If you’re a first time home buyer, then looking for a mortgage can seem daunting, so we’ve put together a guide to walk you through the process and answer some of the common questions you might have about getting on the housing ladder.
To be successful in obtaining a mortgage, the company lending you the money must feel confident that you will be able to keep up repayments, so lenders will want to know that you have a steady income, a reasonable credit history and that your finances are under control. For this reason, it’s worth making sure that you look like a good prospect before you make your applications:
New research from Halifax has revealed that the average UK first-time purchase price has reached £231,455 (varying from £136,104 in the North of England to £453,385 in London), with the average deposit now standing at £46,187, with regional variations from £24,091 in the North to a rather terrifying £109,885 in London.
Lenders face a higher risk when they are loaning a greater percentage of the value of the house (known as a larger loan-to-value “LTV”), as if anything happened to the property (like a busy road being built nearby) or to the economy (like a general slump in house prices) then if the buyer failed to pay the mortgage and the home was repossessed, the lender would be more likely to end up out of pocket. For this reason lenders charge higher interest rates for larger LTV mortgages (and may be unwilling to loan higher percentages on brand new homes which may be over-valued).
So while it is possible to get a 95% mortgage (or even a 100% mortgage in certain circumstances), the interest rate on these products will be much higher than on an 80% or 75% LTV, so it is in your interest to save as big a deposit as possible.
To boost your savings, consider the Lifetime ISA (LISA) which lets you save up to £4,000 a year tax-free with a Government bonus of 25%. It’s only available to first time buyers aged 18-39 and can be used to buy homes up to £450,000, or put towards a pension. After that, look at online Best Buy tables to find the best-paying home for your deposit, bearing in mind that you may not want to lock your money away for too long in case you spot your dream home.
If saving that kind of amount seems impossible, there are Government-backed schemes for first time buyers that are designed to help.
The Chancellor announced the availability of a mortgage guarantee scheme in his Budget statement in March 2021. It’s available from April 2021 and enables first time buyers (as well as existing homeowners) to gain a mortgage loan of 95% of the value of a property, provided they raise the remaining 5% for a deposit. The property has to cost no more than £600,000 but can be a new build or an older property.
Lenders are being incentivised to take part in the scheme by being offered a guarantee on the loan by the government.
The Help to Buy: Equity Loan scheme will close to new applications at 6pm on 31st October 2022. Your Help to Buy reservation and purchase must be legally complete by 31st March 2023.
The Government will lend you 20% interest-free for the first five years (40% in London), so you only need a 5% deposit combined with a 75% mortgage. The scheme is available only on new homes that are worth up to £600,000.
The main advantage is that as 75% mortgages are lower risk for lenders, they come with a lower interest rate than if you had to take out a 95% LTV mortgage, so the Government loan acts as a large deposit, enabling you to move sooner and borrow less at lower interest rates.
However, after five years you will begin to be charged interest on the Government loan (initially at 1.75%, but increasing every year after that at RPI plus 1%), which will push your monthly bills up, although many people find they are able to remortgage at this point to pay it off. When you repay the Equity Loan, whether by remortgaging or if you sell your house, the amount due is the percentage of the property price that your borrowed, not the amount in pounds. If prices have risen you will have to pay back more (although your house will be worth more), but if prices have fallen, the amount you need to repay also falls.
If you have a household income of less than £80,000 (£90,000 in London) you can buy a part-share of a home, from as little as 25% (and the Government is planning to reduce this to 10%), then pay rent on the rest of it. Over time, through a process called staircasing, you can buy additional shares until you own the whole home. Most Shared Ownership properties are new, but some resale properties are available.
You need a deposit of just 5% of the share you are buying, so the main advantage of using Shared Ownership is that it’s a much more affordable gateway to home ownership than other options. When house prices are rising, it offers the chance to invest in property and gain from the appreciation of your share, while paying usually roughly the same amount as a market rental.
