Getting onto the property ladder can feel like a complex and overwhelming process, especially if you’re buying your first home. A first time buyer mortgage is a specific type of loan designed to help individuals who have never owned a property before. Understanding how these mortgages work, what options are available, and how to prepare for your first application can give you the confidence to move forward with your plans.
In this article, we’ll explain everything you need to know about a first time buyer mortgage. We’ll explore the types of mortgages available, the eligibility criteria, the steps involved in the application process, and the key aspects to consider when making your decision.
What is a First Time Buyer Mortgage?
A first time buyer mortgage is aimed at individuals purchasing their first property, who have not previously owned a home. These mortgages often come with specific features to support people entering the housing market for the first time. While the basic principles are similar to other types of mortgage, lenders may offer certain terms or products that are more accessible to first time buyers, such as lower deposit requirements or tailored repayment structures.
It is important to understand that although first time buyer mortgages may provide benefits, they also require careful consideration. Understanding your affordability, long-term financial commitments, and the full scope of associated costs is essential before proceeding.
Who Qualifies as a First Time Buyer?
To qualify for a first time buyer mortgage, you must not have previously owned a residential property in the UK or abroad. This includes properties that you may have inherited or co-owned with someone else. If you’re buying with a partner or as part of a group, all applicants must typically meet these requirements to qualify for first time buyer status.
Some government schemes and lender products are only available if you meet this definition, so it’s important to check your status carefully when assessing your options.
How Much Can a First Time Buyer Borrow?
The amount you can borrow depends on several factors, including your income, expenses, credit history, and the size of your deposit. Lenders typically offer loans of between 4 and 4.5 times your annual income, although this can vary based on individual circumstances and lender criteria.
Affordability assessments are carried out to ensure you can manage the monthly repayments, both under current interest rates and under assumed higher rates, to account for potential future increases. These assessments will look at your earnings, regular outgoings, and any existing financial commitments.
How Much Deposit Do You Need?
Most lenders require a deposit of at least 5% of the property’s purchase price. The larger your deposit, the more mortgage products you may be able to access. Typically, with a 10% or 15% deposit, you could benefit from better interest rates and broader product availability.
Saving for a deposit remains one of the biggest challenges for first time buyers. Many people use tools such as savings accounts or government schemes to help build a deposit over time.
Types of Mortgages for First Time Buyers
There are several types of mortgages available to first time buyers. Understanding the differences between them can help you choose the one that best suits your financial situation and future plans.
Fixed Rate Mortgages
With a fixed rate mortgage, the interest rate remains constant for a set period, usually between two and five years. This means your monthly repayments will not change during that time, which can help you manage your budget more predictably.
Variable Rate Mortgages
Variable rate mortgages are linked to the lender’s standard variable rate (SVR) or a base rate, meaning your monthly repayments can go up or down over time. While initial rates may be lower than fixed rate products, there is less certainty about future costs.
Tracker Mortgages
A tracker mortgage follows the Bank of England base rate, usually with a set percentage added. As the base rate changes, so too will your monthly payments. These can offer competitive initial rates, but come with the risk of rising costs if interest rates increase.
Offset Mortgages
Offset mortgages link your savings account to your mortgage. Instead of earning interest on your savings, the balance is used to reduce the amount of interest charged on your mortgage loan. This can be beneficial if you have significant savings and want to reduce the interest you pay over time.
Government Schemes for First Time Buyers
The UK government offers several schemes to make home ownership more accessible for first time buyers. These schemes aim to reduce the deposit required or make mortgages more affordable.
Lifetime ISA (LISA)
A Lifetime ISA allows individuals aged 18-39 to save up to £4,000 per year towards their first home, with the government adding a 25% bonus on contributions. Funds can be used to purchase a first home costing up to £450,000.
Shared Ownership
Shared ownership enables you to buy a portion of a property (usually between 25% and 75%) and pay rent on the remaining share. Over time, you can purchase a larger share through a process known as ‘staircasing’.
