First-Time Buyer Mortgages Guide 2024 Update

Estimated reading time 20 minutes

For a first-time buyer getting onto the property ladder is big step especially as buying a home is probably the biggest purchase of anyone’s life. To be classified as a first-time buyer you and anyone you are buying with must be purchasing your first residential property.

Our first-time buyer mortgage guide will cover everything to think about when applying for a mortgage.

Do look out for the Gaffsy says advice throughout.

PART ONE: Let’s look at some jargon

What is a mortgage?

A mortgage is a loan agreement that you take out with a bank or building society to buy or maintain your home, and or other types of property. The borrowed money is secured against the value of the house until the loan is repaid. You will be expected to repay your mortgage in monthly instalments over a set period of time.  These repayments will be pre-agreed and can be divided into principal and interest.

Principal is the amount borrowed and the interest is the rate of interest you have agreed to pay on the borrowed money.

Gaffsy says .. if you fail to repay the mortgage lender has the right to repossess your home and sell it to recover the money owed. If the amount they get for selling it is less than the amount you borrowed you usually still have to pay back the remainder so make sure you only borrow what you can afford. If you are in financial difficulty speak to your lender as soon as possible. If you are in the unfortunate position of being in arrears and or can no longer afford your property and want to sell you house, do call Gaffsy today as we can make you a cash offer and complete in a time to suit you.

What is a deposit?

When you buy a house for sale, as the purchaser you will have to provide a cash deposit of at least 5% of the property’s total value upfront. If can afford to put down a larger deposit this will reduce the mortgage that you need to take out and the monthly payments may be lower. According to the Halifax for average first-time buyer mortgages the buyer puts down a 20% deposit on their first home. This deposit goes towards the total purchase price of the property and the remainder of the money is borrowed from a mortgage lender.  

Gaffsy says… a good way of saving for a deposit is through a LISA which is designed to help younger generation get on the property ladder or save for retirement or both.

·         LISA (lifetime individual savings account)

You can use a LISA to help buy your first home (for a property costing £450,000 or less) or save for later life. You must be aged between 18 and 39 to open a LISA.

You can put in up to £4,000 each year, until you’re 50. You must make your first payment into your ISA before you’re 40. The government will add a 25% bonus to your savings, up to a maximum of £1,000 a year.

What is a mortgage term?

A mortgage term is the terminology used to refer to the length of time that is set to pay back the mortgage. Many last between 20-30 years some are shorter and some are longer. The longer the term of the mortgage the lower the monthly repayments will be, but remember the longer the term the more interest you will end up paying.

Once a mortgage term has ended any outstanding balance must be paid immediately which can leave some homeowners with limited options. If you are a homeowner whose mortgage term is coming to an end and you do not have the money to pay off the balance, you will either have to sell your house, remortgage or face repossession in the courts.

Please don’t wait until you are experiencing severe financial difficulty before getting in touch with your mortgage lender. It is far better to contact them as soon as you realise you are struggling to pay your mortgage as they will be able to offer advice to you.

Gaffsy says …if you do find yourself in this unfortunate position and want to sell your house, please contact Gaffsy today for a free cash offer.  We have the funds available to buy your home fast, with zero fees for a cash sum that you are happy with. 

What is Loan to Value (LTV)?

When you take out a mortgage you will hear the term LTV or loan to value this is the ratio of what you borrow from the mortgage lender against how much you pay as a deposit. So you simply divide the value of the mortgage you need by the value of the property for sale and multiply by 100 to give you LTV percentage.

For example

  1. You see a house for sale £200,000 and have a £20,000 deposit.
  2. You need a mortgage of £180,000 to cover the remainder of the balance.
  3. So your LTV is 90%

It probably won’t surprise you to learn in this first-time buyers mortgage guide that first time buyers tend to have a higher LTV ratio, so their monthly payments are higher than those selling one house to move to another. The average ratio for first-time buyers is 82%, compared to 74% cent for home movers.

Gaffsy says  … LTV is important because mortgage lenders look at the LTV when deciding what terms to offer the mortgage at. Most mortgage lenders offer mortgage products based on LTV bands and the lower the LTV the more favourable the terms they offer will be. The reason for this is that the probability of house prices falling below the amount owed on the mortgage is smaller when the loan to value is low than when the loan to value is high. 

