The average age of first time buyers in the UK is 34, and while this would deem most people as responsible, mature adults, mortgages can still be very confusing. With different types of interest, different types of mortgages and different criteria to meet, finding a mortgage as a first time buyer can be overwhelming. It can also be incredibly daunting given the sheer amount of money involved in buying a house – for most people, their deposit is their life's savings.
We have created a brief guide to first time buyer mortgages to help you get an understanding of what might be involved, without inundating you with information at this stage. We will cover:
There are two main types of mortgages: fixed-rate and variable mortgages. Less commonly, you’ve probably also heard of tracker mortgages. The difference between these mortgages is how the interest is calculated.
Aside from these three, there are other variations of mortgages, but these will be the terms you’ll see most commonly.
Mortgages are essentially just a loan, so like all creditors, banks will want to make sure you are a low credit risk. One of the way banks can check this is your credit history – this is why your credit file is so important. As a first time buyer, you won’t have any previous mortgage payments to demonstrate your creditworthiness, which can be a disadvantage. However, banks will also want to get first time buyers on board, as lots of people don’t change their mortgage provider throughout their lifetime. This means once you have a mortgage with a bank, you’ll likely stay with that bank (even though you should always check the market and other mortgages available for the best deal!).
Of course, banks don’t just look at your previous mortgage repayments: there are several factors that influence your credit file. Some as simple as being registered on the electoral register, and some more time-consuming like ensuring all of your bills have been paid on time every month for a few years.
Overall, first time buyer mortgages are the same as any other mortgage, but you might be subject to a slightly different criteria, and although it’s not official, mortgages appear to be capped at around 4.5x your income. For example, if you earned £30,000 per year, you’d probably be able to borrow £135,000 with a typical 10% deposit.
Unfortunately, there’s not a set checklist for each bank that you have to meet and then you will be granted a mortgage. However, as a loan product, there are some general factors you should be considering in the year or two years before you’re looking to apply – ideally, the sooner you start to prepare for a mortgage, the better.
Banks will conduct extensive creditworthiness checks when assessing your mortgage application because there is a lot of money involved. They have to be sure there is little to no risk that you will fail to make your mortgage repayments, and they also have to make sure that the repayments are affordable and won’t land you in serious debt.
A record will remain on your credit file for six years, and even a default or county court judgement (CCJ) from half a decade ago can affect your mortgage application. Whatever loans or services you use, ensure all of your repayments are made on time so you avoid any missed payment markers. Also consider the type of credit you use regularly and whether you could reduce the balance on a credit card, for example. If you have a running balance of £500, try to pay a little more each month to repay the balance entirely. You don’t need to stop using credit altogether, but only use it when you need to and try to repay the balance in full as soon as possible.
It’s common knowledge that you generally need a 10% deposit to buy a house. There are 95% loan to value mortgages (this means, you borrow 95% of the value of the house), however these are often advised as avoidable if possible. Despite the fact that 10% is the suggested amount to save prior to buying a house, the more you can save towards your deposit, the more you’ll likely be able to borrow. Each bank will have different loan to value bands, and if you can save 15% or more as a deposit, you’ll probably jump into the next band and usually you can borrow a little bit more or maybe even get a better rate.
As a first time buyer, it can be tricky working out how much you can borrow and what size deposit you’ll need. A good place to start is with mortgage calculators. Generally, there are two mortgage calculators you should check:
The first calculator will typically ask for your income, any bonuses you receive and any current financial commitments such as credit cards, car finance etc. You don’t need to enter your priority bills or disposable expenditure. You will also have to enter your deposit – depending on which stage you’re at in your house-buying journey, you can either enter the current amount you are planning to save or try a few different values to see how it will affect the amount you can borrow. It varies between banks, but the calculator will tell you how much you could borrow based on your deposit and your income. It’s important to note that this is not the same as an Agreement in Principle and the figures are based purely on your income and deposit, rather than on you as a borrower.
Mortgage repayment calculators will allow you to work out how much your monthly repayments will be depending on how much you borrow. They generally ask for an interest rate, and first time buyer mortgage interest rates can be anywhere between 2.5% and 5% at the moment. Entering different interest rates can also help you to see how even a small difference in an interest rate can affect repayment amounts when borrowing in the hundreds of thousands. You can also change the mortgage term and first time buyers can now get mortgages up to 40 years which helps bring down the monthly costs.
While these mortgage calculators are not exact representations of your mortgage, they can help you understand how much you need to save, what kind of salary you might need and what your monthly financial commitments might look like.
Before securing a mortgage, you’ll need an agreement in principle. An agreement in principle is important when viewing houses because it demonstrates to the estate agent that you’re serious about buying a house. Plus, as a first time buyer, you’re also chain free which many sellers prefer as exchanging tends to be quicker. So, the main do before applying for a mortgage is to get an agreement in principle.
However, there are some smaller steps you can take in the years and months running up to purchasing your first home:
Getting a mortgage is a lifetime achievement for many people but as house prices increase and affordable housing demands rise, getting on the property ladder is increasingly difficult. Take the time you need to save your full deposit – it might be beneficial to save a little extra as well so you can buy at least a sofa and a microwave when you move in! As a mortgage is probably the biggest loan you’ll ever take, it’s important you do your research and educate yourself on just what’s going on. A lot of the time, the information can feel like reading a foreign language as explanations get too technical, so try a range of websites and banks, and even just try talking to other first time buyers or friends and family who’ve been through it all already. As the first time buyer age averages into the thirties, there’s no rush or expectancy to become a homeowner as soon as you leave school or university, or even a few years into your working life. As a big commitment, it’s important to take your time.
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