The first-time buyer's guide to getting a mortgage

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Those hoping to climb onto the property ladder may be in for a bit of a shock – mortgage options are vast and can at first seem a little overwhelming.

The key to getting the best deal on your mortgage – and that means the most sensible option, as well as the cheapest – is being armed with as much information as possible… so be prepared!

Having a mortgage secured in theory is also a huge factor as to whether or not your offer on a new home will be accepted.

We explain what new buyers need to know, and what schemes are on offer to help you buy. Help to Buy came to an end in Autumn 2022 but options such as shared ownership and mortgage guarantee schemes provide other routes to owning your own home.

Moving home: How first-time buyers can get the best deal on their mortgage and make sure they pick the right choice

Moving home: How first-time buyers can get the best deal on their mortgage and make sure they pick the right choice

SHARED OWNERSHIP: A WAY ON TO THE PROPERTY LADDER 

Shared ownership is a property ownership option that allows you to buy a share of a property if you cannot afford the deposit and/or mortgage payments on a home’s full market value.

Under the scheme you can buy between 25-75 per cent of a property outright and then pay rent on the remaining portion to a landlord, usually a housing association, but this is often discounted. Some homes allow you to own as little at 10 per cent. 

When buying through shared ownership you have to put down a deposit for the share that you own, as you would any other house purchase. The amount required for a deposit will vary from property to property, but the typical shared ownership deposit is 5 per cent or 10 per cent of the share you are purchasing.

For example, if you buying a 25 per cent share of a home with a full value of £300,000, the value of your share will be £75,000. If a 5 per cent deposit was required, you would need to put down a deposit of £3,750.

You can then build up the portion you own, usually in 10 per cent increments, and as you do you will pay less rent on the remainder as your share builds – this is called staircasing. Be aware that you will pay legal fees taking this approach.

It is also likely that you will pay ground rent and monthly service charges for the communal space, as the property is likely to be commercially owned.

However, stamp duty when you move into the property can generally be deferred until your share reaches 80 per cent.

What are your property options with shared ownership?

Shared ownership schemes are available on new build properties or existing homes via shared ownership resale schemes. In the case of the latter the home will have been previously lived in and owned via shared ownership and is being sold on under the same system.

You buy the previous owner’s share either outright or by securing a mortgage and then pay rent on the part you don’t own.

There are also options to buy a share in a home that meets your specific needs – for example, if you have a long-term disability and need a ground floor flat.

First steps: what you need to think about before applying for your first mortgage

Are your finances under control? And how much can you afford for a deposit?

To get the best deal you need to make sure your money is in order. The better your credit rating and bigger your deposit, the more options you will have when looking for a good mortgage deal.

Your first move should be to carry out a simple credit search on yourself. This will let you see what lenders will be looking at when they consider you. 

Most lenders go through three main credit reference agencies for information on your financial past – Experian, Equifax and Transunion.

 Rules ushered in since 2014 also mean that lenders will have to carry out stricter checks on borrowers and carry more responsibility for their actions.

The Mortgage Market Review is the watchdog the Financial Conduct Authority’s attempt to clean up the home loans market after the easy credit boom of the 2000s that played its part in the financial crisis.

Ultimately, MMR means two things.

The first is the official shift from old-fashioned salary multiple lending to affordability calculations, but in reality many lenders have been pushing this since the financial crisis.

This means weighing up your essential spending, alongside your income and asking questions about your outgoings. A mortgage lender will look at the gap between what you have to spend each month and what you have coming in – and then do its sums from that.

So expect to be quizzed on habitual spending on things like feeding the family, childcare, a car loan, your energy bills and even a mobile phone or gym contract. Mortgage lenders won’t just have to assess your mortgage’s affordability now, they will also need to take a stab at working out what will happen to you in the future and stress test for theoretical interest rate rises.

It will also not be enough simply to tell the lender or adviser about these things, you will need to provide documentary evidence of regular outgoings and what they set you back.

The second big change involves the fact that almost all mortgage sales must now be advised, so to get one will require a conversation with either a qualified mortgage broker’s adviser, or if you go direct the bank or building society’s own financial advice team.

EXPERT ADVICE 

London and Country Mortgages’ David Hollingworth’s tips for first-time buyers on how to get the best mortgage rates.

What are the main traps first time buyers need to be aware of when getting a mortgage?

The big hurdle for first time buyers remains the deposit. Lenders now require bigger deposits in most cases and so, although there are deals for 95 per cent of the purchase price, a first time buyer will typically need at least 10 per cent.

