First-Time Buyer Mortgages

A broker is an individual or company that acts as an intermediary between the buyer and the lender. They take the information provided by the buyer and try to match them to the best mortgage deal based on their requirements.

Some brokers offer a free service, while others charge a fee to find you a mortgage. Traditionally, brokers were more popular with buy-to-let investors. However, an increasing number of residential users have employed their services over the last few years. Sometimes, a broker can find a mortgage that isn’t routinely advertised online or on the high street.

If you don’t use a broker, you can search the web using a comparison website to compare the best available deals.

Regardless of whether you use a comparison website, broker or go directly to the lender, it’s only the bank or building society that actually offers you the mortgage. Anything else is just a facilitator to put you in touch with a lender and make things a little bit easier.

More recently, a growing number of lenders have started offering 95% mortgages, meaning you only need a deposit of 5% (more on that shortly).

Other schemes include the First Homes Scheme, in which developers offer 30%-50% discount on the market value of new-build homes.

There’s also the Shared Ownership option (this doesn’t mean buying with friends!), which sees you buy a percentage of the house and pay rent on the remaining amount. For example, you could buy a home worth £250,000 and pay 25% of its value (£62,500), with the remaining 75% owned by the local housing authority or the developer.

Essentially, you pay a mortgage on the 25% you own and rent on the remaining 75%. While this might sound more expensive than owning the home outright, it’s actually a more affordable way for many to become homeowners.

Let’s say you bought a house for £250,000 with a 5% deposit. In that case, you would contribute £12,500 of the property’s value, and the lender would cover £237,000. You would then pay this amount back (plus interest) over the agreed mortgage term.

Having just a 5% deposit makes owning a home more affordable, especially because many people find themselves priced out of the property market. However, it’s important to remember that a low deposit means high repayments.

Let’s take that £12,500 deposit on a £250,000 home and place it on a mortgage with an interest rate of 2.50%. With these kinds of numbers, you would be looking at paying a little over £1,050 per month on a fixed-rate mortgage.

If, however, you put down a 30% (£75,000) deposit on the property of the same value, your monthly payments would be around £750. Moreover, the higher deposit amount would give you access to lower interest rates. Instead of 2.50%, you’re more likely to get rates in the region of 1.25% (£680 per month).

Ultimately, it comes down to affordability. Five per cent deposits give a larger number of people access to homes. If, however, you can afford a higher deposit, you should give it serious consideration.

The majority of first time buyers dip into their savings to put a deposit down on a home – or they save with the sole intent of raising a deposit. However, the average UK savings per person is a little over £9,500, it’s not always easy to save the required amount – especially as the average house price in the UK is £329k, according to property portal Zoopla.

“The Bank of Mum and Dad” is a well-known phrase in the UK. It relates to parents helping their children get on the property ladder by covering all of – or a portion of – the deposit. This method is popular, but there may be tax implications for receiving a financial gift. Therefore, it’s worth checking with a financial advisor beforehand.

Most lenders accept inheritance money as a form of deposit without any issues.

While a first time buyer might not have a home to sell, they could theoretically have other assets for sale. That might come in the form of cars, boats, valuable memorabilia, artwork or anything else.

And while we understand that most people reading this probably don’t have a boat to sell, the list gives you an idea of the type of items that make up other assets. If, however, the lender has any suspicion of money laundering, you may be asked to prove that the sale came from a legitimate source.

Technically, there’s nothing to stop you from taking out a loan or using your credit card to fund a loan. Although you should think very carefully before going down this route. Not only will you be liable to pay back the borrowed amount on top of the mortgage repayments, but loans and credit cards usually have high-interest rates, with some reaching 36%.

Generally speaking, it’s not advisable to use unsecured borrowing as a deposit. Indeed, most lenders are cautious about accepting a deposit from unsecured borrowing because of the problems it can cause the buyer in the long term.

Repayment is when you pay off a portion of the loan amount and the interest each month at the same time. Over time, the loan reduces until you have paid off your home entirely. At this point, you become the complete owner of the property and no longer owe any money to the mortgage lender.

