Mortgage Guide for first time buyers
Explore and understand more about mortgages and how they work.
What is a mortgage?
A mortgage is a loan you take out on a property. You’ll have to repay the loan with interest, and if you can’t pay it then you could lose the property. If you’re buying your first home, you’ll need a special ‘first time buyer mortgage’ which is commonly offered by a large number of mortgage lenders like Molo.
Fixed rate vs variable rate
When you get a first time buyer mortgage, you can choose what kind of interest rate you want and for how long you want it – this is called the ‘initial term’.
Fixed rate mortgages keep the interest rate the same for a period of time (usually 2-40 years). Your monthly mortgage repayments will stay the same for that period, no matter what happens to interest rates across the wider economy.
Variable rate mortgages have an interest rate that could change at any time during a period of time (usually 2-10 years). Your mortgage payments could change from one month to the next, depending on what happens to (usually) the Bank of England’s interest rate.
What is a variable rate mortgage?
Mortgages explained: what’s the Initial Rate?
Long term vs short term
Mortgages can be repaid over a long or short period of time (usually 15-40 years). Typically, you’ll end up paying more interest overall on a long term mortgage but your monthly repayments will be lower.
Long term mortgages can last for up to 40 years. They may be suitable if you’re looking to keep your monthly payments low and don’t mind paying more in interest over time.
Short term mortgages can last for as little as 5 years, or even less. They may be suitable if you’re able to repay more each month and want to reduce the overall interest, or if you’ve nearly paid off your mortgage balance.
Long term vs short term mortgages
40 years long-term vs short-term rates
Repayment vs interest only
When you take out a mortgage, you’ll need to repay both the capital (the original loan amount) and interest (charged on the loan amount). But you can choose to repay the capital bit by bit or in one go at the end of your mortgage term.
Capital repayment mortgages include portions of both the capital and interest within your monthly payments. You’ll pay this each month until the mortgage is paid off. These cost more on a monthly basis, but usually work out cheaper over the long run.
Interest only mortgages don’t include a portion of the capital within your monthly payments. You’ll pay the capital in one go at the end of the mortgage term. These cost less on a monthly basis, but usually work out more expensive over the long run.
What is an interest only mortgage?
High vs low LTV
LTV stands for Loan To Value, which is the percentage of the value of your property which is covered by your mortgage. LTV is used by lenders to determine the amount of interest they’re willing to charge on the mortgage. Typically, they’ll charge less interest the lower the LTV is.
Over time, the LTV will reduce as you pay off the mortgage and own more equity in your home. This can open up more competitive mortgage options when you come to remortgage in the future. However, this won’t impact you as a first time buyer.
60% LTV means your mortgage is worth 60% of the value of your property. Mortgage rates tend not to get any lower after this point, even if your LTV is lower. First time buyers would need a 40% deposit to get a 60% LTV mortgage.
80% LTV means your mortgage is worth 80% of the value of your property. You might not get the lowest interest rate on 80% LTV mortgages, but they’ll typically be cheaper than borrowing at a higher LTV. First time buyers would need a 20% deposit to get a 980% LTV mortgage.
95% LTV means your mortgage is worth 95% of the value of your property. These days, most lenders won’t lend on any property that needs a higher LTV. First time buyers would need a 5% deposit to get a 95% LTV mortgage.
What is Loan To Value (LTV)?
What’s the best first time buyer mortgage?
The best first time buyer mortgage isn’t necessarily the one with the lowest interest rate. To choose the right mortgage for you, you’ll need to take into account the above – do you want a fixed rate or a variable rate, for example?
You’ll also want to consider the total cost (or ‘true cost’) of the mortgage, including capital, interest and any fees that may be charged over the course of the initial term.
How to get the best mortgage for you
Who can get a first time buyer mortgage?
To be considered a first time buyer, it’s not quite as simple as having never bought a home before. And your status can impact everything from the range of mortgages you’ll have access to, to the stamp duty you may have to pay on your property purchase. So you’ll want to make sure you qualify for the title before looking into getting a mortgage.
Who’s considered a first time buyer?
To qualify as a first time buyer, you (and any other joint-buyers) typically need to meet the following criteria:
- You’ve never purchased a residential home before
- You’ve never owned a residential home before (including via full or shared inheritance)
- You’ve never purchased or owned commercial property that includes a residency
There are some very particular rules around who does and doesn’t qualify as a first time buyer. For example, you may still qualify if you inherited a property but sold it without transferring the deeds of ownership into your name. So you may want to speak with a solicitor to confirm your status.
What is a first time buyer?
How much deposit do you need?
The minimum deposit amount accepted by lenders is usually 5%. There isn’t typically a maximum. In the past, some lenders didn’t require a deposit (known as 100% mortgages) but this has now stopped.
A 5% deposit would be worth £13,688 for the average UK property (as of January 2022). It would require a 95% LTV mortgage.
