First Time Buyer Mortgages
If you are ready to start the journey towards your first home, we are here to help with comprehensive and tailored first time buyer mortgage advice.
Who is eligible as a first time buyer?
You will be classified as a first time buyer if you and anyone you are buying with have not previously purchased a residential property; this will be your first. If you have owned a house or flat before, either in the UK or abroad, then it is highly unlikely that you will not be eligible for many of the schemes designed to help first time buyers make their first steps on to the property ladder. This is true regardless of whether you owned the entire property or just a share in one, for example as a joint tenant or under a shared ownership scheme. It is important to read the criteria before applying as all schemes will have different terms and conditions.
What does applying for a first time buyer mortgage involve?
When applying for a mortgage for the first time, start by calculating how much money you have for a deposit, then move on to working out how much you can afford and are eligible to borrow. Applying for your first buyer mortgage will typically involve an affordability assessment and a credit check. The mortgage providers will review your annual income and other income, as well as your household outgoings such as bills and debts from loans or credit cards. By checking your credit history, they will be able to find out whether you are a reliable borrower by checking for missed payments in your past.
If you are applying for a variable rate mortgage, or a fixed rate mortgage of less than five years, the lenders will also perform a ‘stress test’ of your ability to repay your mortgage should your repayments increase as a result of something like an interest rate increase.
At this stage of the process, the cost of the home isn’t taken into consideration. The mortgage lenders will calculate how much you can realistically afford, and provide a mortgage limit based on that information.
When should you start the first time buyer mortgage application process?
Before you start looking at properties, it is recommended that you get an agreement in principle from a mortgage lender. A mortgage in principle isn’t a guarantee of a mortgage offer, but does give you a good indication of what you can afford. Most estate agents will expect you to have a mortgage in principle in order to be a ‘proceedable buyer’.
Getting a mortgage agreement in principle is usually a soft credit check, meaning your credit score won’t be affected, however some AIPs can also be hard credit foot prints, so it is important to check before applying for one. They are usually valid for up to 90 days, and you are under no obligation to proceed on to taking the mortgage if you change your mind or your circumstances change.
Types of first time buyer mortgage available
Your eligibility and monthly repayments will depend on the total loan value, the loan-to-value amount and the type of mortgage that you have.
The range of mortgages available to first time buyers include:
- Fixed-rate mortgages
With a fixed-rate mortgage, you will keep your monthly mortgage repayments at a set rate for a certain period of time, typically ranging from two, three, five or in some cases ten years. At the end of this period, the lender’s standard variable rate will apply, which is typically much higher than the fixed rate deal that you would have been paying. Once your initial fixed-rate term has come to an end, it might be time to consider remortgaging.
- Tracker mortgages
Linked to the Bank of England base rate, the amount of interest that you pay every month could rise or fall depending on if the base rate changes. Due to the potential repayment increases, it is important to budget whether you could afford the repayments if the interest rates rose.
- Discounted variable-rate mortgages
Usually lasting between two to five years, a discounted variable-rate mortgage is fixed at a set percentage below the lender’s standard variable rate. However, whilst the discount is fixed, it is still linked to the standard variable rate so is still subject to price fluctuations.
- Offset mortgages
An offset mortgage enables you to link a savings account to offset against the amount owed on the mortgage. Instead of earning interest on the savings, you pay less interest on the mortgage. Your savings balance is used to offset the amount owed on your mortgage, and as you only pay interest on the debt balance, this will reduce your repayments amount.
What schemes are available to help first time buyers?
A Lifetime ISA enables people aged 18 to 39 to save up to £4,000 a year and receive a 25% bonus from the government to use for a deposit when purchasing your first home. You can claim an annual bonus from the government of up to £1,000, and these savings can be used as a deposit towards a property costing up to £450,000. This Lifetime ISA can be paid into via either a cash ISA or a stocks and shares ISA. The Lifetime ISA can only be used at least 12 months after being opened.
Help to Buy: Equity Loan
Available to first time buyers in England buying eligible homes, the Help to Buy Equity Loan scheme offers loans of up to 20% (40% in London) of the value of a new-build home costing up to £600,000. This loan is interest-free for the first five years and then from year six you will be charged 1.75% interest rate on the loan amount. From each year after that, the amount of interest you pay will rise in line with inflation plus 2%. Often, many homeowners who took out a Help to Buy: Equity Loan will consider remortgaging to avoid the rising interest rate after year six.
