First time buyer mortgage

Last updated: May 2024 | 3 min read

Purchasing your first property requires careful planning and consideration of numerous factors. These include determining your borrowing capacity, selecting the most suitable mortgage option, and calculating the required down payment. This article will help you in preparing and knowing each stage of the process.

Buying your first home is both exciting and daunting. We will take you through the details of first-time buyer mortgages available in the UK, to make your home-buying journey smooth and productive.

What is a first time buyer mortgage?

A first time buyer mortgage is a financial product designed specifically for individuals purchasing a home for the first time.

Unlike standard mortgages, these often come with specific terms and benefits to make homeownership more accessible to new entrants in the property market.

First time buyers usually encounter different criteria from lenders, which may include favourable interest rates, lower deposit requirements, or government-backed support.

Advantages for first time buyers

Government support schemes

The UK government offers several schemes to aid first time buyers. One notable initiative is the government's mortgage guarantee scheme. This scheme aims to support buyers who can only afford a small deposit, encouraging lenders to offer 95% mortgages.

Buyers benefit from wider access to the property market, transforming their homeownership dreams into reality sooner than anticipated.

Know more about the UK government schemes dedicated to first time buyers.

Lower deposit requirements

For many first time buyers, accumulating a substantial deposit is a significant hurdle. Fortunately, first time buyer mortgages often come with lower deposit requirements.

This aspect translates into needing a smaller upfront amount, easing the initial financial strain.

With options like a 5% or 10% deposit, entering the property ladder becomes a more achievable goal for most buyers. Here are some tips on how to save for a deposit.

Preparing for a mortgage

How much can you afford?

Getting a clear picture of your financial health is the first step towards securing a first time buyer mortgage.

Examine your income, expenses, and existing debts. This assessment helps in determining how much you could borrow and the affordability of monthly payments.

Lenders often apply a loan-to-income ratio, typically capping the amount you can borrow at 4.5 times your annual income. Budgeting for upfront costs such as valuation fees, legal fees, and a deposit is also necessary.

Try to understand the impact of house prices on your budget. Regions across the UK vary significantly in average property prices.

Higher house prices in cities like London might require a larger deposit and result in higher monthly payments.

Take advantage of online mortgage calculators for an initial estimate of what you might afford.

Mortgage payments and monthly costs

Mortgage payments often represent a substantial part of your monthly outgoings. You should know how to estimate these payments and what they include.

Monthly payments generally consist of the capital (the amount borrowed) and the interest charged by the lender.

Additional costs might include home insurance and, in some cases, service charges or ground rent, if you're purchasing a leasehold property.

What affects mortgage rates?

Mortgage rates vary based on several factors, influencing how much you'll pay back each month and over the term of your mortgage.

Key factors include the Bank of England base rate, the overall economy, and individual circumstances like your credit score and the size of your deposit. Worried about your credit score?

Fixed-rate mortgages can offer predictability in your monthly outgoings, while variable-rate mortgages might provide lower rates initially but can fluctuate.

A repayment mortgage is where you pay back the amount you have borrowed along with the interest in every monthly payment. Learn in detail about the mortgage types in the UK to see which mortgage deal is right for you

What will be your monthly payments?

To calculate your monthly mortgage payments, consider the loan amount, mortgage term, and interest rate. You risk losing your home if you cannot manage your mortgage repayments on time.

Fixed-rate mortgages provide consistency in monthly payments for a set period, aiding in budgeting.

Use a mortgage calculator to get an approximate monthly payment. Remember, the longer the mortgage term, the lower the monthly payments, but the total amount of interest paid increases.

Steps in acquiring a first time buyer mortgage

1. Compare first time buyer mortgage deals

This is step one: first time buyer mortgages vary greatly in terms, rates, and fees; you must compare different mortgage products to find the one that suits your financial situation.

Start by looking at the interest rates, repayment terms, and any additional charges. Websites comparing first time buyer mortgages provide a comprehensive view, helping you weigh options without bias.

A low interest rate isn't the only factor; consider the mortgage term, product fees, and flexibility in repayments.

2. Consult mortgage advisers

You must speak with mortgage and protection advisers. Mortgage advisors possess the expertise to recommend suitable mortgage options based on your financial circumstances.

Advisers often have access to exclusive deals not available directly from lenders.

Their guidance extends beyond finding a mortgage; they can help understand the mortgage completion process, explain legal jargon, and prepare you for your mortgage appointment.

Consult a mortgage adviser early in your journey, ensuring you explore all potential avenues.

3. Check your credit rating

Your credit score significantly influences your mortgage options. Credit reference agencies, like Experian or Equifax, provide a numerical score reflecting your creditworthiness.

Accessing your credit report online is straightforward and often free. It's important to review this report for any inaccuracies that might affect your score negatively.

Knowledge of your credit score shapes expectations and informs decisions on how to improve it if necessary.

4. Improve your credit score

Improving your credit score demands patience and consistency. Start by ensuring all credit payments are on time.

Reducing existing debts can positively impact your score.

If you have a limited credit history, consider using a credit card for small purchases and paying off the balance each month. This approach demonstrates to lenders your reliability in managing credit.

Avoid making several credit applications in a short period, as this can signal financial distress to lenders.

Implementing these changes can take time to reflect in your score, so start early.

5. Get your Agreement in Principle (AIP)

This is the first formal step. A mortgage Agreement in Principle (AIP), sometimes called a Decision in Principle (DIP), is a statement from a mortgage provider indicating the amount they might lend you, based on preliminary information.