A 10% deposit would be worth £27,376 for the average UK property (as of January 2022). It would require a 90% LTV mortgage.
A 20% deposit would be worth £54,752 for the average UK property (as of January 2022). It would require a 80% LTV mortgage.
If you’re short on cash or simply want to boost the amount at your disposal, there are ways to boost your deposit. A family member could gift you a deposit or you could use a scheme like the Lifetime ISA to increase your savings ahead of time.
How can you boost your deposit?
How much income do you need?
Your budget will depend on the amount of deposit you’re able to put down as well as the amount that you’re able to borrow on a mortgage.
The maximum amount that mortgage lenders will lend is typically calculated as a multiple of your annual income. Typically, lenders will loan up to 4.5 times your income.
If you earn £20,000 you could borrow up to £90,000.
If you earn £30,000 you could borrow up to £135,000.
If you earn £40,000 you could borrow up to £180,000.
If you’re buying with another person, you can add up the multiples of your salaries. For example, if you earn £30,000 each, then you could together borrow a total of up to £270,000.
If you had £20,000 to put towards a deposit and wanted to buy a property worth £250,000 then you’d need an annual income of £51,111. If you were buying with someone else, you’d each need an annual income of £25,556.
If you’re self-employed, you may need to show proof of income over a two year period. Lenders may then take the lowest annual income over that period or average the two years. Some lenders may require more or less than two years’ proof of income.
How much do you need to earn to buy a home?
What’s the maximum LTV you can get?
The maximum Loan To Value (LTV) mortgage lenders are willing to lend is typically around 95%, but it varies between lenders.
Your deposit will decide the required LTV amount. For example, if you put down a 5% deposit then you’d need to get a 95% LTV mortgage.
Your credit score may also affect the amount lenders are willing to lend. For example, if you had a poor credit score then the lender may reduce the maximum amount they’d be willing to lend from 95% to 85% LTV.
The property price could also play a part in how much the mortgage lender is willing to lend to you. More expensive properties will typically require bigger deposits and therefore lower LTVs.
What is Loan To Value (LTV)?
How many applicants can apply at once?
Each mortgage lender will set their own limit on the number of joint-applicants buying a property as part of their eligibility criteria.
At Molo, we’ll generally accommodate up to a maximum of four individuals.
While the cost per individual reduces the more applicants there are, bear in mind that the complexity also increases. This could cause conflict further down the line – for example, if one person wanted to sell while the others didn’t. So if you’re considering applying with more than one other person, make sure that all your expectations are discussed and aligned.
Can you get a mortgage with 3 applicants or more?
Can you get a mortgage with bad credit?
You don’t need a perfect credit score to get a first time buyer mortgage. And a particularly poor score might not be a problem, either.
The interest rate that mortgage lenders offer will typically go up the worse your credit score is.
You may not be able to get a mortgage with a traditional mortgage lender if your score is particularly poor.
However, there are specialist mortgage lenders that cater for those with bad credit. But they typically offer mortgages with higher interest rates.
There are ways you could increase your credit score, including paying off old loans and making sure you’re on the electoral roll – admittedly easier said than done, in some circumstances.
How to get a mortgage with bad credit
How to improve your credit score
Can you get a mortgage as self-employed?
If you’re a sole trader or the director of a limited company, it’s often possible to get a mortgage. But you’ll need to meet certain criteria set by mortgage lenders to get one.
The number of years you’ve been self-employed may affect if you’re eligible to get a mortgage. Often, lenders will require at least two years of bank statements or tax returns.
Your last few years of income may affect the amount lenders are willing to lend to you. Some lenders will look at your previous income and use the year with the lowest amount of income to calculate how much they’re prepared to lend to you. Others will average the last two years of income. Some will take the most recent year’s income.
Getting a mortgage when you’re self-employed can be a little more tricky than if you’re in permanent employment, but it’s not impossible.
How to get a mortgage if you’re self-employed
What help is there for first time buyers?
In response to the rising cost of housing, the government offers a number of schemes to assist first time buyers. So if you’re looking to make your money go further, you may want to consider some of the following options.
Lifetime Individual Savings Account (LISA)
More often referred to simply by its abbreviation, LISA, this is a type of ISA that can give a serious boost to your savings.
Pay in up to £4,000 a year and the government will boost this by 25% (up to £1,000 a year).
To qualify for a LISA, you’ll have to open it between the ages of 18-39 and purchase your first property for less than £450,000.
The money in a LISA can only be accessed when you buy your first property or are over 60 years old. You’ll have to pay a penalty if you access it for any other reason.
What is a Lifetime Individual Savings Account (LISA)?
Help to Buy
Help to Buy (England)
Available in England and often available for new-build homes only, the Help to Buy equity loan allows you to borrow up to 20% (40% in London) of a property’s value interest-free for the first five years. You can use this money to boost your deposit, increasing the value of property you can afford to buy.
