GETTING YOUR FIRST MORTGAGE
Most first time buyers will need a mortgage when buying their first home. It’s exciting and there’s lots to think about, including finding the right mortgage.
We have written this First Time Buyer Mortgage Guide to help explain everything you need to know when buying your first home.
FTB Mortgages
What is a Mortgage?
A mortgage is money that you borrow from a mortgage lender to buy a property.
The mortgage is simply a big loan that is secured against the property. This means that if at any point in the future you fail to keep up the mortgage payments the lender is able to sell your house to repay the debt (repossession).
Hence the warning:
Your home may be repossessed if you do not keep up repayments on a mortgage or any debt secured upon it.
MORTGAGE TERM
When applying for a mortgage you will agree to pay the money back over a set number of years; the mortgage term. Typically for first time buyers the mortgage term is 25-30 years to make the monthly repayments affordable.
DEPOSIT
You will need to have a deposit when buying a house as you cannot borrow all of the money. The would require a 100% mortgage which lenders no longer offer.
A deposit is the amount of cash savings that you are using to put towards the cost of the house. This does not include any other costs or fees which are payable separately.
DEPOSIT + MORTGAGE = NEW HOUSE
INTEREST RATE
As you have borrowed some money, the mortgage lenders will charge you interest which needs to be paid each month. The amount you pay is calculated from the interest rate you apply for.
Types of Mortgage
There are a few decisions needed when setting up your mortgage and your broker can help with these. Some lenders may restrict the choices available to First Time Buyers (FTB).
REPAYMENT METHOD
The repayment method is about how the mortgage loan will be repaid and it also affects how much your monthly payments will be.
REPAYMENT MORTGAGE
This is the most popular option for most borrowers but especially with FTB’s and is also called a Capital & Interest mortgage.
With a repayment mortgage you are paying back a small part of the mortgage debt each month, along with the monthly interest. As long as you maintain the mortgage repayments requested by the lender then the loan will be completely repaid when the mortgage term ends.
In this respect it is a safe way of borrowing to buy a house as there is certainty that the mortgage will be paid off.
The mortgage company will send you an annual statement showing your mortgage balance and you will be able to see this reducing as each year passes.
INTEREST ONLY MORTGAGE
With an interest only mortgage there is no repayment of capital each month, you are just paying the interest. This means that the mortgage debt is not reducing and at the end of the mortgage term you will owe the same amount as you borrowed.
You will then need to pay the mortgage back all in one go.
A repayment mortgage is the natural choice for a first time buyer and this will allow you to borrow the highest amount of mortgage. However, interest-only options are available as well, but you are likely to need a higher deposit of around 25%.
The box below shows a very simple example of the difference in monthly payments between these 2 options.
| Mortgage amount | £200,000 |
| Mortgage term | 25 years |
| Interest rate | 3.0% |
| Interest only mortgage | £500 per month |
| Repayment mortgage | £948.42 per month |
TYPES OF INTEREST RATE
Once you have decided on the method of repayment you have a choice over the type of interest rate.
An interest rate is the percentage of your mortgage that the lender wants each year. This is how the lender makes their money.
There are few different types:
VARIABLE
With a variable interest rate your monthly payments change each time the variable rate changes. This usually happens when the Bank of England announces a new interest rate. The lender will decide how much the variable rate will be.
TRACKER
A tracker interest rate is linked to the Bank of England Base Rate. Your monthly payments will change as and when the BOE Base Rate changes.
FIXED
Here the interest rate is fixed for a set period of time, anywhere from 1 to 10 years. During this time the interest rate will not change, up or down, if the BOE Base Rate changes.
Fixed rates are a popular choice for first time buyers as it makes monthly budgeting easier as the payments stay the same.
Mortgage Deposits
When buying a new home you need to have a cash deposit available as well as money from a mortgage. These 2 combined will provide the cost of the new property.
For a first time buyer mortgage the minimum deposit is usually 5-10% of the purchase price.
The purchase price is the price you have agreed to pay for your new home.
Here’s a quick example with a 5% deposit:
| Purchase Price | £200,000 |
| 5% Deposit | £10,000 |
| Mortgage needed | £190,000 |
| Loan to Value (LTV) | 95% |
When you increase your deposit the mortgage needed to buy the same property is reduced, making the monthly payments cheaper.
Let’s take a look at what happens with a 15% deposit:
| Purchase Price | £200,000 |
| 15% Deposit | £30,000 |
| Mortgage needed | £170,000 |
| Loan to Value (LTV) | 85% |
When looking at mortgages you will see reference to LTV or Loan to Value. This is the percentage of the loan when compares to the purchase price of the property. In the example above the LTV is 85%.