An interest-only mortgage sees you pay the interest, but not the amount borrowed. For example, if you owe £200,000 on your mortgage, you will only pay the interest rate, which is fixed when you get the mortgage. The loan amount doesn’t reduce, and you typically pay it back by selling the property at a later stage. The aim is for the property to increase in value enough so that you can pay back the loan with the sale and make a profit at the same time. Interest-only mortgages are more familiar with the buy-to-let market than they are residential. The obvious benefit of an interest-only mortgage is lower monthly payments as you’re only paying the interest.

As a first time buyer, it will be hard to get an interest-only mortgage, as most lenders require you to earn a minimum income of £100,000. Some lenders won’t even offer interest only to first time buyers, regardless of your earnings.

It shouldn’t matter, though. Most first time buyers (and residential owners in general) are more interested in paying off their home than having an interest-only mortgage where they would need to sell the property at some stage to pay back the loan amount.

Therefore, it’s more likely that you will apply for a residential mortgage with repayment where you repay the interest and the loan amount simultaneously.

The majority of mortgages require you to pay back the amount borrowed, plus interest. Once your repayments begin, the lender will break down how the payments work – for example, the amount of interest and the amount of repayment.

Payments happen over the agreed mortgage term, which is, on average, 30 years. In the beginning, you typically pay more in interest than the repayment amount, with the tides changing over time – to the point where you’re paying more for the repayment than the interest: the higher your interest rate, the higher your monthly payments.

Mortgage interest rates are either fixed for a specific period of time or variable (more on that shortly) and the rate you are given depends on several factors, such as your income and credit score.

There’s also something called APRC, which means the annual percentage rate of charge. Regulators now ask lenders to work out a mortgage product’s APRC, the total cost of credit charged for the consumer.

The interest rate is usually fixed or on a tracker. Each one of these has a different meaning in relation to the amount you pay in interest and the length of time you make the payments.

A fixed-rate mortgage sees you fixing the interest rate for a set period of time. Historically, two and five years were the most popular terms for fixing a mortgage interest rate. However, an increasing number of products allow you to fix the rate for the long term, sometimes as much as 40 years. If, for example, you fix your rate for five years, then your interest won’t change during that time, even if the lender or BOE changes their rate.

Instead of fixing your rate, a tracker mortgage tracks the Bank of England base rate. During the term, your rate could change with the base rate. To illustrate, if your initial rate is 2%, but the base rate falls during the term, your mortgage payments will go down. Likewise, they will increase if the BOE base rate increases.

For the last 10-or-so years, fixed-rate mortgages have been the most popular. This is because interest rates have been historically low with little room for movement, and with rates likely to increase over the next few years, many borrowers are trying to secure their interest rate with a fixed-rate mortgage.

On the other hand, trackers were popular when rates were higher. This is because there was room for a drop in rates. If interest rates increase to significantly higher levels shortly, tracker mortgages will likely grow in popularity.

The average mortgage length is 25 years, but there’s also an initial rate that lasts for between two and 10 years. During this initial rate period, you’ll pay a lower rate than the lender’s standard variable rate (SVR), either on a fixed or tracker mortgage. Once that initial rate period ends, the cost of your monthly mortgage increases as it moves onto the SVR.

To avoid going onto the SVR, you can remortgage – either with the same lender or another bank or building society. When you remortgage, you go onto a new initial rate, keeping your payments down in the process.

Traditionally, mortgage borrowers in the UK had always needed to remortgage their homes when the initial rate ended. However, a growing number of lenders are offering long-term fixed rates, fixing the mortgage for up to 40 years. These types of mortgages have removed the need to remortgage, as you pay the same amount each month for the entire term, regardless of what happens with interest rates.

There are pros and cons to longer-term mortgages. You have the security of knowing that your monthly payments will never change. But if rates change for the better, you’re locked into the previous rate and will need to continue paying it until the mortgage is fully paid.