How to get your first mortgage

If you are hoping to take out your first mortgage, the good news is that the Covid-19 has pushed mortgage interest rates to record lows. The bad news is that, as of 2020, lenders are asking for larger deposits, with many requiring borrowers to find 15% of the purchase price to get a mortgage. For an average first time buyer in London, this means finding more than £70,000.

Luckily there are a number of government schemes to help you buy your first home. So, even though securing your first mortgage and buying your first home is a huge undertaking, it’s still doable.

How do I apply for my first mortgage?

No mortgage lender wants to lend money to someone if they think there’s a high chance they won’t get their money back, so the key to getting your first mortgage is to prove you’re a reliable investment. Here’s how:

  1. Save up as much of a deposit as you can – the bigger your deposit, the less you will pay in mortgage interest. Not got much? Look into the government’s Help to Buy schemes and shared ownership.

  2. Check your credit score – you can do this for free with all three credit reference agencies (Experian, Equifax and TransUnion)

  3. Consider whether you can afford a mortgage – will your salary cover the payments with enough left over to live on? Could you still pay if rates went up?

  4. Find a property – this is the fun part! Look online and visit properties you like multiple times in person. In light of current lockdown restrictions, virtual viewings have become more popular. Physical viewings should be done by appointment only. 

  5. Look for a mortgage – speak to your bank and use unbiased best-buy tables to shop around for the best deals

  6. Speak to a broker – they can help you navigate the market and may be able to give you access to exclusive mortgage deals

  7. Choose a mortgage and apply!

Who can get a mortgage?

You’re most likely to get a mortgage if:

  • You’re in full-time employment

  • You’re sensible with your money

  • You’ve saved a reasonable deposit (between 5 - 10% of property value)

  • You’ve got a good credit score

But as a first-time buyer it can be trickier to get a mortgage than those who are remortgaging or have owned a property before.

One reason is that you have less of a credit history, so lenders have less evidence you can meet payments in full and on time. Similarly, you’ve not had a mortgage product before, which, to a lender, might make you look like a risky investment. Plus, many first-time buyers have small deposits, meaning more risk for the bank.

How much deposit do I need?

How much deposit you have determines how much you’ll need to borrow to buy the property you want. The ratio between your deposit and your mortgage is known as the loan-to-value (LTV) ratio and is given as a percentage.

If, for example, you want to buy a flat that costs £100,000 and you have a £5,000 deposit, you will need a mortgage with an LTV of 95%. Not all lenders offer 95% LTV mortgages, and the interest rates on these deals can be a lot higher than on mortgages with lower LTVS such as 85% or 70%. 

Having a higher LTV may also increase the size of your monthly payments, which could make the mortgage unaffordable.

“The penalty for only having a 5% or 10% deposit is significantly less now than it was even a year or two ago,” senior mortgage manager at mortgage broker John Charcol, Ray Boulger, explains. “A 15% deposit is the point at which the interest rate falls.

“Whether you have a 5% or 25% deposit, the other factor which will affect whether or not your loan application is approved is affordability.”

What is mortgage affordability?

Banks and building societies have to adhere to strict rules on how much they can lend to you, based on a number of factors, including your income, credit score, and the “affordability” of the loan to you.

The aim is to ensure you can afford to pay back the debt (mortgage) you owe.

Affordability is a measure of how much money you have in the bank after your income and all your outgoings have been taken into account. So even if you have a high salary, you may not pass a lender’s affordability test if you’re overspending or have a lot of debt.

“If you are a first time buyer your prospective lender will most likely want to see your bank statements,” says Boulger. “They will be checking to see that you don’t exceed your overdraft, or that you don’t go overdrawn. Lenders might be concerned if you are spending money on things that are not essential.”

The Money Advice Service has a good affordability calculator that you can use before you apply for your first mortgage. It’s really important to use tools like this BEFORE applying because being turned down for a mortgage will have a negative impact on your credit score. Having a bad credit score will then make it even harder to get a mortgage and credit in the future. 

Which type of mortgage is best for a first time buyer?

The best type of mortgage anyone (not just first-time buyers) can get is one that costs as little as possible. This may not be the mortgage with the lowest interest rate if it also comes with high set-up fees (some are as much as £2,000) or more restrictions that will mean you paying other charges, for example for overpaying.

That said, many first time buyers opt for fixed rate mortgages with overpayment restrictions rather than variable rate mortgages, because they know their monthly payments will stay the same for the duration of the offer (usually 2, 5 or 10 years).

There are also some mortgages that are specifically designed to help first-time buyers:

  • Help to Buy: Equity Loan mortgages – the government lends you up to 20% (up to 40% in London) of the cost of your new-build home, so you only need to provide a 5% cash deposit to qualify for a 75% LTV mortgage from a participating lender

  • Help to Buy: Shared Ownership mortgages – you buy between 25% to 75% of the property and the property developer/housing association owns the rest. Available on new builds and ex-council housing, this scheme involves you paying rent of the rest of the property

  • Guarantor mortgages – a family member puts up their own home and/or savings as security on your mortgage

Alternatively, there are government schemes to help you save a deposit for your first mortgage:

  • Lifetime ISAs - you can save up to £4,000 a year tax free in a Lifetime ISA. The government then adds an annual 25% bonus on top, meaning after the first year you could have £5,000. But to get the bonus when you withdraw the money to buy a home, you need to have saved for a minimum of one year

  • Help to Buy ISAs (no longer available to new customers) – a tax-free savings account that allows you to save up to £2,400 per year. The government gives you a 25% bonus when you withdraw the money to buy a property. If you already have this ISA, you will be able to continue saving until November 2029

For more information, read our in-depth guide on Help to Buy mortgages.

Can I get a mortgage without a deposit?

You may be able to get a mortgage without a deposit, but it will be more difficult and usually more expensive. In such situations, people consider help from family or buying with another person, says Boulger. 

So-called 100% mortgages that allow you to borrow 100% of the property’s value are few and far between, and usually come with much higher interest rates. Lenders offer preferential rates to customers who have saved up a large deposit, with the best rates going to those who have a deposit equal to 40% of the purchase price – a loan-to-value ratio of 60%.

29th May 2020