Most lenders will offer mortgage products that are available up to a certain LTV limit.
For example:
FIXED RATE UP TO 75% LTV
Here the only borrowers who can apply are those with at least a 25% deposit.
FIXED RATE UP TO 90% LTV
Only for borrowers who have at least a 10% deposit.
Do I need a mortgage broker?
Many first time buyers conduct their own research and apply for a new mortgage online or direct with a lender. If your circumstances are very straightforward then this maybe the best route for you also.
But if your employment situation is not clear-cut, you are self-employed or you haven’t got much time then a mortgage broker is invaluable. Certain professions such as doctors and dentists derive their income from both employed and self-employed so a good broker will be able to find the lenders that understand how this works.
Mortgage advisers must be qualified and registered with the Financial Conduct Authority (FCA) to provide mortgage advice.
They will advise you on all of your mortgage options, research who offers the best deals for you, answer your questions, deal with the paperwork and lead you through the home buying journey.
A whole of market mortgage broker will give you the widest choice of lenders and mortgage products.
Mortgage Affordability
Lenders are required to assess whether you can afford the new mortgage.
This assessment is in two parts:
1 – They look at your provable income. This would be from bank statements, payslips, self employed accounts etc. You need to demonstrate that the payments are regular.
2 – Then they want to see how you spend this money. They will ask for your personal bank statements and analyse what you do with your income.
This is the mortgage affordability assessment. Even if your gross income seems to qualify you for a certain size of mortgage, if you spend all your money every month, you are unlikely to get approved for a new mortgage.
Agreement in Principle (AIP)
An Agreement in Principle (AIP) or Decision in Principle (DIP) is the first stage of getting a mortgage for FTBs.
It is provided by a mortgage lender and confirms in writing what they would be prepared to lend you. This will let you know what the maximum mortgage you can apply for is so you can search for properties in your price range.
Estate Agents often ask for a copy of your AIP. This allows them to see whether you can afford to buy certain properties and helps to avoid timewasters.
An AIP is not a mortgage offer. When you have agreed on a property to buy you will then need to make a full mortgage application.
WHERE DO I GET AN AIP FROM?
You need to approach a specific lender for an Agreement in Principle. We would recommend speaking with your mortgage broker before this stage. They can assess, based on your financial situation, what you can borrow and who from.
Your broker can then advise on the best lender to approach for an AIP. It does not commit you to anything but it saves time if you go with the right lender for your circumstances at the outset. Your broker will arrange for the AIP and will answer any questions the lender may have.
Fees and Costs
Buying a house comes with some initial costs. Your broker will be able to provide some specific amounts for your mortgage but here is a rough idea:
LENDERS ARRANGEMENT FEES
Usually the cost will be linked to the mortgage product you apply for. Fixed, tracker etc
VALUATION/SURVEY
When applying for a mortgage the lender needs to assess the property you wish to buy and will commission a valuation. This is covered in a bit more detail below and you do have some choices if you would like a more detailed assessment of the property.
BROKERS FEE
We do charge a fee for our mortgage advice service. Your mortgage broker will confirm this with you. Our service will include the initial advice, completing the application and then liaising with all parties until completion.
STAMP DUTY
Stamp Duty Land Tax (SDLT) is paid to the government when you buy property or land in the UK. Your solicitor will calculate what is due and arrange any payments needed. FTB’s are able to save on Stamp Duty costs depending on the property purchase price.
LEGAL FEES
You will need either a solicitor or a conveyancer to complete the legal work for both your mortgage and registration of property ownership.
REMOVAL FEES
If you use a removal company then this is another cost that needs to be budgeted for.
INSURANCES
You will need buildings insurance for your new property, the lender will insist on this. Optionally you may also need contents insurance and/or mortgage life insurance.
Property Search
Once you know what you’re looking for, you can search for suitable properties online.
There are plenty of reasons to consider online markets when seeking a new property. From convenience to greater choice, this will help you to see a vast array of options and understand what you might be able to afford. You can search in exact locations using a variety of filters, choosing options such as garden, garage, new build, detached, etc. It’s quick and easy to find the exact properties you want to shortlist and narrow down your selection quickly.
But as well as looking online, you might want to speak directly to local estate agents and property developers, who may have options that are not listed.
The agents will want to know if you have got an AIP/DIP, so have some copies handy.
VIEWINGS
One of the most exciting parts of buying your new home is going on property viewings.
Property viewings let you see what’s available on the market for your budget. Go along to viewings ready to take notes and photos and ask lots of questions. This is your opportunity to find out all the details of the property and the local area that you might not see in the listing.
MAKE AN OFFER
Once you’ve found the right property, you’ll need to make an offer.
