First time buyer mortgage advice – your questions answered

April 4, 2019 2:12 pm Published by

 

Buying your first home can be mind-boggling as you come across a whole new world of jargon, mortgage products and options. There are some questions I get asked frequently when providing first time buyer mortgage advice. I thought it’d be handy to cover them off here to help first time buyers feel more prepared when talking to their mortgage broker. Of course, I’ll be more than happy to answer these in person, just get in touch to arrange a call.

 

What’s the best mortgage for first time buyers?

There’s no easy answer to this one. It really depends on your circumstances, such as your deposit, repayment goals, your budget, future plans, to name a few. There are many mortgage options open to you: mainstream mortgages, guarantor mortgages, shared ownership and Help to Buy.

Mainstream Mortgage – You can get on the property ladder with a deposit of as little as 5%, and the lender provides the rest of the funds to buy your home. With a 5% deposit, the loan would be 95% – this percentage is known as the ‘loan-to-value’ or LTV. If your deposit is 10%, the LTV for mortgage provider is 90%. It’s worth knowing that the higher the LTV the riskier the loan is from the lender’s point of view. This means the interest rates and repayments are likely to be much higher if you have a 5% deposit than if you had 10% or more.

Guarantor mortgages – sometimes known as a ‘parent assisted mortgage’, allows your relatives or even close friends to help you buy your first home. This could be an option for you if you have a small or no deposit. However, it means your family member is linking their savings or house to your mortgage instead of a deposit, making their cash or assets inaccessible until you’re able to refinance on your own.

Help to Buy Shared Ownership Mortgage – a government scheme for low income buyers. It allows you to buy part of your new home (usually between 25% and 75%) and pay rent to the housing association on the part they own. You can buy another share in your home in the future, if you can afford to do so – this is called staircasing. This can be a good way to get on the ladder but you’ll only benefit from the growth in the value of the part you own. If you buy out a part or all of the housing association’s share, you’ll need to give them their share, plus any growth. You are restricted to newly built properties, or those offered by housing associations on a resale programme, and you need approval from the housing association.

Help to Buy Equity Loan – another government scheme that helps first time buyers who only have a 5% deposit buy a newly built property. The government lends up to 20% and the lender the remaining 75%. You don’t pay interest on the equity loan for the first five years. And, when you can afford it, you can repay the loan plus any growth on the government’s share. In London, the government lends up to 40%.

How much can I borrow to buy my first home?

The most generous lenders generally consider up to 5 times your income with a deposit of 10-15% or more. So, if you earn £45,000 a year you may be able to borrow £225,000. However, a smaller deposit typically means your loan is restricted to 4.5 – 4.75 times your income. Other factors come into play too. The loan needs to be affordable, so the maximum borrowing will vary from one lender to another and will also be dependent on your expenses, credit commitments, employment status, whether you have any adverse credit history, and many other factors. Your mortgage adviser will ask a number of questions relating to your income, outgoings and plans for the future to ensure they can accurately calculate your maximum borrowing with each lender.

What will my monthly repayments be on my first mortgage?

Your monthly repayments will very much depend on:

– How much you’re borrowing;
– How much you want to/can afford to pay off monthly;
– The term of your mortgage;
– When you plan to retire;
– Interest rate of your mortgage.

Your adviser should take you through the options best suited to your circumstances, preferences and priorities.

As an example, if you’ve borrowed £225,000 for 25 years, at a rate of 2.00%, your initial repayments will be around £960 per month. However, rates differ and this is very much indicative.

Can I buy my first property without a deposit?

There are some mortgage options that allow you to buy your first home with no or low deposit. Guarantor mortgage would be the no deposit option. While shared ownership and Help to Buy would be the low deposit options. It’s best to try to save for a deposit as your mortgage loan will be more affordable and you open yourself to less risk. There are many ways you can start saving. Here are some ideas:

– Setting a monthly budget and sticking to it;
– Consider Help to Buy ISAs and LISAs
– Moving back with your family for a bit;
– Sharing rented property with friends.

The ‘bank of mum and dad’ is now the 9th largest ‘mortgage lender’, according to Financial Times. Obviously, this isn’t an option for everyone but if it’s something your family could help with, it may be worth having a chat about the possibility of lending/gifting you money for the deposit. If they’re over 55 years old, they may be able to release cash from their home through equity release – you can read more about it here.

How big should my first time buyer deposit be?

Your deposit needs to be at least 5% of the amount you’d like to borrow. However, this will limit the number of potential lenders that can offer you a mortgage. The bigger your deposit, the more competitive mortgage terms are. Most lenders are now looking for a deposit of 15% so it’s worth exploring how to potentially raise more money for a deposit. If there are no other options, you may be able to use Help to Buy schemes.

Do first time buyers pay stamp duty land tax?

As a first time buyer you don’t currently pay stamp duty tax on the first £300,000 of the property value. You then pay 5% for anything over £300,000 up to £500,000. And if the property you’re buying costs more than £500,000 then standard stamp duty rates apply.

To illustrate this, if you buy your first home for £450,000 the stamp duty will be calculated as 5% of £150,000 – so you’ll pay £7,500 when your purchase goes through.

You can read more and calculate stamp duty here.

What happens when I meet a mortgage adviser to speak about buying my first home?

We take the time to listen to your needs and understand exactly what it is you’re hoping to achieve. We ask you questions about your earnings, outgoings, debts as well as aspirations and future plans. We help you work out your budget and plan ahead to make sure you can afford your mortgage repayments.

This initial meeting can take anything from one to two hours to make sure we’ve got all the information we need. We also explain the whole process to you and, at Mortgage Studio, we guide you through this process from taking your first steps right through to completing your purchase.

What happens after I see a mortgage adviser about my first time mortgage?

Your mortgage adviser will look for the best lender and product for you. At Mortgage Studio we’re independent and whole of the market, which means we’re not tied to any particular lender and will truly focus on finding the best option for you. We also have access to some lenders and products which are only available through brokers like Mortgage Studio, who are part of a network or members of a mortgage club – this can mean big savings.

After that:
– We get you an ‘agreement in principle’ allowing you to look for your first home, knowing what you can borrow.
– When your offer on your dream home is accepted, we’ll refresh our research to make sure you’re getting the best deal.
– We’ll finalise and submit your mortgage application.
– The lender will review your application, value your new home and formally offer you the mortgage.
– Once the solicitors on both sides finish the legal work, they exchange contracts and agree the date you get your keys – completion date.
– Completion date – you get your keys and move in!

Different advisers may have slightly different ways of dealing with their clients. At Mortgage Studio we look after you every step of the way and liaise with solicitors, estate agents, lenders and surveyors on your behalf. We act as a kind of project manager that helps you see one of the biggest ‘projects’ of your life from start to finish. We can even help you find a solicitor, sort your home insurance, and any life insurance you might want.

We hope you find this article useful. If you have any questions at all or would like to chat about your first mortgage, do get in touch.

Alternatively, view our first-time buyer mortgage page.

Your home may be repossessed if you do not keep up repayments on your mortgage

Categorised in: Information and advice

This post was written by Steve Moses