What Mortgage is Best for a First Time Buyer?
If you are a first-time buyer looking to secure a property in the current market it can be downright frightening. This fear can be made worse if you are uncertain about the range of options available to you.
The great news is lenders have a whole range of products to help first-time buyers and this can make buying your first property much less scary. This article looks at the types of mortgages available to first-time buyers, the deposit you will need and the types of interest rates you can expect. Let’s dive in.
What Are the Different Types of Mortgages?
Mortgage lenders realised about twenty years ago that the products they were offering were unsuitable for first-time buyers because deposit amounts were too high, or their lending criteria was too strict. To combat this, lenders looked at ways they could creatively help first-time buyers onto the property ladder.
Low Deposit Mortgages
One of the biggest barriers to entry a first-time buyer encounters is saving for a deposit. Historically it was the norm for lenders to request at least 10% deposit for a mortgage.
While a 10% deposit in 1975 on a property valued at £25,000 was achievable, as property prices increased it soon became unaffordable for most first-time buyers.
Lenders now allow you to put down as little as 5% deposit on a mortgage. In real world terms this is a huge difference as 5% on a £200,000 property is £10,000 compared to the 10% £20,000 deposit of old.
For some though, the 5% deposit was still too steep and lenders looked at ways they could reduce risk and extend lending without the 5% deposit.
To do this some lenders created springboard mortgages where family members can pay the deposit amount into a savings account that acts as a guarantee against the mortgage. These mortgages work in a similar way to offset mortgages.
Fixed Rate Deals
Once you have the deposit, you will want to decide between the type of interest rate you choose for your mortgage deal. Lenders typically offer either a fixed rate or a tracker rate mortgage.
Fixed rate mortgages have a set interest rate that remains unchanged for the entire duration of your product term. For example, if you have a 5-year fixed rate, it will remain unchanged over the 5-year period.
Tracker Rate Deals
Tracker rates follow the bank of England base rate and are known as a floating rate. The tracker rate will sit at a set amount above the base rate.
If the Bank of England changes the base rate, your tracker rate mortgage follows and goes up and down according to the base rate change.
Because the rate is subject to change, some borrowers find this type of interest rate unacceptable because they can’t budget for their mortgage payment definitively over the deal term.
However, Tracker Rate mortgage products often have the benefit of no Early Repayment Charges. If you believe that general mortgage interest rates are likely to fall in the short and medium term, a Tracker can create an opportunity for you to leave the product at minimal expense when a better deal becomes available in the market.
Adverse Credit Mortgages
Bad credit history is more common than you might imagine and some lenders realised a whole portion of the first-time buyer market were unable to borrow the money they needed. Adverse credit mortgages provide the option to borrow money if your credit history prohibits you approaching a traditional mortgage lender.
The interest rates on adverse credit mortgages are normally much higher than a typical mortgage. Some lenders only allow you to borrow on a Standard Variable Rate which is an interest rate set by the lender at their discretion and can change over the term of the mortgage product.
How Much Deposit is Ideal for a First-Time Buyer?
In general, the higher the deposit amount you can put toward your mortgage the better. Higher deposit amounts typically result in more lenders being available and a cheaper ongoing interest rate. With that said, there are options available as outlined above for those struggling to save enough money for a deposit.
Free consultations are available in the UK.Get Started Now
How Much Can a First-Time Buyer Borrow?
First-time buyers can borrow a multiple of their annual salary. Most lenders allow you to borrow 4.5 times your annual salary but there are a few who allow you to borrow 5 times your annual salary.
For example, if you approach a lender using the 4.5 times calculation with a salary of £50,000 a year, the mortgage offered will be £225,000.
This figure is the uppermost limit for that lender and if you have other expenditures such as a car finance agreement you may find the amount offered is lower than the headline figure. Also, the mortgage term that you apply for has a significant impact on the level of borrowing available. The shorter the term, the less borrowing is generally available.
What Our Clients Have To Say
Are There Any Government Schemes Available?
The government has not issued any new government schemes with the last budget. However, there are a few schemes currently running that you can renew on the government website.
Government schemes are normally targeted to help those on lower incomes or in certain sectors buy their home.
How to Apply for a First-Time Buyer Mortgage
A mortgage broker will complete a fact find which helps them understand your personal financial situation. From this information they will make a recommendation and provide any further advice to help you get a mortgage.
With a Scheme
If you are applying for a mortgage using a government scheme you will need a Decision in Principle (sometimes known as an Agreement in Principle) before you can proceed to a full mortgage application with the scheme signed off.
Without a Government Scheme
If you are not using a scheme, you can forego this step although it is normally advisable to get a Decision in Principle to ensure you have a good chance of obtaining a mortgage before making a full mortgage application.
Some estate agents require a Decision in Principle before you can make an offer on a property.
Boon Brokers is a Whole of Market Mortgage, Insurance and Equity Release Brokerage, providing fee free mortgage advice. Contact us to book your first-time buyer mortgage consultation today.