First-Time Buyers Mortgage (Complete Guide)

For a first-time buyer, purchasing a property can sound like a daunting task. 

Considering the various requirements and steps for acquiring a mortgage and finally buying a house – one wrong move could lead to negative consequences. 

Fortunately, first-time buyers can benefit from several unique benefits designed to entice them into the housing market including specialized first-time buyers mortgage options. However, there is still a lot to think about when buying your first abode.

For instance, you must know the right type of mortgage for your needs, how much you can borrow, and how much you will need to deposit. 

But fret not because we have compiled all the necessary details in this informative article to guide you through the process of obtaining a first-time buyer mortgage. All this so you can make your dream house a reality! 

What Is A Mortgage? 

A mortgage is a financial loan obtained for the purpose of purchasing property or land. While most mortgages have a duration of 25 years, the term can be shorter or longer depending on the agreement and the applicant’s required circumstances. 

To secure a mortgage, you will need to provide a minimum deposit of 5% of the property’s purchase price. Then you must borrow the remaining amount from a lender, such as a bank or building society. 

The loan is “secured” by the value of your home until it is fully repaid. If you are unable to make your mortgage payments, the lender has the right to repossess your home and sell it to recover their money. 

What Makes A Mortgage Different From Other Types Of Loans? 

1. Secured Loan 

A mortgage is a secured loan, meaning it is backed by the property or land being purchased. The property acts as collateral for the loan, providing security for the lender.

If the borrower fails to repay the mortgage, the lender has the legal right to repossess and sell the property to recover the outstanding debt. 

2. Property Ownership 

A mortgage is typically used to finance the purchase of property or land, such as a house or a flat. Unlike other loans, which may be used for various purposes, a mortgage specifically facilitates property ownership. 

3. Long-Term Nature 

Mortgages in the UK are generally long-term loans with repayment periods spanning 25 years or more. This extended term allows borrowers to repay the loan in smaller, more manageable monthly instalments. 

4. Interest Rates 

Mortgage loans often have lower interest rates compared to other types of loans. This is due to the collateral provided by the property, which reduces the risk for the lender. The interest rate for a mortgage can be fixed or variable, depending on the agreed-upon terms. 

5. Legal Formalities 

Acquiring a mortgage involves legal formalities and documentation. The lender will require a property valuation, credit checks, and detailed financial information from the borrower as part of the application process.

In addition, a legal process called conveyancing is required to transfer property ownership from the seller to the buyer (this will occur alongside and primarily after the mortgage application). 

6. Government Regulation 

The UK mortgage market is heavily regulated by government authorities, including the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).

These regulatory bodies set guidelines and rules to protect consumers, ensure fair lending practices, and maintain the stability of the housing market. 

Who Is A First-time Buyer? 

In simple terms, a first-time buyer is one who purchases their first home. According to the Oxford Dictionary, it is “a person who is buying a house or flat for the first time and therefore has no house or flat to sell.”

The distinction lies in the assumption that if someone lacks a property to sell, it implies they have never owned one. 

However, according to the government, if you have once owned a home, you cannot be a first-time buyer again, regardless of whether you currently possess a property or not.

Due to the legal implications attached to the term “first-time buyer,” it is crucial to exercise caution in how we present ourselves when purchasing a home. 

First-Time Buyer Checklist 

The process of buying a home can be lengthy, involving various checks, paperwork, and property viewings. So, here’s a simplified first-time buyer checklist to help you out. 

Step 1 

Begin by saving up for a deposit before considering purchasing a home. Typically, the required deposit may range between 5 and 20%, depending on the type and size of the property. 

Step 2 

Budget for necessary fees, including solicitor fees and stamp duty. 

Step 3 

Consult a mortgage advisor to determine how much you can afford. It’s important to be honest about your expenses and debts, as providing false information is a criminal offence. 

Step 4 

Obtain a mortgage in principle from your chosen lender. This agreement states the specific amount the lender is willing to offer you towards your new home. 

Step 5 

Locate a local estate agent who can arrange property viewings and assist you in determining the ideal property type for your needs. 