The interest rates on offer are higher for those with smaller deposits and lenders are often offering their keenest rates to those with at least 40 per cent to put down.

The golden rule is therefore the bigger the deposit the better, as it will open up a wider choice and better rates.

Every 5 per cent deposit will make a difference which is worth bearing in mind especially for those on the cusp of the lower band – if they can push a bit further on the deposit size it could qualify them for a better mortgage rate.

For example if they could squeeze the mortgage from 86 per cent of the purchase price to 85 per cent it will open up a wider choice and better rates.

Is there anything extra people can do to bag themselves a better deal?

Getting the right mortgage is about more than just seeking out the lowest mortgage rate and it’s important that first time buyers shop around.  

Firstly, some of the lowest rates can carry a big arrangement fee (it can be a couple of thousand pounds) whereas other deals can carry smaller or no fee or offer help with other costs like valuation fees or provide a cashback.

All these factors need to be factored in to arrive at the best deal for the borrowers requirements, focusing on overall value over the deal period.

As lenders have toughened their criteria in recent years it is as much about knowing which lender will do what as it is about the rate and fee package. A first time buyer trawling the high street could find that they like the look of a deal only to find further down the line that the lender will not lend for one reason or another.  

Even an agreement in principle (AIP) doesn’t guarantee that the lender will lend. They can be useful to reassure an estate agent that you are a buyer able to proceed but getting an AIP from lots of lenders will mean a footprint on your credit file each time.

Experts say the application conversation will now take two to three hours, compared to about 45 minutes previously.

So before you apply for a mortgage get all your finances in order, all the paperwork you need together and have details and figures on things like earnings and outgoings to hand.

The cost of buying

Remember, that along with getting a mortgage comes the actual cost of buying. Fees are steep, often running into the thousands, and can cause quite a dent to your down payment, impacting how much you can afford.

You will also need to find the money for stamp duty. 

Home buyers were celebrating after former Chancellor Kwasi Kwarteng took an axe to stamp duty in his ill-fated mini-Budget in September.

Kwarteng had cut raised the house price threshold under which buyers don’t have to pay stamp duty land tax from £125,000 to £250,000.

It meant home movers would save up to £2,500, and 200,000 more homebuyers every year would pay no stamp duty at all.

But Jeremy Hunt announced that this cut was only temporary and will end on 31 March 2025. The increased tax relief will be phased out after that date.

Find out how much stamp duty you would pay under the current system below.

> Stamp duty calculator: work out how much you will have to pay

Check out all the buying and moving costs you need to budget for before applying for a mortgage with our homebuyer’s checklist here.

If you discover that you would be overstretching yourself by buying a home, as frustrating as it may seem, it may be better to wait a few months or years while you sort out your finances before taking the leap.

How big is your deposit?

The single biggest factor when it comes to what mortgage rate you can get nowadays is the size of your deposit – how big a percentage of the property’s value you can put down.

To get the full choice of deals raising a decent deposit is still vital. The benchmark figure is 25 per cent, if you have this then you’ll be getting close to the best rates, although for the absolute cheapest deal you’re still likely to need 40 per cent.

However, it is now far easier to get a home loan with a 15 per cent, 10 per cent or even 5 per cent deposit.

Bear in mind though that the jump in rates from 5 per cent to 25 per cent deposit mortgages is substantial, so raising that extra cash can really pay off.

Use our savings calculator if you are saving for a deposit, to see how your money will build up. Plus, for the latest savings news and advice see our saving and banking section.

Extra costs worth thinking about

Remember owning a home carries costs that are not incurred when renting. You will need to budget for your property’s upkeep and maintenance and fork out for other essentials, such as buildings insurance.

When it comes to home insurance, just taking out your mortgage lender’s insurance without shopping around could mean you are paying out more than you need to. Read our guide to getting cheaper home insurance and compare prices with our finder.

Once you’ve sorted your finances, you are ready to move on to the next step…

How to get the right mortgage deal for you

There are hundreds, if not thousands, of options out there.

So, as well as doing your own research, this is certainly an occasion to search out expert opinion.

First, read This is Money’s regularly updated analysis What next for mortgage rates? This outlines the current state of the market and highlights the current best buy deals.

You can also check the top mortgage deals on offer currently in our best buy mortgage tables.

You should now be armed with some knowledge on what is on offer. 

You should also talk to a mortgage broker.