If you are selling your house or selling your flat and struggling to find a buyer because buyers are failing to secure a mortgage give Gaffsy a call as we buy any house, any flat for cash. As we do not require mortgage approval, we can make you a cash offer today.

Part 2: Let’s look at first time buyers mortgage choices

Your choices here will help to determine the first time buyer mortgage rate

Choice 1:  Repayment mortgage or interest only?

Repayment guarantees you are paying off some of the debt every month. So at the end of the mortgage term you owe nothing as the original debt and interest will have been fully repaid.

With the interest only you just pay the interest therefore the debt stays the same so at the end of the mortgage term whilst you will have paid all the interest you owed you will still owe the entire sum you borrowed. 

Gaffsy says … interest only deals are rare and they are only offered when there is credible plan in place on how the sum borrowed is going to be repaid. If you are at the end of your mortgage term and have not paid off the mortgage and want to sell contact us today for a free no obligation cash offer.

Choice 2:  First-time buyer mortgages

Now it’s time to choose what type of first time buyer mortgage and which first time buyer mortgage rate suits you best.

Fixed Rate Mortgages

The interest rate is fixed for the length of the deal you take out. Fixed rate mortgages are normally between 2-5 years but can be longer. They act as an insurance policy against interest rates going up as your rate doesn’t move it stays exactly the same throughout the length of the deal.  They will typically have a higher rate than the equivalent variable rate and interest rates fall over while you have this deal you will not benefit as your rate stays the same. 

Gaffsy says .. you need to weigh up the pros and cons, if you think interest rates are going to continue to rise and you are concerned about not knowing what your payments are going to be each month then a fixed rate mortgage is for you.  However, if you may want to get out early from your deal you will have to pay high penalty costs and if you think the interest rate is high and you think they may come lower then perhaps one of the alternatives would suit you better.

Variable Rate Mortgages

With a Variable Mortgage, the interest rate you pay on the mortgage can go up and down. Which means your monthly payments may not stay the same, they can vary, hence the name Variable Rate. 

Gaffsy says .. at times when the economy is growing and/or there is inflation interest rates by in large will go up, so your variable mortgage rate will rise. When the economy is in a recession and there is no price growth then typically interest rates fall and your mortgage rate will follow.

There are 4 types of variable deals that mortgage lenders offer.

1.      Tracker Mortgage

On a Tracker Mortgage the rate of interest you pay on your mortgage usually follows “tracks” the Bank of England base rate plus a set percentage. Which means if the Bank of England raises interest rates by 0.5%, the interest payments on your mortgage will also increase by the same amount. You will effectively pay the new Bank of England base rate plus the set percentage. Likewise if the Bank of England cuts base rate your interest repayments will fall by the same %.

Some trackers only run for a set period of time and some for the lifetime of the mortgage. Some have a collar which means the rate of interest never drops below a certain level even if rates below that level and some have a cap that means your rate of interest will never go above a certain level even if base rates move above it.

Gaffsy says .. always read the terms and conditions to be clear on what rate the tracker follows. Also if the tracker is not for the lifetime of the mortgage note what rate you move to when the tracker ends. A tracker mortgage that seems cheap now can become more expensive if rates continue to rise.

2.      Discount Rate Mortgage

A Discount Rate Mortgage usually offers a discount on the mortgage lenders standard variable rate. The discount tends to be for a relatively short period and once you come to the end of the set period you start to pay the higher standard variable rate unless you remortgage to a better deal. The longer the discounted period, the smaller the amount of the discount tends to be.

Gaffsy says .. as your discounted rate can track your lenders SVR it means the rate can change at any time by any amount. If you are looking at first time buyer mortgage rates and are on a budget and need repayments to stay the same this mortgage is not for you.

3.      Standard Variable Rate Mortgage (SVR)

A standard variable rate is a rate the mortgage lender switches you to at the end of your product rate period, so when your tracker, discount or fixed rate mortgage term ends. Every lender has an SVR which tends to be higher than most mortgage options and can change at any time.

