If you’re a first-time buyer, you have probably spent some years saving for a deposit that will help you start your climb on the property ladder.
If that's so, congratulations! The next step is to find out how much you can borrow and have a clearer picture of the property that you’ll be able to afford - and most importantly, when to start looking for your first-time mortgage.
So, how do first-time buyer mortgages work?
The amount of money that you have cumulatively saved prior to buying your first property becomes your deposit. The deposit plays a vital role, since it determines how much you’ll need to borrow as your mortgage. The mortgage you’ll need to get is inversely proportional to the amount of deposit you have; that is, the more deposit you have, the less mortgage you will have to borrow. However, if you have a larger deposit, you are open to more competitive mortgage rates that are typically better.
In addition to having the deposit, you will also need sufficient funds to add on that will act as fees for property searches, surveys, mortgage arrangements, home insurance, removal costs, stamp duty, solicitor’s tax and so on.
On applying for the mortgage, the lender will have to assess your affordability to repay by analysing your income and additional funding sources. The lender will also look at your outgoing funds such as credit cards, loan debts, travel, childcare, and general expenses.
The lender will also have a look at your credit history to see whether you are reliable in paying off the debt and will use this assessment to appraise you on how much you can get.
Mortgagers will have a maximum LTV (loan to value) which they are ready to offer to you. The LTV is the maximum mortgage loan as a percentage of the property value. Let’s take an amount to make the math clearer: if the property value is £300,000 and you were offered a mortgage of £255,000 then your LTV becomes 85%. You will need to deposit £45,000, which is 15%.
Before you start viewing properties, it is advisable to get a mortgage agreement in principle from a lender or multiple lenders. In doing so, you get a rough idea of how much you need to borrow.
Most lenders will take a detailed hard credit check for this, which will appear on your credit file. Some lenders might also carry out a soft search, so be sure to confirm with your lender before applying for the principle agreement.
Your offer will take between 30 and 90 days, but don’t be too attached to the outcome, for this is only an approximation and not a guarantee.
Having an approximate estimation of how much you can borrow will keep you in good stead in knowing how much you can affordably pay for the property. You will also have an idea about the best price range when viewing the property. The actual mortgage loan will help you decide the price for which you’ll buy the property. You can also get to choose whether you want to use part of the mortgage on home improvements.
If you have managed to get a 5% deposit, you are capable of acquiring and using the government's help on equity schemes. Under this scheme, the government will help you pay the remaining 20% (or 40% if you are in London) to help you purchase a newly built home, up to a maximum of £600,000. The loan is not limited to first-time buyers but to also open to others who want to get a notch higher on the property ladder.
For the first five years after building, the interest is free, but from the sixth year, it rises to 1.75% and can be raised by 1% through inflation.
If your deposit does not guarantee you the property that you want, you can get assistance from other people you trust, such as your partner, family member, or a family friend. They might help you to add on deposit, and from the combined income, you might get a larger deposit and consequently a reasonable mortgage rate. It's recommended that before you take this joint initiative, you seek independent legal advice, just in case one of you decides to leave or sell the property.
A guarantor mortgage will help you secure a higher mortgage as a first buyer. You can decide to get a suitable guarantor - most likely a parent - who will legally promise to support you in case you are unable to repay or incur a missed repayment.
If you are a first-time buyer and earn less than £60,000 a year, then you might consider getting a shared mortgage. Here you’ll take a certain percentage of the mortgage, and the government or the landlord will take up the rest. You will then pay a reduced amount of the rent, but the house will not appear in your name.
How you will pay the instalments of your mortgage will be determined by the mortgage that you choose. The type of mortgages include:
• Fixed rate mortgages
This type of mortgage will see you repaying monthly instalments at a constant preset rate for two or three years, but you can decide to fix the mortgage for as long as five years. Once the deal is done, it is advisable to switch lenders rather than remaining on the lender’s standard variable rate (SVR), which is relatively uncompetitive.
• Offset mortgages
You can decide to get a mortgage from a bank from where you own a savings account. If this is the case, you will be in a position to offset the amount of interest you pay. So instead of earning interest on the savings, you are not charged interest on the mortgage.
• Tracker mortgages
A tracker mortgage tracks the trend with the Bank of England. This means that your interest can either go up or down depending on the Bank of England base rates. Before you get to cast that deciding vote, be sure that you can pay the instalment of the base rate rises.
All said and done, try comparing the mortgage deals that are out there for first-time buyers and which one best appeal to you. However, be sure that you will be in a position to afford monthly repayments before you make an offer on mortgage repayment.
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