Disadvantages include the fact that there are relatively few lenders offering mortgages on Shared Ownership homes and the properties are sold as leasehold so there is ground rent and service charge to pay in addition to rent on the non-owned share. Staircasing can be expensive – if property prices rise, so does the cost of an additional share, and there are valuation and legal fees to pay each time. It can also take longer to sell a Shared Ownership home.
With both of these Government schemes it can be harder to get the right mortgage as the selection of lenders is smaller (especially for Shared Ownership), so if you are considering using either option it can be especially beneficial to use an independent financial adviser or mortgage broker such as Embrace Financial Services.
It is quite common for parents to gift their children some money towards a deposit, but your lender will want evidence that this is a gift and not a loan that needs to be repaid, so warn mum and dad that there might be some paperwork.
Parents or grandparents may also offer to act as a guarantor, to enable family members to obtain a mortgage that might otherwise be considered too high risk. This means that, until an agreed loan-to-value figure is reached, if the homebuyer fails to pay their mortgage, then the lender will demand payment from the guarantor. Guarantor mortgages may be based on the income of the guarantor, or may involve a charge on their own home. Obviously there are risks attached for the guarantor, so it might be helpful for the whole family to sit down with an adviser from an independent company such as Embrace Financial Services who can explain all the implications.
Newer options include “family deposit” or “family offset” mortgages, where helpful family members can put money into a savings account that is tied to the child’s mortgage account and acts as a form of deposit. Once a certain amount of the mortgage has been paid off, the money is available for withdrawal, often with interest.
The amount you can borrow depends on your income and your outgoings, and a lender will want plenty of details about your finances. Although it can seem intrusive, the point of a financial assessment is to protect borrowers from over-stretching themselves and to ensure they could still pay their mortgage if interest rates went up to 6% or 7% (sometimes called as a stress-test).
As a rough estimate, lenders are likely to offer around four times a single or joint income, although some may offer more for qualified professionals at the beginning of their career.
It may be useful to obtain a “mortgage agreement in principle” which is a conditional offer from a lender that says how much it will be prepared to lend you, based on a quick check of your income. It isn’t a guarantee, but can help establish you as a serious buyer and may be requested before an estate agent will accept your offer on a property. If possible, select a lender that will do a “soft” credit check that won’t leave a mark on your credit file, as too many checks in a short time can harm your credit rating. There’s no obligation to use the same lender for your mortgage.
When working out your budget, don’t forget to factor in the other costs that are involved in buying your first home:
As long as all those buying the property are genuine first time buyers and intend to live there, there is no Stamp Duty payable on homes in England costing up to £300,000, and a reduced rate of 5% on the portion of the price between £300,000 and £500,000. Above £500,000 the normal rates apply. You can find out how much you will need to pay at www.gov.uk/stamp-duty-land-tax as well as find out about the more complicated rules concerning Stamp Duty and shared ownership purchases.
Mortgage deals often have arrangement fees attached, that can be £1,000 or more, and there will usually be a £200 or so valuation fee (although some lenders offer this free). You may pay a fee to a mortgage broker for helping you to find the best deal and handling the paperwork.
Even if you’ve paid for a mortgage valuation, you should also consider an independent survey. There are various surveys available which are detailed in a brochure that has been produced by our sister company, e.surv Chartered Surveyors.
The process of transferring the legal title from the previous owner of the home to yourself (conveyancing) will cost from around £930-£1,200 for a freehold property and £1,110-£1,390 for a leasehold purchase. Searches will cost around £300 more, plus the Land Registry Fee of up to £540.
The budget option for a first time buyer is to hire a van for £100 and ask your mates to give you a hand, but there are also a wide variety of removals services available than cost up to £1,500 for a full packing and removals service.
You will need buildings insurance from the moment of exchange of contracts.