Unlike tracker mortgages the lender SVR does not have to strictly follow the Bank of England base rate like a tracker mortgage the lender can raise or lower the rate at anytime. So not only is the SVR influenced by the Bank of England rate the mortgage lenders variable rate can also move when the cost of lending, regulations, technology or systems changes.

Gaffsy says … SVRs are not very competitive usually 2-3% above base rates and your first time buyer mortgage rate repayments can go up or down at any time making budgeting each month tricky. Also, there is no guarantee you will get the full benefit of rate changes as any move is at the mortgage lenders discretion. If you are coming to end of your product rate period it is a good idea to start looking around for another deal.

4.      Offset Mortgage

An offset mortgage uses your savings or current accont to reduce the amount of interest you pay. It works by “offsetting” the amount of money you need to repay on your mortgage against what you have in your savings/current account. Your monthly repayments could be lower because you will pay less interest on what you borrow. An offset mortgage can come in variable or fixed deals as mentioned above.

Gaffsy says … interest rates can be higher with offset mortgages so you may want to use your savings for a bigger deposit instead. Unless the offset is really cheap only those who’ll be offsetting a substantial amount should consider it.

Flexible mortgage

Once you have decided you want either a variable or fixed mortgage the next decision you need to make is whether you want the flexibility to overpay. By overpaying you can reduce the loan faster and therefore you will pay less interest too. The mortgage lender will limit the amount of money you can overpay per year which is typically 10% of the outstanding mortgage or there will be a fixed maximum amount that can be paid each month.

Some lenders may agree for you to pay less than the standard monthly amount for a set time if you have overpaid previously. Some will allow you to take a mortgage holiday which is a break from making monthly payments for a set time but interest will continue to accrue. If you overpay there are a few mortgages that have a borrow back facility that will allow you to get the overpayments back if you need them but not all so it is important to check what’s being offered.

Gaffsy says … having the ability to overpay gives you more freedom and can help you pay off the mortgage faster and can be useful if your income fluctuates. Flexible mortgages typically have higher interest rates and as the terms and conditions vary across lenders it is important you chose one that is suitable for your circumstances. 

PART 3: Help for first-time buyers

There are several government schemes that can help you buy a home.

The Mortgage guarantee scheme

This a UK wide government scheme for first-time buyers and existing homeowners who want to buy a house or flat as their permanent residence, have at least a 5% deposit, but less than 10%, borrow less than £570,000 and be applying for a mortgage with a loan to value of more than 90% and less than or equal to 95% of the property. It was initially set up in 2021 with a planned end date of Decmber 2022, it was then extended to December 2023 and following the Autumn 2023 Statement, it was extended by the Chancellor once again. This time until the end of June 2025.

Houses both old and new are eligible to be included in the scheme as long as they cost under £600,000, however, each lender may have different criteria.

In order to qualify the property cannot be a new build flat, shared ownership, shared equity, right to buy or a buy to let.

First Homes

The First Homes scheme supports first time buyers including keyworkers and army veterans by offering new build homes at least 30% discount compared to market prices. You can look for new homes in your area that are advertised by developers as part of the First Homes scheme.

Developers offer these homes to first-time buyers with 30% to 50% of the market value taken off the price. Every home that’s sold is valued by an independent surveyor to make sure the discount is based on actual market value. Those looking to buy on this scheme must have a household income of less than £80,000 or £90,000 if living in London. The scheme is in place to help people get on the housing ladder in their local area so the eligibility criteria can vary across different local authorities.

The homes cannot cost more than £420,000 in London, or £250,000 anywhere else in England, after the discount has been applied. You can only sell the home to someone who is eligible to buy a First Home. You must give them the same percentage discount that you got, based on the home’s market value at the time of sale.

Shared Ownership

You can buy a home through the shared ownership scheme if you cannot afford all of the deposit and mortgage payments for a home that meets your needs. When you buy through this scheme you buy a share between 10% and 75% of the homes full market value and pay rent to the landlord for the share they own.

Shared ownership homes are offered by housing associations, local councils, and other organisations. They are called ‘providers’ or the landlord and you can buy more shares from them in the future.

