Mortgages for First Time Buyers
A mortgage for First-Time Buyers is the same as any other type of mortgage for a house purchase, although a more thorough discussion regarding regular budgets and affordability is normally appropriate to ensure that applicants are fully aware of all the ongoing costs associated with home ownership.
First Time Buyer
First Time Buyer topics
First Time Buyer mortgage advice
As a potential first time buyer, you will probably have a lot of questions and concerns regarding the whole property buying process and need to borrow money by way of a mortgage to enable the purchase to take place. By having an initial discussion with one of our team, we can answer your questions and guide you through the process to make sure you can move forward with confidence.
What are the benefits of using a mortgage broker if I am a First Time Buyer?
As a first time buyer, no doubt with many questions and possibly a limited understanding of the whole house purchase process, a discussion with a suitably qualified mortgage broker may prove invaluable. You will be guided through the purchase process, where the adviser will make sure you understand some of the key points.
Once the mortgage broker has a full understanding of your current circumstances and objectives, he or she will be in an ideal position to research the marketplace and select a suitable mortgage lender and rate to match your needs.
Following on from the completion of the purchase, the broker will make contact with you before your mortgage rate finishes, to review your circumstances and assist with finding another good deal, either with your existing lender of by moving to a new lender.
In addition to having access to lenders, deals and rate from the mainstream and high street lender, it is highly likely that some exclusive rates and terms may be available through a mortgage broker. Membership of a variety of professional mortgage networks or mortgage clubs will from time to time attract rates or scheme terms (for example, lower arrangement fees or fees assistance) from lenders which are not available elsewhere. This is possible because of the volumes of business provided to the lenders by intermediaries.
Generally speaking, a deposit of at least 5% of the purchase price will be required, although there may be some exceptions to this in the event that you are buying a property under the market value, possibly with a gifted equity deposit from the vendor who would usually be a family member. A larger deposit will influence the rates of interest and mortgage deals that will be available. Deposit can come from a variety of sources.
Most commonly this will be from personal savings and investments, although in recent years there has been a growing number of borrowers receiving financial help from family by way of gifted deposits. This is normally acceptable to a lender, provided that the funds are not repayable and the donor of the gift will not have any financial interest in the property or be living in the property. Regardless of the amount of deposit you have, the amount of borrowing must still fit within the lender affordability calculations.
It is important that an affordable monthly budget is established at the early stage of a discussion to ensure that your expectations can be met. Traditionally a lender used to calculate lending based on a multiple of income. This is no longer the case as individual circumstances are very different when it comes to how people spend their disposable income. A lender will have a specific affordability calculator into which all income and known commitments are entered. Any future unknown costs may be estimated or the lender may assume a figure based on information from the Office of National Statistics. Income used in the calculation can be from employment or self-employment.
Some types of benefits may also be acceptable and these can be clarified by our experts. A detailed analysis of all your income and expenditure by one of our specialists will provide an accurate indication of a maximum mortgage that may be available. However, in some circumstances it may be that this is actually greater than you are comfortable with, once you have established your monthly budget for mortgage and related costs. The amount of deposit may also influence the amount available to borrow, with some lenders applying a “cap” on higher loan to value cases which may be 4 or 4.5 x the income, regardless of the affordability calculation.
Buying your first home is usually a very exciting time however it can also be a time of great uncertainty and anxiety. With so much to find out and learn it can feel like you just simply have no idea where to begin. For many there is the need to arrange a mortgage and this in itself comes with many unknowns such as:
- How much can I borrow?
- How much will it cost?
- How will my payments change if interest rates go up or down in the future?
- How does a longer or shorter term affect my monthly payments?
Other questions you may look to find answers for are:
- How much will I have to pay for Stamp Duty?
- What other costs are involved and how much are these?
- I have a history of bad credit, what chance do I have of getting a mortgage?
- What interest rates are available?
