Getting a mortgage can be daunting, especially if it’s your first one. But there’s no need to be anxious - we’ve put together information on what to consider and how to find the best one for you.
How getting a mortgage works if you’re a first-time buyer
If you’re a first-time buyer, you may have spent the past few years saving for a deposit. The next step is to find out how much you can borrow so you’ll have a better idea of the type of property you can afford to buy when you start looking for your first home.
First-time buyer’s deposit
The more money you’ve saved as a deposit, the less you’ll need to borrow from the bank. And if you have a bigger deposit, you’ll have access to more competitive mortgage rates.
As well as saving for your initial deposit, you’ll also need funds to put towards fees like property searches, surveys, mortgage arrangement fees, solicitor’s fees, stamp duty, home insurance, removal costs and so on.
First-time buyer’s mortgage
When you apply for a mortgage, the lender will assess your affordability by looking at your annual salary and any other income you receive, as well as all of your outgoings, including credit card and loan debts, household bills, childcare, travel and general living costs.
The lender will also check your credit history to see whether you’re a reliable borrower and will use this and its affordability assessment to decide how much you can borrow.
Mortgage providers will usually have a maximum loan-to-value – LTV – they’re prepared to offer you. This is the maximum mortgage loan you can take out as a percentage of the property value.
For example, if the property value was £200,000 and you were offered a mortgage of £170,000, your LTV would be 85% and you’d need a deposit of £30,000, which is 15%.
When to apply for a mortgage
Before you start viewing properties, it’s a good idea to get a mortgage agreement in principle from a lender or a couple of lenders. This will give you an idea of how much you can borrow and it will prove to estate agents you are serious about buying.
Some lenders will carry out a hard credit check for this - which then appears on your credit file – so keep this in mind when applying for an agreement in principle. And if the mortgage provider does carry out a hard check, it’s best not to get more than one or two agreements.
Some lenders will run a soft search – and this won’t affect your credit score – so it’s a good idea to check with each lender you contact before applying.
Your offer should last between 30 and 90 days. Keep in mind that this is only an estimate and isn’t a guaranteed mortgage offer.
The purchase price of your new home
Having an idea of how much you can borrow will help you work out how much you can afford to pay for your new home, and should give you a better idea of your price range when it comes to viewing houses.
The actual mortgage loan you take out will then depend on how much you pay for the property, and whether you want to use any of your mortgage loan for making home improvements.
You should always make sure you’d be able to afford the monthly repayments before deciding whether to make an offer.
Help to Buy for first-time buyers
If you’ve managed to save a deposit of at least 5%, you might be able to use the government’s Help to Buy equity scheme.
Under this scheme, the government will pay a further loan of up to 20% - or 40% if you’re in London - to put towards a new-build home costing up to £600,000. The scheme is open to first-time buyers and those looking to move up the ladder.
The loan is interest-free for the first five years, and from year six, you’ll be charged 1.75% interest on the loan amount. The amount of interest you pay will then rise with inflation, and 1% will be added on top too.
The government is also offering a Help to Buy ISA through certain banks, building societies and credit unions, and it’s designed for first-time buyers. Depending on how much you pay into your ISA, you could get a savings top up of between £400 and £3,000.
Joint mortgage
If your deposit and mortgage amount isn’t enough to get you onto the property ladder, you might be able to buy a home with other people – either a partner, friend or family member. They could help add to your deposit, and with their income plus yours, you might be able to take out a larger mortgage loan and get a property together.
A joint mortgage could mean that you and the other tenants own equal parts of the property – joint tenants – or you might own a share of the home – tenants in common – which might not be the same amount as the others.
It’s a good idea to seek independent legal advice before taking out a joint mortgage so you all agree on what happens to the property should one of you decide you want to sell or leave.
Guarantor mortgage
A guarantor mortgage could also help you take out a larger mortgage for your first home, as a guarantor – most likely a parent or close family member – promises to cover any missed mortgage repayments if you can’t afford them.
Although the guarantor’s name won’t go on the mortgage, it’s still a good idea to seek independent legal advice before asking someone to be your mortgage guarantor to make sure everybody knows what is expected.
Shared ownership
If you’re a first-time buyer and you earn less than £60,000 a year, you might be able to take out a shared ownership mortgage.
This means that you’ll take out a mortgage for a certain percentage of a property, and a landlord or the government will own the rest. You’ll then pay a reduced amount of rent on the value of the property that’s not in your name. You might be able to buy a larger share of the house when you can afford it.
Monthly mortgage repayments
How much you’ll pay in monthly mortgage repayments will depend on what type of mortgage you get. The types of mortgages available include:
Fixed rate mortgages: a fixed rate mortgage will keep your monthly mortgage repayments at a set rate for two, three or five years – although in some cases, you can fix for as long as 10 years. Once the deal has ended, it’s best to switch mortgages rather than remain on your lender’s standard variable rate – SVR – which is unlikely to be competitive.
Tracker mortgages: a tracker mortgage tracks the Bank of England’s base rate, which means that the amount of interest you pay each month could go up or down, depending on what the Bank of England base rate does. If you decide to go for this option, make sure you could afford your repayments if interest rates rose.
Offset mortgages: if you have a savings account with your bank and you also decide to take out a mortgage with that bank, you might be able to offset the amount of interest you pay on your mortgage. So instead of your savings earning interest, you wouldn’t be charged interest on that same amount of your mortgage.
Contact us now for advice
Email: Mortgages@fraser.hk.com
Tel: +852 2527 2399
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