How To Get A Mortgage as a First-Time Buyer in the UK

Last Updated on May 30, 2024 by SampleBoard

Buying your first home is an exciting milestone, but securing a mortgage can be daunting.

This guide aims to demystify the process for first-time buyers in the UK, offering step-by-step insights to help you navigate this significant financial commitment.

Understanding Mortgages

A mortgage is a loan specifically for purchasing a property. It's secured against your home, meaning the lender can repossess it if you fail to make repayments.

Typically, mortgages last 25 to 35 years, but shorter and longer terms are available. Your income and deposit size normally determine the loan amount you can borrow.

Assessing Your Financial Situation

Before applying for a mortgage, it's essential to understand your financial situation. Speak to a professional, and they will have a detailed discussion with you to go through your options.

  • Savings: You'll need savings for a deposit, usually at least 5% of the property's value. However, larger deposits (10-20%) can give you access to better mortgage deals and lower interest rates.

  • Income and Expenditure: Lenders will assess your income, regular outgoings, and outstanding debts. This includes looking at your payslips, bank statements, and financial commitments such as loans or credit cards.

  • Credit Score: A good credit score improves your chances of securing a mortgage with favorable terms. Check your credit report for any discrepancies and take steps to improve your score if necessary, such as paying off debts and ensuring timely bill payments.

Types of Mortgages

Several types of mortgages are available in the UK, including:

Fixed-Rate Mortgages

In the UK, a fixed-rate mortgage is a home loan whose interest rate remains unchanged for a specified initial period, typically two to ten years.

During this fixed-rate period, your monthly mortgage payments stay the same, regardless of changes in the Bank of England base rate or the lender’s standard variable rate (SVR).

This offers borrowers predictability and stability in their monthly budgeting, as the interest rate remains unchanged for a set period (usually 2, 3, or 5 years), providing stability and predictable monthly payments.

Example Scenario:

Suppose you take out a 5-year fixed-rate mortgage at a 3% interest rate. Your monthly payments would be £800.

Regardless of any changes in the Bank of England base rate or economic conditions, your payments will remain at £800 for the entire 5-year period.

After 5 years, your mortgage will revert to the lender’s SVR unless you remortgage.

A Fixed-Rate Mortgage in the UK is an attractive option for many borrowers due to its stability and predictability.

It provides peace of mind by ensuring that monthly payments remain unchanged for a fixed period, making it easier to budget and manage household finances.

However, it’s important to know potential early repayment charges and plan for what will happen when the fixed-rate period ends.

Variable-Rate Mortgages

A Variable-Rate Mortgage (VRM) in the UK is a home loan whose interest rate can change periodically, usually in response to fluctuations in the Bank of England base rate or the lender’s standard variable rate (SVR).

Unlike fixed-rate mortgages, the interest rate and monthly repayments on variable-rate mortgages can go up or down, meaning borrowers might pay less or more over time.

The interest rate can change and be influenced by the Bank of England's base rate or the lender's standard variable rate (SVR). This means your payments can go up or down.

Example Scenario:

Suppose you take out a tracker mortgage with an interest rate set at the Bank of England base rate (currently 0.5%) plus 1%, making your initial interest rate 1.5%.

If the base rate increases to 1%, your mortgage rate will rise to 2%, leading to higher monthly repayments.

Conversely, if the base rate falls to 0.25%, your mortgage rate would decrease to 1.25%, lowering your payments.

A Variable-Rate Mortgage in the UK offers potential benefits such as lower initial rates and flexibility, but it also comes with the risk of fluctuating monthly payments.

Borrowers need to be prepared for changes in their mortgage payments and should consider their financial stability and ability to manage potential increases in repayments.

Understanding the different types of variable-rate mortgages and their features can help you make an informed decision aligned with your financial situation and goals.

Tracker Mortgages

A Tracker Mortgage in the UK offers borrowers a transparent and potentially cost-effective option, particularly when the base rate is low.

However, it also comes with the risk of fluctuating monthly payments based on changes to the base rate.

Borrowers need to be prepared for these potential changes and consider their ability to manage increased repayments.

Understanding the features and benefits of tracker mortgages can help you make an informed decision that aligns with your financial situation and long-term goals.

Discount Mortgages

Offer a discount off the lender's SVR for a set period. After the discount period, the rate reverts to the SVR.

Help to Buy and Shared Ownership

Government schemes to assist first-time buyers.

Help to Buy offers an equity loan where the government lends you up to 20% (40% in London) of the property price.

Shared Ownership allows you to buy a share of your home (between 25% and 75%) and pay rent on the remaining share.

Saving for a Deposit

The larger your deposit, the better the mortgage deals you'll be offered.

Aim to save at least 10-20% of the property's value. Consider using a Lifetime ISA, which provides a 25% government bonus on savings up to £4,000 a year. This can significantly boost your deposit fund.

Affordability and Eligibility

Lenders will conduct affordability checks, examining:

  • Income includes salary, bonuses, and any additional income such as rental or freelance earnings.
  • Outgoings: Regular expenses, debts, and financial commitments. Lenders will examine your living expenses, childcare, travel expenses, and other regular outgoings.
  • Stress Test: Assessing if you can afford repayments if interest rates rise. This involves evaluating your ability to make payments should the interest rates increase by a certain percentage.

Finding a Mortgage

You can find a mortgage through:

  • Direct Lenders are banks and building societies. This option can be straightforward if you have a preferred bank with an existing relationship.

  • Mortgage Brokers offer advice and access to a broader range of products. They can sometimes find exclusive deals that aren't available directly to consumers.

  • Comparison Websites are helpful for initial research. These platforms allow you to quickly compare various mortgage product interest rates, fees, and features.

Mortgage Application Process

The application process involves several steps:

  • Agreement in Principle (AIP): An initial indication from a lender of how much they might lend you. This is based on a soft credit check and basic financial information.

  • Complete Application: Submitting detailed financial information and supporting documents such as payslips, bank statements, and proof of identity.

  • Valuation: The lender will value the property to ensure it's worth the mortgage amount. This may involve a surveyor visiting the property.

  • Mortgage Offer: If approved, you'll receive a formal mortgage offer detailing the loan terms. Review this carefully to ensure you understand all conditions and commitments.

Additional Costs

Be aware of extra costs associated with buying a home:

  • Stamp Duty: A tax on property purchases over a certain threshold. First-time buyers are exempt from Stamp Duty on properties up to £300,000.

  • Legal Fees: These are fees for conveyancing and other legal work. They typically include fees for the solicitor or licensed conveyancer and costs for searches and disbursements.

  • Survey Costs: To assess the property's condition. Different types of surveys range from essential valuations to comprehensive building surveys.

Completion and Beyond

Once all checks are complete and contracts exchanged, you'll move to completion, where the funds are transferred, and you get the keys.

Post-purchase, ensure you keep up with mortgage repayments and budget for maintenance and unexpected costs.

Tips for First-Time Buyers

  • Get Professional Advice: Consider hiring a mortgage advisor or financial planner. They can help you understand the best mortgage options and guide you through the process.

  • Stay Within Budget: Avoid overextending yourself financially. It's essential to buy a property you can afford comfortably.

  • Plan for the Future: Think about potential changes in your circumstances. Consider job stability, potential family growth, and long-term financial goals.

  • Research Government Schemes: Explore options like Help to Buy, Shared Ownership, and Right to Buy. These schemes can make homeownership more accessible for first-time buyers.

Securing a mortgage as a first-time buyer in the UK involves careful planning and understanding the financial landscape.

With thorough preparation and informed decisions, you can navigate the process smoothly and achieve your dream of homeownership.