Obtaining an AIP marks the first step towards securing your mortgage. It helps you understand how much you could borrow, shaping your property search realistically.

Armed with an AIP, you'll find that estate agents and sellers take your offers more seriously. An AIP demonstrates your commitment and financial capability to proceed with a property purchase.

It also speeds up the full mortgage application process, as you've already provided key financial information to a potential lender.

Difference between AIP and final mortgage offer

An AIP is not a guarantee of a mortgage offer. The final offer depends on a more detailed analysis of your financial situation and a satisfactory property valuation.

A mortgage provider may alter their offer or decline a mortgage if your circumstances change or if issues arise with the property during the valuation process.

6. Prepare the documentation

Applying for a mortgage requires various documents. Lenders scrutinise these to assess your financial reliability.

Key documents include proof of income, bank statements, and identification. Self-employed individuals might need additional paperwork, like business accounts or tax returns.

Always confirm with your mortgage adviser about the exact documents required.

7. Prepare proof of income and financial commitment

Lenders assess your income and financial commitments to gauge affordability. Payslips, P60 forms, and bank statements often suffice as income proof.

They also consider ongoing commitments like loans or credit card debts. Honest disclosure of these commitments ensures a realistic mortgage offer.

8. Get property valuation and surveys done

Once your offer on a house is accepted, lenders require a property valuation. This process confirms the property's value and determines loan amount.

The type of survey you choose can vary, impacting costs and detail level. Learn more about the Homebuyer Survey.

The right survey depends on the property's age, type, and condition. Options range from basic valuations to full structural surveys.

A thorough survey can uncover hidden issues, saving future costs. Discuss with your estate agent and mortgage adviser which survey suits your needs best. Here are the types and costs of home surveys.

9. Deal with negative equity concerns

Negative equity occurs when your home's value drops below the mortgage amount owed. This situation can affect selling or remortgaging plans.

Understand the factors that influence property value, such as market trends or property conditions, so that you can mitigate negative equity risks.

10. The mortgage deed: understand before signing

A mortgage deed is a legal contract between you and the lender. It outlines your loan's terms and conditions, including repayment obligations and interest rates.

This document legally binds you to your mortgage terms. Thoroughly read and understand this deed before signing.

The role of conveyancers in the mortgage process

Conveyancers play a central part in the mortgage process for first time buyers. These legal professionals handle the conveyancing- the transfer of property ownership.

They ensure legal compliance and address complex legal jargon, making the process smoother for you. Their expertise spans across drafting and reviewing contracts, conducting local searches, and managing the exchange of contracts and completion.

A conveyancer’s support can be invaluable, especially in identifying legal issues that might affect the property in the future.

Conveyancing fees

Conveyancing fees are payments made to your conveyancer for their legal services during the property purchase.

These fees can vary significantly, depending on the property’s price and the complexity of the transaction. Generally, they include charges for professional services, local search fees, and other disbursements.

Disbursements cover costs incurred by the conveyancer on your behalf, like searches and registering ownership with the Land Registry.

Obtain a detailed quote upfront, ensuring transparency in what you're paying for.

What to expect from your legal advisor

Expect clear, transparent communication from your legal advisor. They should keep you informed at every step, explaining legal terms in plain English.

Your conveyancer or solicitor will scrutinise the contract, negotiate terms, and highlight any obligations or issues.

They also liaise with the seller's solicitor, your mortgage lender, and local authorities. Good conveyancers proactively tackle issues, guiding you through complexities such as leaseholds or shared ownership properties.

Ultimately, your legal advisor's role is to safeguard your interests, ensuring a legally sound and smooth transfer of property ownership.

Final stages: exchange, completion, and moving in

Preparing for the exchange of contracts

Exchange of contracts in property transactions marks the point where agreements become legally binding.

Both parties, the buyer and the seller are committed to the sale once this step is complete. For you as a first time buyer, this is the moment when your dream of home ownership gets a legal seal.

Before reaching this milestone, ensure all necessary surveys and any negotiations based on their findings are completed. Your conveyancer will guide you through the legal intricacies.

Once contracts are exchanged, pulling out means losing your deposit, and this is usually a substantial sum.

The completion date and its significance

The completion date is when the property officially becomes yours. Usually set a week or two after contracts are exchanged, this date marks the end of your property-buying journey.

On this day, the remaining money owed on the property, normally the majority of the purchase price is transferred from your mortgage lender to the seller's solicitor. After this, the keys are yours!

Arrange the transfer of utilities and services to ensure a smooth first day in your new home. Also, finalise any insurance policies needed. They should be effective from the completion date.

Arranging home insurance

Securing home insurance is mandatory before completion. This insurance covers the structure of your home against damage and is a lender's requirement.

It's different from contents insurance, which covers your belongings inside the home.

Buildings insurance serves as a safeguard for your property, offering protection in the event of unforeseen incidents that could harm your residence. It provides coverage for circumstances such as fires, floods, or severe weather conditions that may result in structural damage, ensuring that the costs of repairs are covered.

What happens if the purchase falls through?

If your property purchase fails after the exchange of contracts, the consequences can be financially severe. You might lose your deposit and even face legal action from the seller.

To mitigate these risks, discuss with your solicitor the possibility of homebuyer protection insurance. This covers some losses and expenses if the deal collapses through no fault of yours.

All the steps detailed above, will help in planning and reduce unforeseen challenges. Being informed, you can now look forward to the exciting day when you hold the keys to your new property, stepping confidently onto the property ladder.

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