First Homes Scheme
The First Homes scheme offers new-build homes to first time buyers at a discount of at least 30% compared to market value. Local authorities may apply additional eligibility requirements based on local housing needs.
Understanding Mortgage Fees and Additional Costs
Buying a home involves more than just the deposit and mortgage repayments. First time buyers should be aware of several additional costs that can arise during the home buying process.
Arrangement Fees
Lenders may charge a fee to set up the mortgage, which can be paid upfront or added to the loan. Adding it to the mortgage means you’ll pay interest on it over the term of the loan.
Valuation Fees
A property valuation is usually required by the lender to confirm the property’s worth. Some mortgages come with a free valuation, while others may charge for this service.
Legal Fees
Solicitors or licensed conveyancers are needed to manage the legal aspects of buying a home. Fees can vary, and will also include costs for searches and registration with the Land Registry.
Stamp Duty
First time buyers in England and Northern Ireland don’t pay Stamp Duty on the first £425,000 of a property costing up to £625,000. Different rules apply in Scotland and Wales under the Land and Buildings Transaction Tax and Land Transaction Tax respectively.
Survey Costs
It may be wise to arrange a property survey to check for any hidden issues. Surveys range from basic condition reports to comprehensive structural surveys, with varying fees based on the level of detail.
Steps to Apply for a First Time Buyer Mortgage
Applying for a first time buyer mortgage can be a detailed process. Being well-prepared can make the experience more manageable and help with organising the key documentation needed.
Step 1: Assess Your Finances
Start by evaluating your income, regular expenses, and existing debts. This can help you understand how much you can afford to borrow and repay each month.
Step 2: Check Your Credit Score
Your credit profile plays a significant role in the mortgage approval process. Review your credit report for any errors and take steps to improve your score if needed.
Step 3: Get a Mortgage in Principle
A mortgage in principle is a statement from a lender indicating how much they might be willing to lend, based on an initial assessment. This can give you a better idea of your budget and may help when making offers on properties.
Step 4: Find a Suitable Mortgage
There are many types of mortgage available to first time buyers, and finding a suitable one involves comparing different rates, terms, and associated fees. A mortgage advisor can help guide you through this process and provide information about products that suit your circumstances.
Step 5: Submit Your Application
Once you’ve found a mortgage that matches your needs, you’ll submit a full application. This includes proof of income, identification, bank statements, and details about the property you intend to purchase.
Step 6: Property Valuation and Final Offer
The lender will conduct a valuation of the property, and if everything is satisfactory, they will issue a formal mortgage offer. This outlines the terms of the loan and confirms their willingness to lend the agreed amount.
Step 7: Legal Process and Completion
Your solicitor will carry out the necessary legal checks, and once all the paperwork is finalised, you will complete the purchase, receive the keys, and officially become a homeowner.
Common Mistakes First Time Buyers Should Avoid
Being aware of common pitfalls can help first time buyers navigate the mortgage process more confidently. Here are some key points to watch out for:
- Not budgeting for additional expenses like legal fees, surveys, and furnishings.
- Relying solely on comparison sites without understanding the full range of mortgage terms and conditions.
- Making financial changes (like job moves or new credit lines) during the mortgage application process.
- Underestimating the importance of credit health and affordability assessments.
- Rushing into a decision without understanding long-term implications of interest rates and repayment terms.
Final Thoughts on First Time Buyer Mortgages
Securing a first time buyer mortgage is a significant milestone and a big financial commitment. Taking the time to understand your options, assess your affordability, and prepare thoroughly can help make the process as smooth as possible. While it may seem challenging at first, with the right information and guidance, you can approach the mortgage journey with greater clarity and confidence.
Whether you’re just starting to explore mortgage options or preparing to submit your application, gaining a solid understanding of the first time buyer mortgage landscape is a valuable step towards successful home ownership.