In days gone by, most people went into a High Street bank or building society for a mortgage, but there are now a variety of additional options:
A reputable broker or adviser will do all the hard work for you, working out the very best deal for your individual circumstances and giving you a personal level of service, including access to broker-only deals. You may have to pay a fee, and you should check that your broker is qualified and is examining a wide spectrum of deals on the market. For example, Embrace Financial Services has more than 350 fully trained consultants across the country who can access thousands of mortgages from a wide panel of lenders, including exclusive deals. The first appointment is always free of charge.
Best buy mortgage tables can help you to compare costs quickly yourself, but are less helpful if your circumstances are not completely average (and not all mortgage providers appear on them). Robo-brokers are a new concept that uses artificial intelligence to match you with a deal. While these systems offer a fast, and usually free service, there is no ability to handle more complex personal circumstances or to offer individual advice that a real-life broker can give.
When you see a broker or mortgage lender you will need to bring lots of information, typically including
There is a mortgage out there for most people – but it isn’t always easy to find it! Here are some circumstances where you might need a specialist lender:
In these more challenging situations, using an adviser with a company such as Embrace Financial Services can make the difference between finding a good mortgage through a specialist lender that is willing to weigh up the risks, or just having to walk away from your dream home.
Lenders make their money by charging interest on the loan, but that can be done in different ways:
With a fixed rate mortgage, the interest rate will not change for a set period of time. Fixed rates can be for as little as a year, or for up to 10 years. Some lenders even offer lifetime fixed rate mortgages. The advantage of a fixed rate, especially to a first time buyer who may be on a tight budget, is that you know exactly how much you will have to pay for the period of the fix. Points to consider:
These mortgages offer a fixed level of discount off the lender’s SVR for either a specific term or the life of the mortgage. The monthly amount you pay will vary if the lender’s SVR changes (usually, but not always in response to changes in the Base Rate). Some lenders may offer a specially discounted mortgage rate for first time buyers.
This is a variable mortgage, so the interest rate can change and you may pay more or less as a result. Unlike SVR, tracker mortgages are linked to the Bank of England Base Rate, so they will only change if the base rate changes, not on the whim of a lender. The rate is fixed at a certain percentage above the Base Rate. These deals are often cheaper than fixed rate deals because the risk to the lender is lower, but you need to be sure you could cope with your mortgage going up.
With mortgages, one size definitely doesn’t fit all, so if you are struggling to work out which kind of loan would work best, it can be very helpful to speak to a broker, such as Embrace Financial Services.
The longer the mortgage, the lower the monthly repayments, but the overall cost will be more. The traditional mortgage was 25 years, but 35-year and 40-year terms are now common, although they are only offered to younger first time buyers, as lenders don’t like to loan into retirement. Taking a longer term may be the only way to secure the amount you need, as it may reduce the monthly payments to what is considered “affordable” by the lender. In reality, it doesn’t mean your mortgage will run that long – you can remortgage for a shorter term when you move or when your finances improve, or pay extra when you can, if your mortgage allows it.
Having a mortgage that allows you to pay extra (either on a monthly basis or as a lump sum) can cut overall costs and reduce your mortgage term, so could be a useful feature, although it is often capped to a figure such as 10% of the loan each year.
Mortgage lenders offer a variety of deals to tempt first time buyers, including cashback and free valuations. While these can be useful, it’s worth checking to see if a cheaper deal without any frills would be cheaper long term
Some cheap mortgages have large set-up fees and some lenders offer a choice of a fee-free option that has a slightly higher interest rate. In general, the smaller the loan you are taking out and the shorter the period you expect to be on that deal (whether you anticipate moving or it’s a short fix period), the bigger impact fees will have, so consider the options carefully (online mortgage calculators can help).
The optimum choice will vary considerably depending on personal circumstances, but an adviser from Embrace Financial Services will be able to guide you through these decisions.
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
Your initial mortgage appointment is without obligation. We normally charge a fee for our services; however, it is payable only on the submission of your mortgage application. The fee will depend on your circumstances but our standard fee is £549. Complex cases usually attract a higher fee. We will discuss and agree the fee with you prior to submitting any mortgage application.