Step 6 

Use online resources to explore different homes, but remember that you’ll need to work with an estate agent who will schedule the viewings.

Step 7 

Visit and inspect various properties. Viewing a range of homes will help you select the one that best suits your requirements. 

Step 8 

Once you like a property, make an offer. Your offer doesn’t have to match the full value of the property, but offering too low may result in rejection. 

Step 9 

Once the homeowner accepts your offer, submit your full mortgage application to the lender and consider arranging a property survey.

This survey will identify any structural or cosmetic issues. This is important as underlying problems may cost you a lot in the future.

Please bear in mind that a mortgage valuation that the lender will complete is different to that of a more extensive survey such as a homebuyers report or full building survey. 

Step 10 

Finally, follow the legal procedures leading up to exchanging contracts. Once completed, you will become the proud owner of your first home! 

First-Time Buyer Benefits 

1. Government Schemes for First-Time Home Buyers

A. Lifetime Individual Savings Account (LISA) 

LISA can be utilised for two purposes – purchasing your first home (for a property priced at £450,000 or less) or saving for retirement. To open a LISA, you must be between 18 and 39 years of age. 

You have the flexibility to contribute a maximum of £4,000 annually to your LISA until you turn 50. But it is important to make your initial payment into the ISA before turning 40. The government provides a 25% bonus on your savings, capped at £1,000 per year. 

Note that if you’re purchasing a property with another first-time buyer who also holds a LISA, both of you can utilise your LISAs for the same property.

However, there is a penalty for withdrawing your funds from a LISA if they are not used towards a property deposit or withdrawn after reaching the age of 60.

B. First Homes Scheme (England) 

According to this scheme, first-time buyers can purchase a home at a significantly reduced price, ranging from 30% to 50% below its market value.

The homes can either be newly constructed properties by a developer or homes being resold by individuals who initially purchased them through the scheme. 

This scheme is exclusively available in England. 

2. Shared Ownership 

In this arrangement, you can purchase a portion of a house or flat (between 25 and 75%) based on the amount you can provide as a deposit. The remaining share is acquired by either your local council or a housing association. 

Through part or shared ownership schemes, you are responsible for paying the mortgage on the portion you own while paying rent on the portion you don’t own.

Since your deposit covers a larger percentage of the property value as you are only owning a share this will make the purchase possible, whilst paying rent and usually a service charge on the unowned share. 

As time passes, you will have the option to buy additional shares of the property, subsequently reducing your rental payments. This process is referred to as “staircasing,” and you can continue acquiring shares until you ultimately own 100% of your home. 

Whilst shared ownership is there to help first time buyers, you can use the shared ownership scheme not being a first time buyer. There is a rule where you cannot own another property when purchasing a new shared ownership home. 

3. You Are Not Held By Any Existing Property 

Those who already own property usually need to sell it prior to purchasing a new one. This process can often lead to financial and legal delays due to the presence of a chain. 

On the other hand, first-time buyers have the advantage of not being tied to an existing property, which can be highly appealing to sellers who are in a time-sensitive situation.

Consequently, first-time buyers may even find sellers who are willing to accept a lower price to quickly sell the property. 

How Much Deposit Do You Need To Buy A Home?

Before considering properties, it is essential to set aside funds as a deposit. 

In general, aim to save a minimum of 5% of the total price of the desired house you intend to purchase. To illustrate, if the home you wish to buy costs £150,000, you will need to save at least £7,500 (5%) as a deposit. 

By saving a larger amount, you will get access to more affordable mortgages offered in the market, along with the advantage of obtaining a lower interest rate.

Additionally, your affordability should also be better as you are taking out a smaller loan amount the higher the deposit. 

Single-Person Mortgage 

Many first-time homebuyers purchase their first property via a single-person mortgage. Such buyers generally do not require a large family residence, making it relatively manageable to enter the housing market as properties less in demand may be able to be considered. 

Although there are certain advantages to opting for a joint mortgage, both single and joint mortgages entail some level of risk. 