The list of possible questions can seem endless and indeed will vary from one person’s requirement to the next but most if not all of these answers can be found on our website. Many questions you have can be answered using some of the numerous first time buyer calculators where you can input your specific details to find out the information that relates to your circumstances. Of course, if you are unable to find the answers here or anywhere else, or simply do not have the time, please drop us a line at Just Mortgage Brokers and one of our friendly qualified advisers will be on hand to help you.
One of the more common questions a first time buyer wishes to know the answer to is “how much can I borrow?” Understandably so, as this will for many be the dictating force for the possible purchase price they can go up to. So how is this established?
Historically, the amount an applicant could borrow would be calculated as an income multiple i.e. income would be looked at as a whole and then as an example a multiple of 4x may then be applied. Therefore, any applicants earning the same or with the same financial picture when any commitments such as loan payments etc are taken into consideration, would be able to borrow the same. A sole applicant earning £40,000 per annum with no credit commitments would therefore be looking at a potential maximum mortgage of 40 x 4 = £160,000.
However following changes in the market back in 2014, lenders amended their assessment of loan amounts to be based on an affordability model. Although income is still very much a deciding factor, many other elements are now also taken into consideration. Some of these being:
- An applicant’s age i.e. how long can the loan be taken over?
- How much deposit or amount of equity is there?
- Number of dependants
- Outstanding credit commitments
- Childcare costs
- Pension contributions and other salary deductions
- Council tax
- Travel costs
- Ground rent and/or maintenance payments where applicable i.e. leasehold properties
Although the list above is not exhaustive and different lenders apply different rules around their calculations, it does go to show that when calculating what you may be able to borrow it is now much more in-depth than that of historic criteria.
As mentioned above, all lenders adapt their own individual ways of calculating affordability however it is in common that a lender will differentiate between a first time buyer and a home mover, although, at the time of writing there are some who will limit how much a first time buyer can borrow when compared to a home mover. It is also very rare that a lender will exceed that as calculated using the income multiple method of 5x income regardless of how much you may be able to “afford”.
All lenders will invariably have a calculator that you can use on their website to establish what this number is with them. However even these are not always reliable as some are not as in-depth as that used when you actually apply and therefore can be very misleading. Our advice is to speak to an adviser who works for the lender with the specific mortgage you are interested in to ensure they carry out the correct calculations before you make any commitment. Or, alternatively, speak to an unlimited mortgage broker such as us here at Just Mortgage Brokers where we have access to the lenders’ full calculators and can make all these necessary checks for you.
First-Time Buyers can usually access mortgage rates that are available to all applicants. On top of this lenders sometimes have rates that are exclusively reserved for first time buyers that may also include extra benefits added to them. The benefits can range from free mortgage valuation/ surveys, cash back and in some instances help towards fees.
Speak to one of our experienced advisers at Just Mortgage Brokers to see what rates may be available to you.
If your income is not enough to achieve the amount of borrowing you need, a mortgage with a Guarantor may be an option. This type of mortgage will be suited ideally to borrowers who are on a career path where the current income is relatively low but is likely to increase substantially in the medium term.
Essentially, a third party is named on the mortgage application as a guarantor and they agree to cover the monthly repayments if you do not maintain them. The Guarantor will not own or have any interest in your property, nor will they be named on the Title Deeds. They are however required to sign a legal document to confirm that they will make your mortgage repayments if you do not.
The mortgage lender may require additional security to be provided by the Guarantor. This could be;
- A Legal Charge against a lump sum interest paying savings account. This may be for an amount equal to the additional lending that has been allowed and it will not be accessible until either the mortgage is affordable based purely on the income of the borrower.
- A Legal Charge against the residential property of the Guarantor. This means that if they do not cover any missed repayments, their own property is at risk of being repossessed in order to recover the debt.
The financial circumstances of the Guarantor will be looked at by the lender to make sure that they are in a position to take on the commitment. They would normally be expected to own their own home and have a good credit history. The income of the Guarantor should be sufficient to cover your monthly payments in addition to their own mortgage and regular spending. It is essential that the potential Guarantor seeks independent legal advice and the solicitor for the lender would expect to see evidence of this.
