Mortgages for first-time buyers

Last updated: December 2020 | 2 min read

Are you thinking about purchasing your first home and climb the property ladder? Here is what you need to know about getting a mortgage.

You will need a deposit

Almost all banks will require you to pay at least 5% of the purchase value of the property as a deposit. Nevertheless, it is always a good idea to save more if you can. It will reduce the amount of loan you will require and better your chances of getting a cheaper mortgage.

How much can you borrow as a first-time buyer?

The amount you can borrow entirely depends on your income, outgoings, and credit history. The lender will assess your income and your spending patterns to determine whether you can afford the mortgage.

Mortgage lenders also consider other incomes such as investment or earning, which are aside from your primary salary. Further, the lender will do a credit check to see if you have ever been declared bankrupt or were unable to repay your debts.

The lender will also want to assess whether you will be able to afford the mortgage in the future when the base interest rates may be higher. For this, the lender will conduct a ‘stress test’.

Mortgage interest rates

The interest rates you will be charged depends on whether you choose a fixed rated or variable rate mortgage.

Fixed-rate mortgage

In a fixed-rate mortgage, the rates will be fixed for a predetermined number of years. After the end of that period, they will revert to the lender’s standard variable rate. It is a good option for people who are on a tight budget.

You do not have to worry about increasing interest rates by the Bank of England during your fixed-rate period. They are easier to budget and remove uncertainty.

However, you could get trapped in a higher rate mortgage and end up paying more than you would as compared to a variable rate mortgage. Further, if any of the base rates fall, you will not be able to take advantage of it.

Variable-rate mortgage

In a standard variable rate mortgage, your mortgage repayments could change each month depending on whether the interest rates increase or decrease.

There are two kinds of variable rate mortgage. The first is linked to the base rate of Bank of England and moves in line with the changes to that rate. The second is known as the Discounted Mortgage. Discounted mortgages are offered to attract people to the lender’s more expensive standard variable rate mortgage by decreasing their rates for an introductory period. After the end of the discounted period, the rates will revert to the lender’s standard variable rates.

You may need a guarantor

Some lenders require that a relative or your parent act as a guarantor for your loan in the case that you are unable to pay it back. If you have a guarantor, the mortgage lender is more likely to lend to you.

Mortgage fees

Some lenders charge a product fee or an arrangement fee. This can range anywhere between a few hundred pounds to 1% of the mortgage.

Government Scheme

You will also find that there are quite a few government schemes out there for first-time buyers. This includes Help to Buy and Shared Ownership.

In Help to Buy scheme, the government will lend you up to 20% of the value of the property in the form of an equity loan. Further, you will be required to pay a 5% deposit and get a mortgage to cover the remaining 75% cost.

With Shared Ownership schemes, it allows you to buy a part of the property and rent the rest. This way, you will have to get a small mortgage.

There is a new government scheme called the Lifetime ISA. It is a savings account specifically designed to encourage people to save for a deposit for when they want to buy a property. It will earn you a 25% bonus on your savings.

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