First-time Buyer Mortgages – July 2022

Getting a mortgage on your first home is one of life’s key milestones – not to mention a major financial commitment. Here’s how to get to grips with the basics before applying, and get an idea of the kind of mortgage deals available.

How much deposit will you need?

You’ll need a deposit of at least 5% of the property’s value to get a mortgage, depending on what deals are available at the time. Look out for the government’s mortgage guarantee scheme which launched in April 2021. It’s designed to encourage lenders to offer mortgages to borrowers with only a 5% deposit. Major lenders including HSBC, Barclays, Santander, Lloyds and NatWest have signed up.

That said, generally, the bigger your deposit, the better your chances of being accepted for a mortgage and the cheaper the interest rate. So it’s worth saving as much as you possibly can.

Or you could boost your deposit in other ways, such as by using a government scheme – more on this below – or getting help from parents if that’s an option.

Mortgage rates become cheaper at key incremental thresholds of deposit value. For example, having 10% of the property value will unlock better rates than just 5%. Having 20% will mean you can access better rates than 10% and so on – with the very cheapest mortgage rates available to borrowers with a 40% deposit or more.

The amount of deposit you put down is referred to as a ‘loan-to-value’ (LTV) and it is expressed as a percentage. For example, if you want to borrow £180,000 against a property valued at £200,000, this amounts to an LTV of 90% (or a 10% deposit).

Remember, you’ll need to factor in the other costs of buying too, such as mortgage arrangement fees, solicitor’s fees, surveys, property searches, and stamp duty.

What mortgage deals are available?

Below is a live table of the kinds of mortgage deals that are on the market right now. Tailor the results by inputting details of the property value you are looking at – and how much of that sum you will need to borrow from the lender.

You can then select what kind of mortgage you want (say, a fix or tracker) and over how long. And if you’re looking for shared ownership deals, check that box to see mortgages that will support the scheme.

How does a first-time buyer mortgage work?

You can usually borrow around four to four-and-a half-times your income as a mortgage amount. That’s if the mortgage is in your name only. If you’re buying with a partner, family member or friend, you can typically borrow up to three times your joint income.

But this is only a guide. The actual amount you can borrow as a first-time buyer will depend on the lender’s own ‘affordability assessment’. This looks at what you spend, as well as what you earn, to assess how much you can realistically afford to pay towards a mortgage each month.

It’s a rigorous test which will consider a whole raft of expenses including other outstanding debts, car costs, childcare fees, household bills, entertainment expenses, right down to grocery bills.

The lender will then apply an ‘assumed’ interest rate into in its affordability calculations of around 6% to 7%. This will almost certainly be higher than the advertised mortgage rate because it factors in the possibility of interest rates going up.

It will also look at the term of your mortgage – between 25 and 30 years is standard but shorter and longer terms are possible depending on your age and monthly affordability.

Your credit history will also be assessed to see how you’ve managed any borrowing in the past. It is possible to be turned down for a mortgage on the basis of a bad or even just under-par credit score, so this is something you should pay lots of attention to in the years and months leading up to your first mortgage application.

You can apply for a copy of your credit report for free at a credit reference agency, such as Experian, and take steps to improve it if need be.

When should you apply for a mortgage?

It’s a good idea to start the process of applying for a mortgage – perhaps through an independent fee-free broker – before you begin your property search. This isn’t essential but getting a benchmark figure from the outset can be very useful – particularly if you’re new to the property buying process.

You can then ask the lender for a mortgage agreement in principle (AIP). This is effectively a statement saying it will lend you a given amount and is typically valid for between 30 and 90 days.

But, crucially, an AIP doesn’t guarantee you’ll get the mortgage – it just gives you an idea of what you might be offered and shows prospective sellers that you’re serious and not a time-waster.

Generally, mortgage lenders will carry out a soft credit check before giving you an AIP, which means your credit score won’t be affected. But it’s worth checking first as full credit check will show up on your credit report.

What government help is out there?

If you find the sums just aren’t adding up, there’s plenty of help available to first-time buyers. Here are some of the options:

Help to Buy equity scheme: First-time buyers with a deposit of at least 5% receive a government equity loan of up to 20% of the cost of a new-build home (40% in London). The loan is interest-free for five years. The maximum value of the home varies depending on the location. In London it’s £600,000 for example, while in the North West it’s £224,400.

Lifetime ISA: These accounts offer a government bonus of £1 for every £4 you save, which can be put towards buying your first home. If you save the maximum £4,000 a year, you’d get a bonus of £1,000, giving you a total of £5,000.

Guarantor mortgage: You can ask a parent or family member to act as a guarantor which means they agree to cover any missed mortgage repayments if you fail to make them, or you’re unable to afford them over the term of the mortgage.

Shared ownership: You buy just a share of the property, at between 25% and 75%, from a local housing association. You pay a reduced rent on the portion of the property that doesn’t belong to you – and aim to buy more shares of the home as and when you can afford to. It’s a process known as staircasing.

What type of mortgages are available?

There are several different types of mortgages on offer to first-time buyers – here’s a quick look at the main contenders:

Fixed-rate: Offers a set interest rate over a period of usually two, three, or five years. If you’re a first-time buyer, this type of mortgage may appeal as it provides the security of fixed monthly repayments that won’t change over the agreed term. Mortgages offered under the mortgage guarantee scheme at 95% must all be available as five-year fixed rate deals. But there are also two- and three-year fixed rates on offer, too.

Tracker: Your rate ‘tracks’ the Bank of England base rate (interest rates) at a certain percentage above. So, your monthly payments vary depending on where the base rate moves. Trackers usually last for between two and five years, but they can run for the life of your mortgage, unless you choose to switch to another deal.

Offset mortgage: These link your savings to your mortgage to ‘offset’ or reduce the overall amount you pay interest on. You won’t earn interest on your savings, but you won’t pay interest on that portion of your mortgage debt, either.

However, as a first-time buyer, you are likely to want to channel all of your savings into an initial deposit. Family offsets are available though, where the savings of one or more family members can be used to offset the debt of your mortgage.