First Time Buyer Mortgage

What are the typical requirements to apply for a mortgage as a First Time Buyer?

There are a few key ingredients here, so let’s run through the list:

Regular income. Lenders want to see a regular income coming through, with evidence.

Deposit. You will need a 5% deposit as a minimum. Whilst there are certain schemes where we might get away with less than 5%, the majority want a minimum at that level.

Good credit. As you start the purchase journey, check your credit file and make sure it’s in good order. If there are any errors, get them put right.

Proof of ID and address. Have in-date proof of ID and address and check you’re on the electoral roll. If your passport has run out or your driving licence is out of date, get them updated.

Bank statements. See how your bank statements are looking and get rid of any unnecessary spending. Generally, lenders want to see a minimum of three months’ bank statements. As you come up to getting a mortgage, avoid unnecessary purchases and don’t take payday loans. Lenders don’t like these, as it can seem that you’re credit hungry.

Low debts. If you have credit cards with balances on or finance agreements, see if you can clear or reduce these.

Lenders are generally looking for reliable borrowers who have consistent income and aren’t reliant on credit. Demonstrating your income and ideally having saved for a deposit will help you seem a better bet to a lender. It’s about just getting things in order and making sure you’re well prepared.

What is the maximum amount that can be borrowed for a mortgage as a First Time Buyer?

You’ve probably heard of income multiples. We tend to estimate that you can borrow four or 4.5 times a joint income, but this is not always accurate in today’s world.

Lenders are far more scientific in how they decide what is affordable. Maximum borrowing can be affected by many different factors, like regularity of income and existing financial commitments like loans, credit cards and HP.

Having dependent children also has an effect, as do spending habits and the strength of your credit file. All those aspects will influence how much a lender will be prepared to lend. The amount that can be borrowed can be significantly different between lenders because they all have their individual calculations.

That’s why it’s important to work with an independent, whole of market broker to establish your maximum accurately.

What’s the minimum deposit required for a First Time Buyer?

The majority of lenders are looking for a 5% deposit, but there are a few schemes to assist buyers who perhaps haven’t quite got that 5%. These change from time to time, depending on lender appetite.

If you haven’t got 5%, speak to us. Let’s establish what’s feasible – because there are rental schemes where you may only have to put a 1% deposit in. There are also guarantor schemes where the deposit may be less, or your guarantor could contribute the deposit [all information correct at time of recording in November 2024].

What are the types of interest rates available on a mortgage for a First Time Buyer?

You’ve generally got access to most rates in the marketplace. However, some lenders will offer specific First Time Buyer products that may include certain incentives.

The rates you benefit from will depend on the deposit size. For example, if you’re putting in a 5% deposit, your rate is likely to be higher than if you were putting in 10% or 15%. The reason is that lenders are happier if they’re taking on less risk, and may offer you a slightly better rate.

Some lenders offer incentives for First Time Buyers such as free valuations or possibly cashback when you move into your property. It very much varies depending on the appetite of lenders at the time – these schemes change all the time.

What are the pros and cons of fixed versus variable interest rate mortgages for First Time Buyers?

There are various mortgage schemes on the market, including fixed rates. People hopefully have heard of tracker rates, discounted and variable rates.

Starting with fixed rates, which do precisely what they say. Taking a fixed rate out gives you peace of mind. The rate stay the same for a set period of time – normally two, three, or potentially five years. You can get longer ones of 10 years plus, but these are rare.

No matter what happens with the UK base rate, interest rates or inflation, you know what you’re going to pay.

Other types of deals, such as trackers and discounts, are forms of variable rate which can go up or down. A tracker rate is generally based on the UK base rate, where if the base rate goes up, your next month’s payment is likely to go up. If the base rate goes down, it’s likely your monthly payment will go down.

Discount mortgages are not as popular as they once were, but they offer a discount off the lender’s standard variable rate. Again, if market conditions dictate that the standard variable rate goes up, your discounted payment each month will go up. Equally, if rates come down, your payment will come down.

Most First Time Buyers tend to opt for a fixed rate, to give them peace of mind – knowing exactly what they’ll pay for a set period of time.

What government schemes are available to help First Time Buyers?

If you’re looking to use any form of scheme, speak with your broker because things change and may have different end dates. Government appetites can make things happen.

At the moment in November 2024, there are various schemes to help First Time Buyers. There’s the First Home scheme, which is only available to First Time Buyers where you could buy a home for 30% to 50% less than its market value.

The home must be your only and main residence and can be bought as a new build from a developer. Equally, you could buy a secondhand property, as long as it came through the First Home scheme originally.

It’s only available in England. From an eligibility point of view, you must be 18 years or older, be a First Time Buyer and be able to get a mortgage for at least 50% of the price of the home. You must not earn more than £80,000 a year before tax. If you’re buying in London, there’s a slight increase on that to £90,000.

The next scheme, which most people will have heard of, is Lifetime ISAs (LISAs). These can be used to buy a first home or to save for later life. You’ve got to be aged 18 to 39 to open an account. You can save up to £4,000 a year and the government will give you an extra 25% bonus on your savings.

So if you save £4,000, that bonus takes it up to £5,000. Equally, if you’re buying with another First Time Buyer, you can join your LISAs together. You can both benefit from that 25% bonus.

Historically, there have been ‘Help to Buy’ ISAs and many First Time Buyers may have these. These were available until the end of November 2019. If you’ve got one, it still can be used as a deposit to buy a property, but there is an end date of 20 December, 2030, so it has to be used by then.

Are there any other schemes we should know about?

There are a couple of others. The Help to Buy Mortgage Guarantee Scheme is more of a benefit to lenders, but I mention it because it’s worthwhile knowing. This is a scheme whereby the government is effectively guaranteeing lenders compensation to offer 5% mortgages.

The guarantee protects the lender if things go wrong and a property is repossessed, to make sure they get their money back.

The last one is Shared Ownership – a very popular scheme. You can buy a share of a home from a landlord, which is usually a council or a housing association. On the percentage of the property you don’t buy, you pay rent. For the percentage that you do own, you pay on a mortgage.

You can typically buy shares of 25% upwards and pay rent on the remaining amount. If you find that you can later afford to buy more of the property, you can do ‘staircasing’ to buy more shares in the property, up to 100% of its value.

But as we said, government initiatives do change and indeed housing associations and their incentives change. So if you’re looking to use any of these schemes, speak to somebody like ourselves.