First Time Buyer Mortgage Explained
A mortgage is a type of loan that you use specifically to buy a property. You will likely borrow the money from a bank or building society and make monthly repayments at a rate that is based on your financial circumstances. The loan is secured meaning that if you are unable to keep up with repayments, your property can be repossessed by the bank and resold.
To be eligible for a first time buyer mortgage, you must be a UK resident and be looking to purchase a property in the UK. You must be at least 18 years of age and your mortgage period must end by the time you are 75 years old.
To be accepted for a mortgage in the first place is a priority. The first thing you will to do as first buyers is to speak to a mortgage advisor or bank to get a decision in principle. Mortgage lenders want to approve applicants that have a good credit history and employment. This involves showing proof of your identity, credit rating, salary and financial commitments. You are usually asked to produce copies of your passport, water bill, bank statement and pay-slips over the last 3 months.
With this information, your mortgage advisor can let you know whether you are eligible for a first time mortgage, and how much you can borrow towards your mortgage if you were to go ahead. This is known as your decision in principle.
First Time Buyer Guide
For first time buyers, knowing what property value you can afford is always very important. This is based largely on how much deposit you can currently contribute towards the property. Fortunately, with impressive first time mortgage buyer schemes from the Government, you can put down as little as 5% or 10% deposit on the property. This means that the Government or the bank can give you the rest of the loan towards your property and this is known as the Loan to Value (LTV).
To give an example, if the property you want costs £100,000, you can put down a deposit of 10% which is £10,000. If you can get Loan to Value of 90%, this means that the Government or bank will be willing to lend the 90% outstanding to purchase your property.
However, the higher Loan to Value you get, the more you obviously owe to the bank so your monthly rates will be higher to pay off your mortgage.
Use a First Time Buyer Mortgage Calculator to show how much you can borrow
Using our very own First Time Buyer’s Calculator, you can find out how much you can borrow and we will recommend some competitive quotes from mortgage companies in the UK. We will ask a few simple questions including:
- The value of your desired property
- The amount you can deposit
- Employment status
- Credit history
How much does a First Time Buyers Mortgage cost?
The monthly interest rate you pay for a first time buyers mortgage will typically range from 2.5% to 5% per month. However, the overall cost of your mortgage will depend on a number of factors including:
Your personal circumstances: Your current credit rating will impact how much you pay. Your credit rating provides insight into how well your have kept up with other payments for loans and credit cards and gives lenders an indication of your debt to income ration.
For those with a bad credit history, they may be charged higher rates to cover the risk of default. Good credit histories are seen as a low risk of default and therefore they tend to pay lower premiums.
Your income and salary also contributes to the rate you are given. Those individuals with long term employment and show good signs of income growth are more likely to be accepted for mortgages and receive best rates.
Mortgage Term: A mortgage can last for up to 40 years but the longer you the mortgage term, the more you end up paying as the interest accumulates over time. The average mortgage term is around 25 years but having a mortgage period of only 5 or 10 years will mean higher monthly payments but less overall.
Deposit and Loans to Value: How much you can deposit towards your property will make a huge impact on the monthly costs moving forward. The higher your deposit, the less Loan to Value you require, so the less you ultimately have to repay to the mortgage provider.
First time buyers have the opportunity to only put down 5% or 10% deposit to get a mortgage. Typical mortgages have a benchmark of around 25% deposit to get a good deal and to get the cheapest first time buyer mortgage rates, you should look to put down as much as 40% deposit.
Type of Mortgage: There are several repayment options when it comes to paying back your mortgage loan.
A standard repayment mortgage splits the costs between interest (loan charges) and the capital (value of the property). You can choose to pay an interest only mortgage where you only pay the interest every month and then you have to pay the capital at the end of the mortgage term in one big sum. This is very popular for first time buyers who want to pay as little as possible whilst they are young and repay in full when they have saved more over time.
A fixed mortgage rate means that the interest rate you pay each month is fixed for your entire mortgage term. This is helpful if you like to budget and want to plan exactly how much you pay every month for the foreseeable future.
A tracker mortgage changes the rate based on Bank of England base rate. So the interest you pay will go up or down.
Don’t worry about being tied down to one mortgage agreement for the rest of your life. If you want to move property, you can do so, this is called ‘porting’ – because mortgages are transferable and you can always change your repayment type.
Early Repayments: You always have the option to repay your mortgage loan early. Since the longer your mortgage is open, the more interest you pay over time, repaying early allows you to save money. However, you must check the terms and conditions of your mortgage agreement as early payment penalties may apply.
How to get the best First Time Mortgage Rates
Using an independent broker like Quiddi Compare, we are able to find you the best first buyer mortgage deals available. By working with leading mortgage companies, we have access to a number of top deals and rates all in one place. One of the bonuses of applying through Quiddi Compare is that we can help you find introductory periods for your mortgage so that you pay a lower rate for the first few years. Plus, some of the mortgages we compare offer added incentives such as nectar points and cash back.
It is completely free to compare mortgages for first time buyers with Quiddi as we only take a commission from the mortgage companies if your application is successful. So you can rest assured that you if apply for a first time buyer mortgage through our site, you will not be charged and your information will not be sent to any other companies without your permission.
Once you apply, it can take two to four weeks to get an offer.
First Time Buyer Scheme
Fortunately, there are a lot of first time buyer schemes to help young people in the UK get their first mortgage.
The Shared Ownership Scheme means that you part own the property from the Housing Association. You buy shares into the property with a minimum of a 10% deposit and over time you pay rent and you can buy more and more shares, up to 100% if you wish.
Help to Buy
The Help to Buy scheme is a very popular scheme in the UK. First time buyers can purchase a property of up to £600,000 with a minimum 5% deposit. The loan is interest free for 20% of the property’s value for 5 years and then is charged at a very low rate of 1.75% and increases year by year. When the house is later resold, the home owner is required to repay the 20% that was interest free. Another type of Help to Buy loan allows the Government to guarantee any losses on the property’s value.
An Equity Loan means that you need to put down a minimum of a 5% deposit and the Government can contribute another 20% towards your property. You will then need a Loan to Value of 75% from your bank. By having equity in your property, the Government is allowed to receive their investment back and also profit from future sale of the property. See equity loan example.
Additional costs involved in a mortgage
In addition to the deposit and monthly interest rate, other important costs to be aware of include the legal fees involved in creating and approving the mortgage loan agreement. If you are moving into a new home, you will also require home and contents insurance to cover any damaged fittings, structures or items in the house. Above all, the most important additional cost is Stamp Duty which can range from 2% to 12% of the property’s value.
The advertised rate is 1.95%. However this rate will not be available to everyone and will depend on your individual circumstances and the loan to value ratio of your mortgage.
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE OR ANY OTHER DEBT SECURED ON IT.
Some partners may charge you a fee for helping you find a Mortgage or Secured Loan or other services they provide. MAKE SURE you check with the company before agreeing to any service if they charge you a fee and what the terms are.
Warning: Late repayment can cause you serious money problems. For help, go to moneyadviceservice.org.uk QuiddiCompare does not charge a fee and does not provide any financial advice relating to mortgages. However we may on occasion receive commissions from IFA’s and mortgage providers, brokers and intermediaries for introducing you to them.
The content of this site is meant to be informational, and it should not be considered financial advice. – See more at: quiddicompare.co.uk/mortgages