To qualify, you’ll need to be a first time buyer over the age of 18 and put down a deposit of at least 5% using your own money.
There’s a regional cap on the value of property a Help to Buy Equity Loan can be used on. And after five years, you’ll need to start paying interest on the loan. Bear in mind that the interest rate will increase each year and could quickly become expensive. The equity loan can be partly or fully repaid at any time.
What is a Help to Buy equity loan?
Help to Buy (Scotland)
Available in Scotland and available for new-build homes only, the Help to Buy Smaller Developer scheme allows you to borrow up to 15% of a property’s value interest-free.
You can part or fully repay the loan at any time, but it must be fully repaid when you sell the property.
What is a Help to Buy equity loan?
Help to Buy (Wales)
Available in Wales and available for new-build homes only, the Help to Buy equity loan allows you to borrow up to 20% of a property’s value interest-free for 25 years. You can use this money to boost your deposit, increasing the value of property you can afford to buy.
To qualify, you’ll need to be a first time buyer purchasing a home worth up to £250,000 and put down a deposit of at least 5% using your own money.
What is a Help to Buy equity loan?
Help to Buy (Northern Ireland)
There’s currently no Help to Buy scheme available in Northern Ireland. The previous scheme closed to new applications in 2016.
Right to Buy and Right to Acquire
If you live in a council property that you don’t own in England or Northern Ireland, you may have the option to buy the property at a discounted price using one of these schemes.
To qualify for Right to Buy, you’ll need to be considered a secure council tenant or have had a public sector landlord for a total of three years (not necessarily in a row). You may also be able to qualify if you live in an ex-council home that was purchased by a housing association while you were living in it, using the Preserved Right to Buy scheme.
To qualify for Right to Acquire, you’ll need to live in a rented housing association home in England that’s been managed by a public sector landlord for a total of three years (not necessarily in a row). The property will need to have been built or owned by a housing association after 31st March 1997.
The Right to Buy scheme ended in Scotland in 2016 and Wales in 2019.
What is Right to Buy and Right to Acquire?
How do you get a first time buyer mortgage?
There are several ways to get a mortgage. You could go directly to a lender, use a mortgage broker or an independent financial adviser. You could decide to save time and effort and submit a mortgage application online. But whatever you choose, you’ll also need to take care of other things like your finances. We explore all the options below.
1. Get your finances ready
If you’re buying your first home, you’ll need a deposit. Typically, the minimum deposit that lenders will offer is 5%. So you’ll need to do some maths – if you’re set on buying a property worth £200,000, you’ll need a deposit of at least £10,000. If you’ve got the money in the bank, you’re all set. If you don’t, you might need to save a little longer or consider using a government scheme like Help to Buy.
You’ll also need to make sure you can afford monthly mortgage payments. You can use a mortgage calculator to find out how much this might be. Using the example above, a 25 year £190,000 mortgage charging 2% interest would cost around £800 a month. If you can afford it, great! If not, you might need to look at boosting your deposit or look at more affordable properties. Bear in mind that you’ll need a little more spare cash than this, since lenders need to make sure you can afford payments if the interest rate goes up.
Another thing you’ll need to do is take a look at your credit score, since most lenders will offer more competitive mortgage deals for those who have good scores. You can check your score using an online credit agency like Equifax or Experian (note that some services are free while others charge a fee). If your score is low, find out why (it’s usually listed in a report) and address it if you can. For example, you might want to address an incorrect late payment (it happens!)
2. Get a Mortgage in Principle online
A Mortgage in Principle (MIP) is a document provided by a lender that shows how much they’d be willing to lend to you, in principle, before a full mortgage application is made.
You’ll need a Mortgage in Principle to prove to estate agents that you should be able to afford the property you’re viewing. They’ll likely ask to see it when you make an offer on a property.
The easiest way to get a Mortgage in Principle is to do so online. You can get a Mortgage in Principle from Molo in as little as two minutes.
3. Make an offer on a property
Once you’ve found a property you’d like to buy, you’ll need to make an offer. Usually, this will be done through an estate agent.
There’s no official way to make an offer. You can tell them on a phone call, by email or in person. They’ll then inform the seller and let you know if your offer is accepted.
Given the shortage of housing, you probably won’t be the only one to make an offer. So the seller may ask you to raise your offer if another buyer outbids you, or they may simply keep you waiting while they receive other offers.
That being said, you’re within your right to make an offer below the asking price if you feel that’s appropriate.
If you’re purchasing a property in Scotland, your offer is legally binding once accepted. So you’ll need to be careful not to offer more than you can afford.
