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First Time Buyers
Mortgages for First Time Buyers, with Charles Breen.
What is a First Time Buyer mortgage?
There’s no such thing, really, as a First Time Buyer mortgage. You’ll be getting a normal mortgage, but there are some little perks that lenders sometimes add on for First Time Buyers.
In the UK, a First Time Buyer is classed as someone who has not owned property before. But some lenders also include someone who hasn’t owned a property in five or seven years.
Extra benefits for First Time Buyers can include things like cashback, free valuations or even borrowing at an increased multiple of your income. So, rather than four and a half times your income, they might go to five and a half times. That’s more applicable to a small, select number of first time borrowers.
Different lenders give certain perks to First Time Buyers, rather than offering specific mortgages just for you.
What are the typical requirements to apply for a mortgage as a First Time Buyer?
With most of them it’s that you have not previously owned a property. Aside from that, it’s the standard mortgage criteria. The amount you’re going to borrow is based on your income and credit commitments. It will be affected by the amount of credit you have, the size of the loan and your deposit.
The minimum for most purchases is a 5% deposit, but you can of course put down more. Some specialist products are currently offering 0% deposits. One of those is for a standard residential purchase, and the other is for a shared ownership purchase.
Other requirements are your credit report, your credit score, the source of your deposit. They’re all standard for a typical mortgage.
What is the maximum amount that can be borrowed for a mortgage as a First Time Buyer?
The quick answer is about five and a half times your income. But going back to the previous answer, it’s all linked to your income, your credit score and your deposit.
If you’re only putting down a 5% deposit, that will reduce how much you can borrow because you’re a little bit more of a risk. It’s the same with your credit score – if you’re a higher risk client, banks lend a little bit less.
Age is also a factor. If you’re older, the term is going to be shorter, which reduces the amount you can borrow. Lenders also have an obligation to make sure that the payments are affordable within your monthly budget – so they have to tailor the amount you can borrow to how much you can afford on a monthly basis. That way you should avoid getting into stress in the future.
What’s the minimum deposit required for a First Time Buyer mortgage?
Typically, it’s 5%, but there are some specialist schemes [podcast recorded in September 2023]. Skipton Building Society is doing 0% deposits at the moment, but the criteria and thresholds to meet that requirement are very high.
Kent Reliance will do a 0% deposit for shared ownership, but again criteria are strict. On average you need 5% of the purchase price.
What types of interest rates are available on a mortgage for a First Time Buyer?
It’s very dependent on the market at the time. It varies – as we know, over the last 12 to 15 months it has been quite volatile. So it depends when you’re submitting your mortgage as to what the rate is.
The deposit you’re putting down and your credit score will have an effect, but all these things would be discussed with you by your advisor before you apply for a mortgage. We’ll give you very good guidance before you enter into any purchase.
What are the pros and cons of fixed versus variable interest rate mortgages for First Time Buyers?
A fixed rate gives you certainty on your monthly payments. You know exactly how much you’re going to pay every single month for your fixed period, be that two, three or five years – or even 10. It gives you peace of mind.
In terms of cons, fixed rate deals are historically slightly more expensive than variable rates, which go up and down.
Some variable rates track the Bank of England base rate, while others offer a discount on the lender’s standard variable rate. But variable mortgages can go up or down. If interest rates go up, your payments will go up by a similar percentage. If they go down, your payments would go down.
Some people like that – they’re trying to predict what’s going to happen in the future. But the majority of First Time Buyers will go with a fixed rate because they want that certainty of how much it’s going to cost for a few years, so they can budget.
What government schemes are available to help First Time Buyers?
There is the Lifetime ISA which can help you save for a deposit. The government tops up your savings by 25% if they are used towards a purchase of a house.
There’s also the mortgage guarantee scheme, brought in in 2021, which allows people purchasing with a 5% deposit to still get relatively good rates. That’s because the government is backing and guaranteeing 20% of the property value. If house prices dropped, the government would help the banks out. Banks therefore have more security around lending at higher loan to value ratios, which keeps the market going.
Then there’s shared ownership where you buy a percentage of a property. You might purchase 50% with a mortgage on that amount minus your deposit. The other 50% you would rent from a housing association. You can do what’s called staircasing – buying larger chunks as time progresses until you either own all of it or decide to move.
It’s very good for First Time Buyers because it gets your foot on the property ladder to build up some equity. I saw a client the other night and they were able to do shared ownership with just a £6,000 deposit.
There is also the First Home scheme which gives a discount of 30% on certain properties. It’s designed to help people get on the housing ladder in their local area – but there are a lot of eligibility criteria set by local authorities. It’s usually aimed more towards key workers.
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What documents do I need to get preapproved for a mortgage as a First Time Buyer?