Right to buy

If you’re a housing association tenant in England you could be eligible to buy the home you rent with a discount of up to £87,200 (£116,200 in London). If your home used to be owned by the council, but they sold it to another landlord (like a housing association) while you were living in it, you may have the Right to Buy. This is called ‘Preserved Right to Buy’.

Help to build

Help to Build is a government equity loan, available in England to anyone 18yrs or over with a right to live in England who wants to custom build, self build or shell build a home. You can borrow an equity loan from the government of between 5% and 20% (up to 40% in London) of the estimated costs to buy the land (if needed) and build your new home.

When applying for an equity loan you need a deposit of at least 5% of the estimated land and build costs as well as a 95% self-build mortgage from a lender registered with Help to Build based on the estimated costs.  By using Help to Build, lenders will accept a minimum customer deposit of just 5% towards their mortgage.

Part 4: How to get a mortgage

How much can you borrow for a mortgage?

Mortgage providers will look at how much your monthly incomings are versus your monthly outgoings to order to make sure you will be able to keep up with repayments, this is known as an affordability assessment. They do this by factoring in the amount you earn per year alongside your credit rating and any other financial commitments you may have. The most you can borrow is usually capped at four and a half times your annual income.

Most of the large mortgage providers have mortgage calculators on their websites. Some will show you how much you can borrow based on your finances for example Santander, others such as the Halifax provide both an affordability calculator and mortgage borrowing calculator.

Whilst you need a property to be buying before putting in a mortgage application you can ask a mortgage company to give you a mortgage decision in principle.  This is when the lender will check your income and credit and will confirm in principle how much they are willing to lend you for your mortgage. Whilst this is not a guarantee that the lender will lend it can provide you with property price ballpark of what you can look up to and it will provide a house seller with an increased degree of confidence that the buyer will be approved.

Check all lenders first time buyer mortgage rates

Don’t just go to your bank or building society for the first time buyer mortgage rates as you will only be shown the products they have on offer. You can check what first time buyer mortgage rates are out there as newspapers and comparable websites publish best buy tables but if you are unsure as to the deal you need it is worth using a professional to help you.  Contact a mortgage broker, they are regulated mortgage advisors and offer an extra layer of protection if things go wrong, they can access broker exclusive deals and can offer a wide range of mortgages from across the market and find you one that is most suited to you and your requirements.

Gaffsy says .. make sure the mortgage broker has the ability to check all lenders mortgage deals as you don’t want to use one that can only access a small number of mortgage lenders.  Do also check what is out there yourself as some lenders offer deals direct to consumers if you find one that looks interesting run it past your broker they will be able to advise you as to it’s suitability.

What paperwork will the mortgage lender request?

Once you have decided on a lender you will typically need to provide them with the following paperwork. It is therefore a good idea to have this to hand as soon as possible:

  • Proof of income (often last three months’ pay slips or 2/3 years’ accounts if self-employed).
  • Proof of deposit (plus written confirmation from donor — typically parents — if getting a gift towards the deposit that it really is a gift & not a loan).
  • Your last three months’ bank statements.
  • Proof of bonuses/commission.
  • Your latest P60 tax form
  • If self-employed your SA302 tax return forms

Congratulations …

On completing Gaffsy’s First-Time Buyer Mortgages Guide 2024 it should have provided you with a clearer understanding of what a mortgage is, the different types of mortgages, the help available to you and how to get a mortgage.

Do try to remember some of the key take aways:

  • Never borrow more than you can afford.
  • Make sure your repayments stay up to date.
  • Shop around for the best deal for your circumstances.
  • If you ever get into difficulty in making your repayments or your financial situation changes speak to your lender as soon as possible. They will be able to offer you the best advice for your situation.

Gaffsy says … If you are coming to the end of your mortgage term, if your repayments are troubling you and or you have just decided now is the time to sell your house or sell your flat or sell your buy to let property and want to do so quickly. Then do get in touch with Gaffsy today our experienced team is available to make you a no obligation free cash offer for your property.  We champion our transparent selling process and completely tailor our approach to suit your requirements.

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