As a first-time buyer, you’re in a strong position to buy a property, as you’re chain-free. Make sure that the estate agent mentions this to the seller when they pass on your offer.
Once your offer has been accepted its time to get busy!
GAZUMPING
This is possibly a word that you have not heard before. Gazumping is when you have made an offer to buy a property and the seller accepts your offer to buy. But then, sometime later, another buyer makes a higher offer which the seller accepts instead of yours.
Appoint a Solicitor or Conveyancer
Once you’ve had your offer accepted you need to decide who you are going to appoint as your solicitor or conveyancer to handle the legal side of things.
Their job is to draw up the contract, conduct searches and handle the money for you. You may want to consider getting recommendations from family or friends. It is also worth checking reviews and recommendations online.
The conveyancing process starts when your offer is accepted and ends when you receive the keys (completion), and good conveyancing is key to keeping your property purchase on track.
Related: What does a conveyancer do?
Apply for a Mortgage
When applying for your first time buyer mortgage you will need to get quite a few bits of information together beforehand.
Hopefully you will be using a whole of market mortgage adviser to help you through this part. (If you don’t have one yet give us a call on 020 8301 7930).
It’s a good idea to gather your paperwork and info together prior to applying for a mortgage to improve your chances of mortgage approval.
Your adviser can tell you everything that your lender will require. This will include:
- ID and proof of address
- Your contact details
- Bank statements
- Payslips, P60
- Accounts, SA302
- New property details
- Solicitor details
Once everything is in place your mortgage adviser will send your application to the lender, normally electronically. They will then keep you updated on the progress and help with any questions or requests that may arise.
The first milestone will be the property valuation, where the lender takes a look at the new house. If all OK the lender will normally then provide you with a Mortgage Offer. Formal confirmation that they will lend to you,
Your adviser is not only part of the initial mortgage application. They will be there to help all the way to legal completion, when you will own your first home.
Property Surveys
Part of the checks that a lender makes is to do with the property itself.
They will arrange a valuation for lending purposes. This will involve a physical visit to the property but the valuer is there primarily to confirm that the price you have agreed to pay is fair and correct, it is not a survey. They should be able to spot obvious structural issues but they will not spend too much time at the property.
So this is the mortgage valuation, which is really for the benefit of the lender. At an additional cost you may like to have a more in depth survey take place and there are 2 options.
HOMEBUYER REPORT
This is done in conjunction with the mortgage valuation and will provide more information about the property condition, services, garden, garage, outbuildings etc. You will be required to pay for this extra work.
FULL STRUCTURAL SURVEY
This survey is expensive and really only benefits older houses (before 1900), unusual houses or those that have been extensively extended/converted. It provides a thorough inspection and a detailed report covering issues and recommendations.
Exchanging Contracts
Exchange of contracts is an important part of the final stages of buying a house.
The Seller (vendor) has a contract where they agree to sell the property to you. And you have a contract where you agree to buy to property from them. The contracts include the purchase price and any other conditions.
Your solicitor will ask you to sign your contract and request the deposit funds from you.
The solicitor will advise the mortgage company that they will soon need to transfer the mortgage money, this is held in a special account by the solicitor.
Once both parties have signed their respective contracts they will be ‘exchanged’ between the two solicitors. You are now legally obliged to buy the property.
There is normally a time gap between exchange and legal completion, this can range from a few days to a few weeks and will be agreed by both parties.
You will need to start your buildings insurance policy and mortgage life insurance at this point.
Completion and Moving Day
Nearly there!
Although most people do, you do not have to move in on the day of completion.
A few days before the completion day the solicitor will request the mortgage money. Then on completion they will send this money, along with your deposit, to the sellers solicitor.
You then become the new owner and will get the keys to your new home. Congratulations!
Your solicitor will register you as the legal owner at Land Registry. Remember to take out contents insurance now that you have moved in.
SUMMARY
We’ve covered a lot, buying your first home involves steep learning curve.
Here is a quick summary of the main points.
- Get yourself a mortgage broker – An independent mortgage broker can be a tremendous help to First Time Buyers. Speak with your broker before anyone else and they will help to prepare you and create a sound plan to smooth your journey.
- Find a property – This is the good bit! See what you can afford and go searching for that first home.
- Make your offer – Decide how much you want to pay and put your best offer in via the agent.
- Apply for a mortgage – Your mortgage broker will research the market, confirm who can offer you the best deal and help with all of the paperwork.
- Solicitors – Your solicitors will draw up the contracts and search the land registry and leases to make everything looks OK.
- Exchanging contracts – Pay the deposit over to your solicitor. There’s no going back now.
- COMPLETION – This happens when your mortgage money and deposit arrive with the sellers solicitor.