We would need some ID to make sure you are who you say you are. We would need a copy of your credit report so we know where to place you.
Proof of income is important to verify what you earn – then, when we take it to a lender to get a Decision in Principle, we know exactly what we are working with. Your Decision in Principle is like a certificate that will enable you to go off and begin looking at houses.
What are the steps when applying for a mortgage as a First Time Buyer?
The very first step is to speak to a mortgage advisor to work out how much you can borrow. Then you know how much your purchase price could be. You’ll need your deposit in place, whether it’s coming from savings or perhaps via a gift.
Your mortgage advisor will tell you where the money should be coming from – certain areas are taboo, such as Bitcoin.
Next, you get your Decision in Principle – your golden ticket to begin house hunting. Once you find a house, you’ll make an offer and come back to your mortgage advisor and we will start the mortgage process in full.
We’ll talk to you about different mortgages, different rates and whether to choose a two, five or 10 year product – then we submit the mortgage application on your behalf. After the underwriting process, you will hopefully have a mortgage offer.
We will also speak to you about home insurance, which is mandatory, plus life insurance, income protection, critical illness and others to make sure that you are fully informed about the possible pitfalls as well. That will make sure that if anything were to happen you can stay in the property.
We then liaise with solicitors and estate agents, keeping everyone informed along the way. You’ll exchange contracts, which is part of what your solicitor does, then you will complete, move into your house and begin making your first mortgage payments.
What are the most common mistakes to avoid when applying for a mortgage as a First Time Buyer?
The first mistake is not getting an Agreement in Principle before you make an offer on a house. That happens more often than you think and sadly it causes a lot of stress.
Another error is underestimating how long it’s going to take to get a mortgage. I’ve worked with people who have given notice to their landlord, thinking it will all be done in two months. There’s a lot of panic in that situation. Never hand in your notice until you know you’ve exchanged or even completed.
You should also avoid taking out car finance, going into your overdraft or borrowing on your credit card while you’re in the mortgage process. Lenders will do further checks after the mortgage offer is issued. If you take out further credit, it can put your mortgage offer in jeopardy – so it’s strongly advised not to do that.
Also avoid changing jobs if you can. If you go from being a teacher to an estate agent, for example, that’s such a radical change in career that you’ve an obligation to update the lender. If they don’t like that, it could again jeopardise your mortgage offer.
Another thing is not checking your credit score before applying for the mortgage. Don’t go house hunting not knowing what your credit is like and which potential lenders we could go to.
People also underestimate how much it’s going to cost. You need more money than just your deposit – keep some back for solicitors, mortgage fees, surveyors and other professionals that can come into the process.
Very often people will penny pinch and go with a cheap solicitor – but you do get what you pay for. If you want the process to be smooth, quick and efficient, pay a little bit extra to get a better quality service.
It’s also common for people not to do any research on the area they’re moving into or on the property itself. Not asking enough questions can be an error. You might be buying a leasehold, not a freehold – or it could be a unique, quirky type of build that a mortgage lender won’t accept.
What happens if I miss a mortgage payment?
If you’re thinking you’re not able to make that payment this month, first contact your lender. They’ll take it into consideration and should give you a grace period. If you’re struggling with your payments, your lender has to take your situation into account and help you out. They might give you a payment holiday, put you on interest-only or create a payment plan for the arrears.
The worst thing you can do is be an ostrich and put your head in the sand. Inform your lender to prevent any difficulties – they will try to help you out. The last thing they want is for you to get into arrears. If that happens for more than three months you are at risk of losing your property – the last thing anyone ever wants.
Can I qualify for a mortgage as a First Time Buyer with bad credit?
Yes, you can. Just because your credit’s not pristine, you’re not excluded from the property market. You’d need to know your credit score and what the credit issues are. Then your mortgage adviser will be able to tailor you towards different lenders that accept your situation.
A lot of the time they would want a higher deposit from you, because they want that security. But yes, it is possible. We do it regularly for clients to get them the mortgage they need.
What final advice do you have for First Time Buyers?
Always speak to a mortgage adviser, because no matter what your situation or circumstances, we can give you advice. We’ll say whether it’s feasible or not. If it’s not right now, we’ll create a plan to get you where you need to be.
If you do have bad credit we help you improve it so that in a few months you’ll possibly get the mortgage you want.
Buying a house is very daunting. None of us are taught this stuff at school – as an ex-teacher I know this for a fact. So seek advice from someone who’s going to guide you and educate you and help you make an informed decision.
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up with your mortgage repayments.
You may have to pay an early repayment charge to your existing lender if you remortgage.
The Financial Conduct Authority does not regulate most Buy to Let Mortgages.
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