Mortgage costs for First-Time Buyers are as follows.
- In the first instance you will need a deposit to put down. This usually starts at 5% of the value of the property you are looking to purchase.
- Stamp Duty will be payable if you purchase a property for over £300,000.
- You will also need to pay for a Solicitor or Conveyancer who will take care of all the legal paperwork when purchasing a property.
- Your Solicitor will also collect payments for The Land Registry (For when your property is registered in your name), HMRC (to pay the Stamp Duty), Local Authority and various other third parties (while they carry out the due diligence on the property you are looking to purchase).
- You may also be required to pay for a Survey/ Mortgage Valuation fee.
- And lastly you may also be required to pay for a Mortgage Advisers fee, and depending on your mortgage product any product related fees to the lender.
When you apply for a mortgage, the lender will make a full assessment of your financial situation. Your income from all sources will be taken into account, together with any regular outgoings and commitments. These commitments will include loans, credit cards, child care and travel costs. It is important that you do not over commit yourself and the lender affordability calculations will take account of potentially higher interest rates in the future.
In addition to assessing affordability, lenders will carry out a check of your credit profile and history. They will also need to establish your address history for at least the last 3 years and would expect that you are registered on the electoral roll at your current address. To support a mortgage application, you will need to provide evidence of your income, usually the latest 3 months payslips if you are employed or tax calculations and accounts if you are self-employed, together with your latest 3 months banks statements, proof of Identification and address. Documentary evidence of your deposit will also be required at the application stage.
Buying your first home is a time of excitement but also for many it represents a period of anxiety and a step into the unknown. One area of the process that is relevant for nearly all First Time Buyers is that of the mortgage. With what appears to be so many different options available together with a mind boggling amount of terminology it is perhaps no surprise that this is a part of the house buying exercise that many seek help and advice.
Advice can be found from a variety of sources including:
Family and friends – A good source of honest and hands on experience of home ownership. It does however depend on their knowledge of the current mortgage industry to the accuracy of the information being provided.
Internet – A huge amount of information at your fingertips 24 hours, 7 days a week. However, with such a vast amount of information it can be difficult to know where to begin and to determine what is relevant to you and your individual requirements.
Lenders – Fully qualified advice tailored to your individual needs. This could however represent a restricted viewpoint of the market as they are only able to advise on what they can offer or do for you.
Mortgage Advisers – Fully qualified advice again tailored to your individual needs. However, do check on their access to the market. A broker with access to a wider range of lenders will be able to offer more options than a broker who is tied to a particular bank. There may also be a fee payable.
Do first time buyers pay stamp duty?
At present the government have given special allowances for first time buyers regarding to when they pay stamp duty and how much. Head over to our stamp duty calculator page to find out more and calculate if you have any stamp duty to pay for your proposed purchase.
Am I a first time buyer?
There are two aspects of consideration to know if you are a first time buyer. One of these is from a legal point of view. Legally you are not classed as a first time buyer if you have ever owned a property, even if it was left to you or if it was owned with someone else. This could also apply if the property is or was held overseas. Once you have been in this situation you can not be classed as a first time buyer again. Most lenders adopt the same principles for their own rules however, some will class you as a first time buyer again for their specific first time buyer mortgages if you have not owned a property for a certain number of years. This is only in regard to their products and criteria but does not change your legal status. Discuss your situation with one of our advisers and they should be able to clarify things for you.
How do banks know if you are a first time buyer?
Unless you have a record of a mortgage on your file that can be seen on their search a lender has no real way of checking. The question is asked as part of the application and should be answered honestly. Not divulging the correct information on any part of your mortgage application is deemed as fraud. Your status will also need to be discussed with your solicitor where the same principles apply. Lenders may class you as a first time buyer as per their criteria even if you have owned a property before so do ensure you check this out before proceeding. It could get you a better suited mortgage scheme.