The scariest thing about being a first-time buyer is getting a mortgage. How much can you borrow? Will your application be accepted? How does it all work?
We’re here to help! Here’s your quick guide on how to get a mortgage for the first time. We’ll take you through the definition of a first-time buyer, how to boost your chances of acceptance, and explain the different types of mortgage you could get.
Our main aim here is to make sure we save you possibly thousands of pounds in expensive fees – so pay attention!
- What is a first-time buyer? Why knowing the official definition can save you ££££
- How to boost your mortgage chances
- What to do if your deposit isn’t big enough
- Which type of mortgage should you get?
While this may seem obvious, it’s not always as straightforward as you might think and knowing the proper definition is essential.
What this means is that if you have ever owned a property – either jointly or on your own – in Britain or anywhere else in the world, you’re not a first-time buyer.
This holds true for all the buyers of a property, so if you are buying jointly and one of you has never bought before but the other has, then you don’t qualify as first-time buyers.
HOWEVER: if you’re buying a home and using a Help to Buy ISA or a Lifetime ISA as part of your deposit, you qualify as a first-time buyer even if the person you’re buying with doesn’t. This means you could still opt for certain mortgage deals.
Also, according to HMRC, you as the buyer ‘must intend to occupy the property as their only or main residence.‘ You can’t use it as a buy-to-let (which is difficult anyway, as to get a mortgage for a rental property you need to already own a property).
Remember that if you are fortunate enough to have parents who are buying property for you, they obviously won’t qualify as first-time buyers, even if you have never owned property before. And you must remember the stamp duty threshold.
What’s the stamp duty threshold?
Stamp duty land tax (SDLT) is payable on all land and property transactions in the UK, but varies according to the price of the property. Anything with a purchase price of less than £125,000 is currently exempt from SDLT.
When you’re a first-time buyer, you get extra help on SDLT.
You don’t pay any stamp duty on the first £300,000 of a property, and then you pay 5% on any amount from £300,001 – £499,999. You must buy a property worth less than £500,000 to qualify for the first-time buyer stamp duty land tax relief.
Both (or all) people buying the property need to be first-time buyers to qualify, too.
Otherwise, you’re charged SDLT in a rising scale on the value of a house above £125,000. Even if your property is costing £125,001, you’ll pay 5% on that £1!
Check you won’t be refused a mortgage
A good rating is essential if you want to be approved for a mortgage. Remember that a mortgage is just a type of loan and as with all borrowing – the better your credit record, the more competitive interest rates you’ll be able to get.
Check out our guide on the things that could be lowering your credit score and make sure you change any factors like this long before you make a mortgage application.
You can also check your credit record with all three reference agencies for free. This is really important: different lenders use different credit agencies. So, if you’ve got a great score on one but not on another, this could limit your chances of being accepted for a mortgage.
SAVE, SAVE, SAVE!
We cannot stress enough how important it is to have as big a deposit as you can possibly manage before you even think about buying. If you are really determined to buy, then making sacrifices which allow you to put more cash aside now will be 100% worth your while.
No matter how much a of a drag it seems, saving hard will make your mortgage cheaper over the long term – and bearing in mind it’s the biggest loan you are ever likely have, that equates to a heck of a lot of money.
A larger deposit also reduces the loan-to-value (LTV) ratio of the mortgage. This helps lenders decide that you’re less of a risk and will be more likely to accept you.
Of course, with a larger deposit you could also qualify for a bigger mortgage – but you’re better off starting with a smaller, cheaper property first. It’ll be easier and quicker to pay off that mortgage – and then you’ll be a much more desirable borrower for a larger mortgage when it’s time to move house.
So how much do you need for a deposit on a home?
Take a deep breath… you ideally need a deposit of at least 20% of the value of the property you want to buy. So if your dream home costs £200,000 you’re going to need a deposit of £40,000.
You want to be able to make your repayments comfortably each month and not have to constantly worry you can’t pay them – that’s when the problems start. If interest rates go up by just 1% that could add £100s to your monthly payments.
