What is a first-time buyer deposit?
The first step when you’re buying a property is getting your deposit together. This is an amount of money you’ve saved up to put towards buying your home. Some mortgage providers might accept around 10% of the property value.
But this is changing due to the current climate, and some mortgage providers like more than 10% - sometimes up to 20%. Usually the higher your deposit, the lower your monthly repayments will be.
Applying for a first time buyer mortgage
When you have your deposit together, you can start looking into how much you’ll be able to borrow. Lenders will take a few things into account – for example, your income, outgoings, debt, childcare and general living costs. They’ll also look at your credit history to see if you’re reliable when borrowing money.
When they calculate your mortgage, they’ll use an affordability checker to see how much you can borrow. You’ll hear the term loan to value – or LTV – ratio used a lot. This is the maximum amount of the property value a lender is prepared to offer you. It’s expressed as a percentage.
For example, if your property was worth £200,000, the lender could offer you a loan to value ratio of 80%: £180,000. You’d then put in a deposit of 20%: £20,000. Then there’s the interest rate to factor in. This is a percentage of what you borrow, it’s almost like a fee to hire someone else’s money.
If you have a decent deposit, you might get a more competitive interest rate.
Worried that your low credit score might affect your mortgage application? Our bad credit mortgages page might be able to help.
Buying schemes for first time buyers
Help to buy
Help to buy is a government-run initiative to help first-time buyers get on the property ladder. They have a few schemes to suit different budgets and lifestyles.
Here are their current schemes:
- Shared ownership
- Equity loan
A Shared ownership is where you buy a share of your home – between 25% and 75%. You pay rent on the remaining share. You only need to take out a mortgage on the share you want to buy, making it more likely for the mortgage to be approved. You can buy bigger shares on the property later if you can afford to. The schemes are available on new-build properties, or on existing homes that are being sold through a housing association.
One thing to bear in mind is that shared ownership schemes are all leasehold until you own 100% of the property. There are also rules and regulations with shared ownership, for example, you don’t have the freedom to rent it out if you want to leave.
An Equity loan is a scheme where the government will lend you up to 20% – or 40% if you’re in London – towards a new-build home. You can put a deposit down of 5%, and then get a mortgage on the remaining 75% of the property.
Here’s an example of how the scheme would work:
Let’s use the £200,000 house as an example.
Your 5% loan would equal £10,000. The government would put in another £40,000.
You’d then be able to borrow £150,000 from your mortgage lender.
For the first 5 years you won’t be charged interest on the government loan. So if you pay the loan off within 5 years you won’t have to pay any interest. If you don’t pay the loan off in the first 5 years, you will pay interest on the loan as well as on the mortgage you take out from the provider.
Alternative schemes for first time buyers
There are a number of alternative schemes available if you're a first time buyer:
- Guarantor mortgages
- Joint mortgages
- Life time ISA
- Right to buy
A Guarantor mortgage is where a parent or close family member steps in if you’re not able to pay your mortgage. Your guarantor will either put their savings or their home up as security against the mortgage. The lender would then take the value from this if you missed a payment.
Some lenders offer a mortgage of up to 100% if you offer to use your parents’ house as collateral. Make sure you get legal advice before you do this, so you and your guarantor are kept in the loop.
A Joint mortgage means you can get a mortgage with one or two other people. The upside of a joint mortgage is that you can often borrow more money. As you’ll have a higher deposit, you may have better choice of mortgages and access to competitive interest rates too. Like a regular mortgage, they’ll also check each person’s income, debt and general finances to see what you can borrow.
Each person can choose their share of the property, known as equity. So this can be 50%-50% or 60%-20%-20%, however you want to split it. Each person named on the mortgage is responsible for paying for their part of the mortgage.
A Lifetime ISA can be used for buying a house or for building up savings to use later in life. Savings-wise you can put in a maximum of £4,000 a year in until you’re 50. Whatever you save, you’ll receive 25% of it through a government bonus. So if you saved the maximum £4,000, you’d receive £1,000 from the government.
The government is quite specific on what you can spend your ISA on. You can take money out of your ISA if:
- You’re buying a house
- You’re aged over 60
- You’re terminally ill with less than 12 months to live.
The government will take 20% of the ISA total if you withdraw money for any other reason.
There are some rules to using it to buy a house too:
- The house must cost £450,000 or less
- You can only use the ISA to buy a house if you’ve had it for 12 months
- You use a mortgage to buy the house, rather than a cash payment.
If you’re buying with someone else, they can use their lifetime ISA and bonus to help fund the property too. Visit GOV.UK for more details on the Lifetime ISA.
A Right to buy scheme could be for you if you’ve lived in a council house, you may have the opportunity to buy it at a discounted price.
You should be able to apply to buy your council house if:
- It’s your only or main home
- The house is self-contained
- You’re a secure tenant – which means you’ll be occupying the house for the rest of your life
- You have a public-sector landlord, for example a council, housing association or NHS trust. And you’ve had this landlord for three years - this doesn’t have to be three years in a row.
- You can make joint applications too. Either with someone who shares your tenancy or with up to 3 family members who’ve lived with you for the past 12 months.
For more information on the right to buy scheme, visit the GOV.UK website.
Types of mortgage rates for first time buyers
There are different types of mortgages, but these mainly refer to different interest rates.
These are the main types of mortgage interest rates:
- Fixed rate
- Standard variable rate mortgage
- Tracker mortgages
- Discount rate mortgages
- Offset mortgages
A Fixed rate mortgage locks in a certain interest rate for around three to five years. You’ll usually be offered one of these when you first take out your mortgage. You’ll remain on this fixed rate even if the interest rate drops, which is a potential downside.
A Standard variable rate mortgage or SVR will usually start when your fixed mortgage rate ends. Lenders can raise or lower the SVR at any time. It’s sometimes dictated by the Bank of England’s base rate. This is the rate that high street banks use to borrow money. If this goes up, lenders will often raise their SVR rates. As the name suggests, the amount of interest you’ll pay could vary from month to month.
If you’re on this type of mortgage, you should be prepared for the monthly payments to rise or fall each month. Which can make it difficult to budget. One upside of the SVR is that it’s flexible. So you won’t be charged if you want to pay off more of your mortgage or switch to another provider.
A Tracker mortgage will depend on the Bank of England’s base rate. It’s usually an interest rate percentage with the Bank of England’s base rate added. For example, if the interest on your mortgage was 1.5%, and the Bank of England base rate was 0.5%, your total interest payment would be 2%. The Bank of England’s base rate can change, so the overall amount of interest you pay could go up or down.
A Discount rate mortgage is where lenders set their mortgage below their Standard Variable Rate. For example, if their SVR was 5%, then you could get a discount rate mortgage for 4%. But as we know, the SVR can rise or fall, so your discounted mortgage might do this too.
An Offset mortgage could be a good option for you if you have a good chunk of savings. Here, you bring your savings in with your mortgage. Your lender would hold them for you. Your cash savings would then reduce or offset the amount of interest you pay.
For example: let’s say you bought a house worth £200,000 with 3% interest and had savings of £30,000.
By offsetting the mortgage with the £30,000, you would only be paying interest on £170,000.
If you didn’t offset the mortgage, the total interest would be £6,000. By offsetting it with your savings you would only pay £5,100 in interest.
As with any mortgage the interest can rise and fall. You may not have as much freedom with your savings either – taking money from your account could mean that your interest payments increase.
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