As a single applicant, if you have previously rented a property on your own, you are likely familiar with additional expenses, such as council tax, utilities, and monthly rental payments.

Surprisingly, monthly mortgage payments can sometimes be cheaper than rent, potentially allowing you to save more by opting for a mortgage (of course this is not always the case). . 

Mortgages For Bad Credit First-Time Buyers 

Albeit challenging, it is possible for first-time buyers with poor credit to obtain a mortgage. The process can be easier by consulting a specialised bad credit mortgage broker. 

That said, the likelihood of finding a mortgage for bad credit first-time buyers depends on the severity of their poor credit history and the timing of the credit issues.

For instance, a lender would generally be less concerned about a few missed credit card payments from several years ago. But if the borrower has ongoing financial mismanagement issues, it may become all the more difficult to become eligible for a first-time buyers mortgage. 

Mortgage With A Gifted Deposit

A mortgage with a gifted deposit refers to a situation where a family member or relative provides all or part of the mortgage deposit for a homebuyer. The gift can be used for the entire deposit or combined with the buyer’s savings. 

It is important to distinguish a gift from a loan, as a loan must be repaid and does not qualify as a gifted deposit.

As such, lenders and solicitors require proper documentation to verify the legitimacy of the gifted funds as part of anti-money laundering regulations and that the giftor will not seek repayment or hold any ties over the property to be purchased.

This is due to potential issues this could cause over repossession at a later date. 

Family Springboard Mortgages 

A family springboard mortgage allows purchasing a home with the family members providing security. This security is presented in the form of savings held in a dedicated account for a period of five years. As such, it must amount to at least 10% of the value of the home being purchased. 

For instance, if the home being purchased is valued at £250,000, the savings account must hold a minimum of £25,000. 

This type of mortgage is available to both existing homeowners and first-time buyers. The key advantage to family springboard mortgages is the availability of 0% deposit options in essence. 

Rather than receiving a deposit as a gift, the funds are transferred to a linked savings account associated with the mortgage. This arrangement offers security to the mortgage lender in case the loan is not repaid. 

While the mortgage term extends beyond five years, the funds from the savings account are returned to the family helper after the five-year period. Additionally, the security deposit is returned with added interest offered by the bank or building society. 

FAQs 

1. Do you pay stamp duty as a first-time buyer? 

No. First-time buyers do not pay stamp duty on homes valued up to £300,000 (£500,000 in London). The criteria strictly limit first-time buyers to individuals who have never owned or

part-owned any form of property worldwide. For full details on this please speak to an appropriate conveyancing solicitor. 

2. What is the average first-time buyer deposit? 

In the UK, the average first-time buyer deposit for a three-bedroom home in 2023 is £34,500 when purchasing a property valued at £240,000. This translates to a 15% deposit for the property. 

However, the required savings amount can vary based on the location within the UK and the desired deposit percentage chosen by the buyer.

3. What is a no-deposit mortgage for first-time buyers?

Skipton Building Society has introduced a no-deposit mortgage for first-time buyers to obtain a mortgage with a loan-to-value (LTV) ratio of 100%. Here are some points to keep in mind… 

• Only available to first-time buyers
• Applicants must be at least 21 years old
• Each applicant has no missed payments on debts/credit commitments over the last 6 months, as a minimum, alongside meeting other applicant credit profile requirements
• The maximum borrowing limit is £600,000 and you can borrow up to 4.5 times your income
• A demonstrated history of paying rent and bills for the past 12-18 months is required
• This option is exclusively offered with a 5-year fixed-rate mortgage at an interest rate of 5.89%
• You must meet affordability, your current rental payment will be used to calculate your maximum borrowing
• Your mortgage payments must not exceed your previous rent payments
• New build flats are not eligible for this mortgage

Disclaimer: This product is illustrative and we are not saying this is suitable for all first time buyers.

Your home may be repossessed if you do not keep up repayments on your mortgage.

All content is written by qualified mortgage advisors to provide current, reliable and accurate mortgage information. The information on this website is not specific for each individual reader and therefore does not constitute financial advice.