First time buyer mortgage guide
You’ll run a gauntlet of emotions when you get your first mortgage. It’s exciting, but it can be daunting, confusing and stressful.
If you’re a first time buyer, this guide will help you understand what you’re getting yourself into, what you need to watch out for and how to get through the experience as smoothly as possible.
Where do I start?
The best place to begin is to find out how much you could afford to borrow. This depends on how much you earn, your outgoings and how much you have for your deposit.
Having an idea of how much you could borrow will help you find an affordable property.
A mortgage calculator like our Mortgage Matcher should be your first step.
How much do I need to earn?
Most mortgage providers will lend you between four and five times your annual income, but it’s not entirely about what you earn, but rather, what you can afford.
Lenders have different ideas about what affordable means, but they all look at your income, outgoings, debts, bills and what you have left at the end of each month after everything’s paid for.
How much does it cost to get a mortgage?
As well as your deposit and monthly repayments, there are other costs that come with getting a mortgage. Here are some of the fees you can expect to pay*:
Arrangement fee: This can cost you as much as £2,000 or more and covers the cost of arranging the mortgage. Some mortgages come with no arrangement fees. You can sometimes add arrangement fees to your mortgage, but it means borrowing more and paying more interest.
Booking fee: This can set you back by up to around £250 and even if your mortgage never goes ahead, you’ll still pay it. Sometimes this is folded into the arrangement fee and sometimes it only applies on mortgages above a certain amount.
Valuation fee: This fee starts from around £150, depending on the value of the property, and covers the cost of checking the property is worth the amount you’re applying to borrow.
Other fees may apply, but a good broker will take all fees into account when they recommend a mortgage to you.
How do mortgage repayments work?
Let’s say you borrow £250,000 over 30 years. Each month you’ll pay a bit off the loan plus some interest (unless you have an interest-only mortgage – more on that later).
The amount you borrow, the length of time you choose to pay it back over and the mortgage’s rate of interest will determine how much your mortgage costs each month.
Generally, the more you borrow and the higher the mortgage rate, the more expensive your monthly mortgage bill will be.
Our Mortgage Matcher will give you an idea of how much your mortgage repayments could be and recommend the best first time buyer mortgage deal for you.
How much do I need for a deposit?
As a first time buyer, your deposit can be the biggest obstacle between you and getting on the property ladder.
A mortgage lender is going to want a deposit worth at least 5% of the property you want to buy. So, if the property is worth £300,000, you’ll need a deposit of at least £15,000.
If you’re new to mortgages, you might see the term ‘Loan to Value’ or LTV a lot. It’s basically how much you borrow as a percentage of a property’s value. If you have a 5% deposit, your LTV is 95%.
95% is the highest LTV you’re likely to get a mortgage on.
Can I get any help with my first mortgage?
Yes - there are specialist mortgages and government schemes designed specifically to help first time buyers get started.
You can buy a property with a friend or family member, splitting the deposit and monthly repayments (a joint mortgage), or you can buy a share of a property rather than the entire thing, while a landlord or the government owns the rest (shared ownership).
Then there are guarantor mortgages, where a parent or family member is named on the mortgage with you and pledges to cover the repayments if you can’t.
The government’s Help to Buy scheme helps you access more affordable mortgages even if you have only a 5% deposit. Under Help to Buy, the government pumps up your deposit with a loan of 20% (40% in London) that you don’t have to pay interest on for 5 years.
The government also offers specialist savings accounts for first time buyers. The Help to Buy ISA tops up your savings to get you to your deposit faster. For every £200 you save, the government will chip in £50 – up to a total of £3,000.
Can my parents or family help me with my deposit?
If your parents or grandparents are able to gift you a deposit to help you get on the ladder, you’ll have to go through a few legal formalities in order to get your mortgage approved.
Firstly, each lender has its own rules about who you’re allowed to receive a gifted deposit from. Distant friends and relatives might be a problem, for example.
Lenders tend to ask for some kind of confirmation (like a bank statement) of where the gifted money is coming from. Solicitors will also want to know where the money has come from – whether it’s savings, investments, property or whatever.
Finally, there’s a declaration letter to sign that says the money is genuinely a gift (not a loan) and that the person giving it won’t have any claim to the property you buy.
If the gifted deposit is a loan that you’re expected to pay back, it could go against you. There’s an assumed risk that if you don’t pay back the loan, the person who gave you the cash could have a claim to the property – which could get complicated.
How do I choose a mortgage?
You can either go to a lender or enlist the help of a broker like Mojo.
If you go straight to a lender, you’re only going to be recommended one of its own mortgage deals. A broker, on the other hand, will look at deals from various lenders and different types of mortgages and take fees into account to recommend what they think is the best deal for you.
Be warned that some brokers will charge you a fee for their service averaging at £500*. With Mojo you’ll get a personal mortgage recommendation and a mortgage in principle for free.
Do I need to find a property first?
It’s best to get the mortgage process started before you start seriously looking for a place to buy. Do it the other way around and you could fall in love with a place and miss out on it while you get your mortgage sorted.
So, go through our Mortgage Matcher first and you’ll get:
- An idea of how much you can borrow
- A personal mortgage recommendation
- A mortgage in principle certificate
Once you know how much you’re likely to be able to borrow, you can narrow your search and rule out anything too pricey. When you’ve found a place and you’re ready, the mortgage in principle certificate will show the sellers you’re a serious buyer.
What happens then?
Once you’ve made an offer to buy a property and it’s accepted, you can apply for your mortgage proper.
We’ll first tell you everything you need to know about the mortgage we’ve recommended and ask if you’re happy to be credit checked so that we can get you a formal ‘agreement in principle’ from the lender. This says, based on the information they have, the lender is prepared to give you a mortgage to buy the property.
We then submit your application with all your supporting documents (proof of income and so on) to the lender. They’ll do additional checks to make sure you can afford the mortgage, and that the property is worth what you’re asking to borrow for it (valuation). The lender will then make a final decision on your application.
If you’re approved, the lender will make you a mortgage offer which tends to last for three to six months. If you’ve not yet done so, you can then instruct your solicitors to do their thing so that you can exchange contracts with the seller of the property and move towards completion – which is when you get your keys and you can move in.
*Money Advice Service