs more than £500,000, you’ll pay the full stamp duty tax, even if you’re a first-time buyer.

The rules are slightly different in Scotland and Wales.

Other mortgage costs for first-time buyers

Be warned that there are a few other fees and charges when getting a mortgage:

• Arrangement, set-up or completion fees. A charge from your lender to set up the mortgage, these range from £0 to £2,000. Often, mortgages with the lowest interest rates come with hefty fees, so keep an eye out.
• Booking or application fees. Intended to secure your mortgage funds, these are usually a few hundred pounds and won’t be refunded even if the home purchase falls through. They can be rolled into your mortgage, so you don’t have to pay it immediately – though of course you then have to pay the interest on that extra capital.
• Mortgage valuation fees. When you apply for a mortgage, your lender will need to verify the property is worth the price you’re paying. That’s what this fee is for, though how much it costs depends on the lender (sometimes it’s free!)

Other fees to consider outside of the mortgage itself are the home-buyer’s survey (a few hundred pounds) and the legal fees for conveyancing. Conveyancing is the process carried out by solicitors, to legally transfer ownership from the seller to the buyer. These are based on the value of the home, but usually cost upwards of £500.

See our guide on the total cost of buying a home

Final tips for first-time buyers

As with all forms of credit, when buying your first house you want to borrow as little as possible. When it comes to mortgages specifically, there are three ways to do that:

• Save up a large deposit. Most banks and building societies will offer first-time buyers a 95% LTV mortgage. That is, you only need a 5% deposit and they’ll provide the rest, but a larger deposit will give you access to mortgages with lower interest rates.
• Don’t spend more than you can afford. It goes without saying, but you shouldn’t bite off more than you can chew. UK banks and building societies carry out affordability checks before offering you a mortgage to ensure you can comfortably keep up repayments.
• Research thoroughly. That means more than trawling through Zoopla and Rightmove until the early hours. If you spot a mortgage with an incredibly low interest rate, keep an eye on the fees. If you’ve not lived in the area in which you want to buy, check commuting time and costs and local crime stats.
• Read the small print and think long term. Bagged a mortgage with a great rate? Have a look at overpayment charges and early exit fees which could sting you later on. The same goes for Help to Buy schemes, they may help you get onto the property ladder in the short term, but will you be able to afford the loan repayments later on?

Now find out the maximum mortgage you can afford

Edited by: Sarah Guershon

Last updated: 18 January, 2019