There is no obligation to go through with their recommendation and so they may not end up actually arranging the mortgage for you, but, if you choose a good one one, they should be able to explain your options and help you to find the best deal. Go for one who offers advice from the whole market.

This is Money has a carefully chosen partnership with mortgage broker London and Country, we have picked them because they offer a good service, with no upfront fees. Find about more about London & Country’s fee free mortgage advice here

How much can I afford? 

Mortgages are now assessed on affordability criteria rather than the old-style income multiple, ie three times your salary. This involves a lender looking at your income and all of your essential outgoings and deciding whether you can afford repayments. 

Different lenders use different methods and the amount you can borrow will depend on a lender’s affordability criteria, but for someone with fairly standard essential outgoings will typically be in the region of around four times your annual income. 

You also need to take responsibility for not overstretching yourself – don’t take on a bigger mortgage than you can afford. Use our affordability calculator to do the sums.

How you repay your mortgage

Capital and interest: Otherwise known as a repayment mortgage.

You make a payment to the mortgage company each month which is made up of capital and interest, keep paying this amount for the life of the mortgage and by its end your debt will be cleared and you own the property outright.

The sums to calculate repayments assume you remain with that mortgage for the entire term. Of course, most people change mortgages or move house – at this point your balance and repayments will be recalculated.

Interest only: This option is increasingly difficult to come by – particularly for any first-time buyers applying for a mortgage.

Because an interest-only mortgage is just that – you only pay interest rather than capital repayments – the practice is often now frowned upon by lenders because at the end of the mortgage term you still owe them all the money and this is considered more risky.

If you do pick this option, it is up to you to make sure you have the money at the end of the term to pay off the mortgage.

When interest-only initially evolved most people invested in some sort of savings plan to build up the pot to pay it off, but as the mortgage boom gripped this practice slid, leading to widespread problems. If you don’t have the money to pay off the mortgage at the end of the term, you will have to sell your home to clear the debt.

Most lenders will want to see evidence at the application stage of how you are putting money away to eventually pay off the mortgage.

Different types of mortgages

When it comes to choosing a mortgage your choice is essentially between a variable rate – one that can change – and a fixed rate, which will not change for a certain period of time.

EARLY REPAYMENT CHARGES

Lenders will usually lock you in for the initial deal period of a tracker or fixed rate mortgage with early repayment charges.

With ‘no redemption’ mortgages, you will be able to repay the loan at any time without forking out for a redemption fee. There will probably still be sealing and legal fees – usually around £100 to £300.

Avoid mortgages that have repayment charges beyond their initial deal period. Selecting a ‘no overhang’ option means you will be allowed to repay the loan without a penalty once an initial scheme period has ended – which could include a better rate.

Fortunately, most mortgages nowadays do not lock people in beyond an initial fixed or tracker period, but do watch out for this trap

Tracker and variable rates

There are typically two types of variable rate mortgage: trackers and discount / standard variable rates.

Tracker mortgages mirror the movements of the base rate, the benchmark interest rate set by the Bank Of England. They will rise or fall in line with changes in base rate, usually at a level above it.

Standard variable rates (SVRs) are set by lenders and each lender has its own one. These are usually influenced by the base rate but can change independently of it and vary quite substantially. Banks and building societies used to widely offer mortgages set at their SVR but these are much less common nowadays, however, borrowers will typically move to an SVR once an initial deal period on a mortgage ends. Once on it usually there are no major penalties for paying up early.

A discount rate mortgage will follow moves in a lender’s SVR. Unlike a tracker it can therefore move independently of base rate.

Fixed rates

With a fixed rate your interest rate and thus payments will be set for a period of time. This could be for two, three years, or five, or even up to 10 years. The rate you pay will not change during this time, but will revert back to the lenders standard variable rate after it finishes. This is often a good time to look for a better deal.

Should you fix or track? How to choose your mortgage 

How long does it take to get the mortgage?

Depending on your lender and the type of mortgage you are getting, you should expect the mortgage offer within two to four weeks, provided you have supplied all the relevant information.

When you apply for a mortgage, you will receive two documents – ‘Keyfacts about our mortgage services’ and ‘Keyfacts about this mortgage’.

These will not look like the most exciting things you have ever seen in your life, but it is vital that you read them. A mortgage is probably the biggest financial commitment you will ever make, so spend some time checking the details and the small print.

READ THE NEXT MORTGAGE GUIDE 

 

 

 

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