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First-time buyer mortgages

Mortgages for first-time buyers

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What is a first-time buyer mortgage?

A first-time buyer mortgage is a type of mortgage for those who have never owed a property before in the UK or abroad. 

What is a first-time buyer deposit?

The first step in buying a property is getting your deposit together. A deposit is an amount of money you’ve saved up to put towards buying your first home. Some mortgage providers might accept 5%, 10% or 20% of the property value. 

How does loan to value work?

If you’ve got your deposit together, you’re probably already looking at houses and thinking about how much you’ll need to borrow. When looking at the different mortgages on the market, you’ll see percentages such as 95%, 90%, 85% - this is the loan to value (LTV) ratio. LTV is always shown as a percentage and is the amount of the property value a lender is prepared to offer you.

For example, if the property you want to buy is worth £200,000, the lender could offer you a loan to value ratio of 80% - £160,000. You’d then put in a deposit of 20% - £40,000.

If you have a decent deposit to put towards the property’s value, you might get a more competitive interest rate for a first-time mortgage.

When lenders work out how much you can borrow, they’ll look at your credit history to see if you’re reliable when borrowing money.. They’ll also run some affordability checks to look at your:

  • Income
  • Outgoings
  • Debt
  • Childcare
  • General living costs
  • Credit history

The affordability checks help the lender understand whether you’ll be able to afford the mortgage repayments each month. Together with the information about your deposit, the lender is able to work out the maximum mortgage you can take out and the LTV of it. 

A breakdown of how loan to value is calculated

95% mortgages explained

95% mortgages are an attractive choice among first time buyers as you only need a 5% deposit. The need for a smaller deposit makes getting on the housing ladder a more affordable option for many.

Even with the lower deposit amount needed, you should make sure you’re able to make the repayments on the rest of the 95%. It’s also worthwhile looking at how long your overall mortgage term would be, as it could take longer to pay back compared to lower LTV mortgages.

If you’d like to find out more, our 95% mortgages guide may be able to help.

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Buying schemes for first-time buyers

Buying schemes for first-time buyers are in place to help you build a deposit up for your first home. Help to buy is a government-run initiative offering schemes to suit different budgets and lifestyles:

  • Shared ownership
  • Equity loan

Shared ownership allows you to buy a share of your home – between 25% and 75%. You pay rent on the remaining share. You only need to take out a first-time 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 scheme is 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.

What's a leasehold?

Leasehold is when you own the property, but not the land it’s built on.

Find out more on the difference between leasehold and freehold properties.

An equity loan involves the government lending 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.

Equity loan example

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.

An image showing an equity loan example

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
  • Right to buy
  • Lifetime ISA

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 be named on the mortgage, and either put their savings or their home up as security against it. 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 is simply a mortgage arrangement involving one or two other people. The upside of a joint mortgage is that you might not only be able to come up with a bigger deposit but you can often borrow more money. As you might have a higher deposit, you may have better choice of mortgages and access to more competitive interest rates. Like a regular mortgage, the lender will 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.

What's equity?

Equity is the value of the percentage you own in your property. In this instance, the equity can be 50%-50% or 60%-20%-20%, or however you want to split it. Each person named on the mortgage is responsible for paying for their part of the mortgage.

A right to buy scheme could be for you if you’re living in a council house. Through the scheme you may have the opportunity to buy it at a discounted price.

How do I know if I can buy my council house?

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’re planning to occupy 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.

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 until you’re 50. One of the main selling points of a Lifetime ISA is that the government gives you an annual 25% bonus on the amount saved. So, if you saved the maximum £4,000, you’d receive £1,000 from the government.

How do I use a a Lifetime ISA to buy my first house?

You’ll need to have had a Lifetime ISA open for at a least a year before using it to buy your property. The government is quite specific on what the house must be like to spend your ISA on:

  • 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 or more
  • 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.

If you decide to take money out of your ISA and not use it on a house, the government will take 20% of the total. For more details on the rules of ISA withdrawals and using it to buy a house see the GOV.uk website.

Types of mortgage rates for first-time buyers

There are different types of mortgages available to first-time buyers, but these mainly refer to different interest rates.

The main types of mortgage interest rates are:

  • Fixed rate
  • Standard variable rate mortgage
  • Tracker mortgages
  • Discount rate mortgages
  • Offset mortgages

A fixed rate mortgage locks in a set 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. 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 your monthly payments to rise or fall each month, which can make it difficult to budget as a first-time buyer. One upside of the SVR is that it’s flexible. 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 first-time mortgage was 1.5%, and the Bank of England base rate was 0.5%, your total interest rate 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 first-time mortgage, your lender then holds them for you. Your cash savings would then reduce or offset the amount of interest you pay.

Offset mortgage 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 monthly payments increase.

What our mortgages expert says

Being a first-time buyer doesn’t mean you have to settle for sub-standard mortgage rates. Just like car or home insurance, you can compare mortgages with us to find the deal that’s right for you. We try to make understanding your first mortgage as easy as possible by showing you the fees and rates of each.

Louise Thomas mortgage expert signature

Louise Thomas

Personal finance expert

You should think carefully before securing debt against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.
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