What other options are available for first time buyers who are struggling to get on the property ladder?
- Shared Ownership
For first time buyers earning less than £80,000 per year (or £90,000 in London), you might be eligible for a shared ownership mortgage. A shared ownership mortgage enables you to purchase a percentage of the property, and pay discounted rent on the rest. This is a great option for buyers with a smaller deposit, as you only need to fund the deposit on the share of the property you will be buying, not the total property value. Homeowners can then often increase their share of the property ownership in a process called Staircasing.
- Joint Mortgages
Buying a property with a partner, friend or family members can help you to raise a larger deposit and increase your affordability budget. If all parties own an equal share of the property, they will be joint tenants, or if the ownership split is unequal, everyone will be tenants in common. It is highly recommended to seek independent legal advice before agreeing to a joint mortgage, to ensure everyone knows what to expect should one party want to sell.
- Guarantor Mortgages
Guarantor Mortgages can enable you to take out a larger mortgage than if you applied by yourself, as this type of mortgage means that the guarantor, often a parent or close family member, promises to cover the mortgage repayments if you can not. This reduces the risk for the lender. Again, it is highly recommended to seek independent legal advice before asking someone to guarantee your mortgage. Whilst the guarantor’s name won’t be on the property deeds, they will be liable for the full payments if you default, so ensure that everyone understands the full implications of a guarantor mortgage before agreeing to it.
Stamp duty for first time buyers
The stamp duty land tax (SDLT) is levied in England and Northern Ireland when purchasing a property or land above a certain threshold. Typically, the first portion of the value of a property is free from stamp duty, with the tax then levied in tiered rates above that threshold.
First time buyers in England and Northern Ireland benefit from stamp duty relief on the first £300,000 of the property value, as long as the total property value is not over £500,000. The first time buyer will then pay a 5% stamp duty tax on the property value between £300,001 and £500,000.
If the property value is over £500,000, even if you are a first time buyer, then the standard stamp duty rates will apply. The standard nil rate for stamp duty in England and Northern Ireland is £125,000.
Depending on the mortgage lender’s discretion, your affordability and eligibility, it can be possible to add the stamp duty bill on to your mortgage, however this would greatly add to the outstanding mortgage debt.
Other costs to consider when buying your first home
As well as your deposit and any potential stamp duty, there are a number of other expensive costs that you should budget for when looking to buy your first home.
Frequently Asked Questions
- What is the Loan to Value ratio?
Your loan to value ratio (LTV) is the amount you can borrow on a property compared to the total value of said property. Mortgage lenders will often have a maximum loan to value ratio that they are willing to offer. For example, if the lender is willing to lend 90% LTV on a £100,000 property, you will require a £10,000 deposit.
- What is the difference between repayment and interest-only mortgages?
If you take out a repayment mortgage, you will pay back both the amount you initially borrowed plus the interest with each monthly payment. By the end of your mortgage term, you will have paid off the total loan so will own the house outright.
An interest-only mortgage will not pay back any of the original loan, only the interest on the loan. Whilst the monthly repayment will be significantly lower, at the end of the mortgage term you will still owe the lender the original cost of the property. If you are unable to repay the loan, you will likely need to sell your home.
- Should I choose a longer-term mortgage?
A longer-term mortgage will often reduce your monthly repayment amount, but increase the amount of monthly repayments that you have to make. You will also end up paying a lot more in interest overall by extending the term over more years. The standard term for a mortgage is 25 years, although an increasing number of mortgage lenders are offering up to 35 years. If you are looking to choose a longer-term mortgage, it is worth checking any associated overpayment / early payment penalties and charges. Overpaying can help you to shorten the length of your mortgage if you come into some money or receive an increase in income.
Ready to discuss your First Time Buyer Mortgage?
Our expert team is on hand to offer professional and tailored advice to ensure that you make the best decisions regarding your home finances. We are not tied to any specific lender so we can make sure that we help you to select the right mortgage. Call us for an initial, free of charge consultation. There is no obligation to use our services and you can meet in one of our offices in Horsham and Southwater, or arrange a phone based appointment.
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