If you don’t have a big enough savings pot to buy your dream home then don’t despair. You have two feasible options.
1. Downsize your expectations.
We know it’s easy to get carried away when looking at property. You get so used to seeing huge figures that a few £1,000 here and there suddenly doesn’t seem like much. Try having another look at houses in the area to see if you can find a cheaper property. Work out what you can afford so that the money you have actually does amount to 20% of the price.
2. Take your time.
Over the last couple of decades, we have got used to thinking that we have to race to buy a property before it goes up faster than our buying power.
Now, with recent political uncertainties (dare we say, Brexit), there is uncertainty in the property market. Prices have stagnated a little and it’ll take some time for them to start rocketing again.
If you’re going to struggle to make repayments, or to find a mortgage that’ll accept you, it’s best to wait.
If you can, try to adapt your living situation to save as much as possible. Many adults move back in with their parents these days to save on rent. If you can’t do that, consider a house share with friends – you’ll save on bills and rent, leaving extra money to save each month.
We’ve got loads of ideas for how to beat the dismally low savings rates with some great alternatives to traditional accounts here. Plus, if you haven’t already, set up a high interest regular savings account and pay in as much as you can each month.
You’ve saved like mad, have a decent credit score, and have a property budget. Great!
Now the hard work starts.
You’ll need to decide on the type of mortgage you want to look for. Remember, it could be worth seeking advice from an independent mortgage broker to make sure you’re opting for the right deal.
They have access to lots of special deals you wouldn’t be able to find on the high street, and will guide you through the application process, too.
There are two main questions you need to ask yourself at this point:
1. Repayment mortgage or interest-only?
Will you just pay the interest on your mortgage and nothing else each month – an interest-only mortgage – or will you repay both capital and interest each month – a repayment mortgage?
An interest-only mortgage is much cheaper in the short-term, but you’ll have to pay back the full amount of your mortgage at the end. That means, realistically, you’ll need to pay interest AND save hundreds of pounds each month to make this huge repayment.
A repayment mortgage, however, means you’re repaying the loan AND interest at the same time.
As you’re paying interest on the amount borrowed, repaying part of the loan each month reduces how much you pay in interest over the mortgage term. If you’re only paying interest each month, this interest is always on the full amount of the mortgage – so could cost you thousands of pounds more.
2. What kind of interest rate will you pay?
Do you want a fixed rate for a few years, a variable rate where the interest goes up and down according to what Base Rate does or a capped rate where it could go down but it won’t go up above a certain level?
A fixed rate is the most common choice, but remember to get professional advice about your circumstances.
The reason fixed rate is popular is that, as interest rates fluctuate, you’re only locking yourself into a deal for a few years. When the term is up, you can choose to remortgage to find a better deal and reduce the long-term cost of your mortgage.
(There could be exit fees and early repayment charges – check out our mortgage costs guide for more info).
Repayment or interest-only?
Although interest-only mortgages are a lot cheaper than repayment ones on a month-by-month basis, mortgage providers are increasingly reluctant to offer them. Also, while interest-only mortgages seemed attractive when house prices were shooting up as fast as Jedward’s hair, now that prices are flattening out and could easily dip down again this year they are much more risky than before.
We recommend that you go for a safe repayment mortgage if possible. Although in the first few years the majority of your payments will be interest, at least you will be paying off some of the capital.
Fixed, capped, offset, variable?
For first-time buyers it’s generally best to go for a cut-price fixed or capped mortgage for the first few years. It will help you keep your costs down and allow you to budget for all the extras like all the additional property buying costs, as well as furniture and decoration. Knowing exactly what you’ll have to pay every month is very reassuring and much easier to plan for.
If, on the other hand, you are in the happy position of knowing you will be getting some fat bonuses or an inheritance of some sort in the near future, it may be better to get a more flexible mortgage like a variable rate. With these you won’t be penalised if you are suddenly able to pay off a large chunk of the loan.
Remember though, if the Base Rate rises so will what you pay, so make sure you could afford the increase or you might find yourself in difficulty.