A first time-buyer is classified as a person who has never owned a freehold or has a leasehold interest in a residential property, in the UK or abroad. This will be the first purchase the only/main residence.
What is a mortgage?
A mortgage is a loan taken out to buy property or land. Most run for 25 years, but the term can be shorter or longer depending of circumstances.
A minimum of 5% of the purchase price is needed as a cash deposit, you borrow the rest of the money (the mortgage) from a lender such as a bank or building society.
The mortgage (loan) is ‘secured’ against the value of the property until the amount is paid in full or sold.
If you can’t keep up your repayments, the lender can repossess (take back) your home and sell it so they get their money back.
How much deposit do I need to buy a home?
Typically, a minimum of 5% of the cost of the property you want to buy will be needed for a deposit. For example, if you want to buy a home costing £150,000, you will need a deposit of at least £7,500 (5%).
The larger the deposit, eg. greater than 5% opens up the access to a wider range of mortgage lenders available on the market who could potentially offer a lower interest rate.
Help for first-time buyers
There are a range of schemes available to help first-time buyers to get onto the housing ladder, particularly if you only have a small deposit. These schemes fall under the Government scheme, Help to Buy:
Shared Ownership: Also know as Part Buy Part Rent is where you purchase a share of the value of the property you are interested in usually from a local authority or housing provider. If buying a new build you will be expected to purchase between 10% and 75%. On the second hand market this will be decided by how much the previous owners have accumulated.
After 6 months of ownership you can increase your share of the property through a process called ‘staircasing’. You can buy in increments of 1% as affordability allows. Cost of additional shares is subject to market value at the time you buy.
Shared Equity Loan: Commonly known as The Help to Buy Product, is offered through New Home Builders or Developers. Some larger housing associations offer this product on their open market sale units as well.
Loan to Value
When talking about mortgages, you might hear people mentioning ‘Loan to Value’ (LTV). This is simply the amount you have borrowed to buy your home (the loan) compared with the mortgage lender valuation of the property.
For example, if you buy a home for £200,000, put down £20,000 as a deposit and have a mortgage of £180,000 – your LTV is 90%. This is because the amount you’ve borrowed (£180,000) is 90% of the home’s value (£200,000).
The lower the LTV, the lower your interest rate is likely to be. This is because the lender takes less risk with a smaller loan. The cheapest rates are typically available for people with a 40% deposit, which works out as 60% LTV.
So if you see fantastic rates being offered by your local bank, these rates are generally offered to clients with larger deposit. It’s advisable to get your finances checked out with a mortgage broker as they will search a wide range of lenders to ensure you get the best and cheapest product available to you at the time you want to buy.
Make sure you can afford your monthly repayments
Mortgage affordability calculators are everywhere these days, lenders have different stress tests they use and change all the time, some will not mind a missed utility bill 2 years ago, others will disregard your application based on this. Some will take CCJ’s into account but wish to know the amount, what for and why. Using a qualified mortgage broker will save your time and stress.
Rule of thumb, employed clients with 12 months work history and clean credit report can expect to achieve 4.5 times their salary. As a first-time home buyer, the most important thing to bear in mind is whether you can really afford to take this step.
It’s a good idea to put together a budget before you start looking for a property. Think about how much you can afford to pay every month, remembering you still have to cover everyday costs such as gas, electricity and food.
Budget for the other costs of buying a home
Apart from your monthly mortgage payments, there are other associated costs when buying a home.
- Solicitor or Conveyancing Fees.
- Search and Land Registry Fees.
- Mortgage Arrangement and Valuation Fees.
- Removal and Moving Costs.
- Buildings Insurance.
- Initial Furnishing and Decorating Costs.
- Stamp Duty (Land and Buildings. Transaction Tax in Scotland, or Land Transaction Tax in Wales).
Finding a mortgage
You can apply for mortgages directly from a bank or building society. However, you can also use a regulated professional adviser. Professional Mortgage Broker have extensive knowledge in mortgage market and have a wider access to a panel of lenders to help you find the mortgage that best suits your needs.
Using a Mortgage Broker is particularly useful if:
- You only have a small deposit.
- Are self-employed.
- Other circumstances such as the type of property, or a mortgage for a shared ownership scheme.
Types of mortgage
There are many different types of mortgage on the market, and understanding these options will help you make the right choice.
The first thing to think about is the interest rate. Most people start out on a fixed rate deal for a set number of years. After this, you would normally go onto your lender’s more expensive standard variable rate. This is unless you switch to another mortgage with your existing lender, or re-mortgage to a new lender.
Repayment mortgages are the most common, where you make monthly payments for the amount you borrowed and the interest.
Freehold or Leasehold
If you want to buy a house, it’s likely to be freehold. This means you own the property and the land it sits on. If you’re buying a flat, you will be buying leasehold, or buying into a share of the freehold. Rule of thumb, lenders do not like houses on leasehold or flats on freehold.
The mortgage application process
Applying for a mortgage can seem like a long and confusing process, with a lot of forms to fill out.
You will need to provide evidence of your income, credit commitments and spending. If you are self-employed, you’ll need to provide tax returns and business accounts for the last two or three years.
Lenders will carry out what’s called an affordability assessment. This is a detailed look at your finances, which lenders use to work out if you can afford your long-term repayments.
If you’re struggling to save for a deposit
If you’re struggling to save a deposit, there are some options available to you:
Family gifted deposits for instances is where your parents can “gift” you the deposit to buy.
There are lenders that allow friends or family to “invest” in your property, up to 6 people can help boost your deposit or salary to purchase a higher value property and make it more affordable.
Get Advice
It is best to get advice from a knowledgeable qualified mortgage broker.
A Mortgage Broker will have access to a large number of lenders and have a wider knowledge of the market, so a small initial fee up front, could mean you could save thousands over the term of the mortgage!