The stages of buying a house
4. Choose a lender or broker
Once your offer is accepted, you’ll be ready to look for a mortgage. There are several ways to do this, including:
- Using an online comparison site
- Directly with a mortgage lender
- Using a mortgage broker
- Appointing an independent financial adviser
There are benefits and downsides to each approach, but it’s a good idea to use a comparison site to see what kind of mortgage deals are potentially available to you. Bear in mind that a comparison site doesn’t assess whether you’ll be eligible to get the mortgage deals shown, or whether they’re suitable for your circumstances.
If you’re not sure what you’re looking for, using a mortgage broker can help assess your options. They’ll also manage the mortgage application for you, though you’ll still need to provide them with the necessary information. Bear in mind that some lenders could charge up to £500 to assist you.
Applying directly with a mortgage lender can be the quickest and simplest way of getting a mortgage, depending on which lender you choose. For example, using an online mortgage lender like Molo will allows you to:
- Avoid paperwork and meetings
- Start, pause and resume your application at any time
- Check on the progress of your application 24/7
- Speak with a specialist quickly using live chat
- Get a mortgage lending decision in as little as 24 hours
Note that your estate agent will likely be keen to recommend using their in-house or partner mortgage broker. This isn’t necessarily a bad thing, but check their reputation and whether they charge a fee. You’re within your rights to say no, however much they may pressure you into using them.
How to get a Mortgage?
5. Submit a mortgage application
Regardless of whether you apply for a mortgage directly with a lender or using a mortgage broker, you’ll need to provide some details about yourself and the property you’re looking to buy.
You’ll usually need to provide:
- Proof of identity
- Proof of address
- Employment history
- 3 months’ payslips
- 3 months’ bank statements
- 2 full tax returns if you’re self-employed
- Details about your monthly financial obligations
Once these are submitted, the lender will review all this information and conduct a credit check to decide whether they’re prepared to lend to you the amount you need. They’ll also conduct an in-person or digital valuation to make sure the property is worth what you’re willing to pay for it.
There are three possible outcomes of a mortgage application: approval, rejection and deferral. If your application is deferred, a lender’s underwriter will review your application in more detail and may request further information before making a decision.
If your application is rejected, you can still apply for other mortgage deals with other lenders (or even the same lender if there’s another suitable deal).
If your application is approved, you’ll be notified by your lender or broker. The process can take anywhere from 24 hours to several weeks, depending on the lender.
6. Instruct a solicitor
After a mortgage lender approves your application, a solicitor will complete the necessary legal work to transfer ownership of the property to you.
To avoid delays, you may want to instruct a solicitor several weeks ahead of time to make sure they’re available when you need them.
Some mortgage deals include ‘free legals’, however using a lender’s recommended solicitor can often be slower than using your own.
A solicitor will perform the following duties:
- Verify your ID documents
- Receive a contract pack from the seller’s solicitor, raise enquiries and request searches
- Send a report for you to review, including searches, contracts, transfer and stamp duty forms
- Agree a completion date with the seller’s solicitor
- Transfer your deposit and your lender’s mortgage money to the seller’s solicitor
- Confirm when completion has taken place
- Deal with stamp duty and register your ownership of the property with the Land Registry
In England, Wales and Northern Ireland, the purchase becomes legally binding once contracts have been exchanged.
This process usually takes up to 12 weeks but can be quicker or longer depending on circumstances.
What does a solicitor do when you buy a property?
Solicitor vs convincing
7. Arrange a survey
A survey is a report that identifies the condition of the property you’re purchasing. It’s conducted by a qualified surveyor (usually a member of the Royal Institute of Chartered Surveyors) who you’ll need to appoint before or while your solicitor is progressing with the legal work.
There are three different levels of survey:
- Level 1: RICS Condition Report
- Level 2: RICS Homebuyer Report
- Level 3: RICS Building Survey
Each survey is progressively more detailed, giving a more accurate and in-depth representation of the true quality of the property. For example, a Level 3 survey will include looking below the floorboards which the other levels won’t.
It’s not a legal requirement to get a survey done, but it’s highly recommended so that you’re not caught out by any surprises after the sale has completed.
Note that a survey is different from a valuation, which is done to help the lender assess the value of the property.
What is a property survey?
8. Receive a mortgage offer
If your mortgage application has been successful and the lender’s satisfied with the property valuation, you’ll receive a mortgage offer.
Unlike a Mortgage in Principle, a mortgage offer is a firm guarantee that the lender will lend you the money you need to purchase the property.
Your solicitor can only progress with the property purchase once the mortgage offer has been received.
9. Exchange contracts
The final part of the house buying process is the exchange of contracts, where the ownership of the property officially changes from the seller to the buyer.
This happens once the solicitor has completed all the required legal work, the mortgage offer has been accepted, and both your and the lender’s money has been transferred to the seller.
Once the contracts have been exchanged, you’ll simply have to wait for the completion date – when the seller will move out of the property and hand you the keys.
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