First Time Buyer
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First Time Buyer Mortgage
What is a First Time Buyer mortgage?
For most lenders, it’s a mortgage for someone who has never owned a property anywhere in the world. But a few lenders might have different rules.
For example, with Nationwide you could be classified as a First Time Buyer if you haven’t owned a property for five years. That might get you certain extra benefits with the mortgage you go for, although technically you’re not a First Time Buyer.
First Time Buyers get better stamp duty rates, and HMRC are quite clear that you only qualify if you have never owned property anywhere in the world. Simple as that.
What are the typical requirements to apply for a mortgage as a First Time Buyer?
Years ago, First Time Buyers were deemed more attractive to lenders because they thought they could cross sell all their products to these new borrowers. But now, it doesn’t necessarily work that way.
Some lenders will give additional cashback or a different rate, which may or may not be better. It reflects the fact that a First Time Buyer has no payment record for a mortgage. So although a lender might be able to sell them extra things, there is no track record of paying a mortgage of that size for a number of years.
You could argue that someone who has that track record is a better bet than somebody who’s never had a commitment of this size. So it can work to your advantage or your disadvantage.
What is the maximum amount that can be borrowed for a mortgage as a First Time Buyer?
Again, because of the risk perspective, it sometimes is a little bit less than the average buyer. Also, a typical First Time Buyer tends to have a smaller deposit than a next-time buyer or a remortgage.
The level of your deposit can affect how much you can borrow because smaller deposits are considered more risky, and because of that there will be a higher interest rate. Because of that, they have to bring in higher payments when calculating affordability.
However, there’s one lender at the moment that will give you enhanced affordability if you meet a minimum income and opt for a five-year fixed deal. [podcast recorded in December 2023]
Typically, we suggest that 4.5 times your gross income is the maximum you can borrow. But some lenders will go above that, depending on your deposit, and one will potentially go up to 5.5 times your income.
What’s the minimum deposit required for a First Time Buyer?
Normally we would say 5%, but one lender is currently offering 100% mortgages. This would apply if you are currently renting and the cost of the mortgage you’re looking at is no more than your rental payment. In other words, you have a proven track record as a renter.
There are other criteria you have to meet as well. This product helps address the fact that First Time Buyers can be unable to save for a deposit because they’ve been paying rent. The rates are not particularly good, however, and that’s why we tend to say 5% as the minimum.
As your deposit increases, in bands of about 5%, the rates will improve. The difference between a 5% and a 10% deposit is significant – if you have a 5% deposit we’ll always ask whether you can get 10%. If you have 10%, can you get 15%? You will see better rates.
Sometimes other criteria might kick in. For example, sometimes on flats the minimum deposit might be 10%.
What interest rates are available on a mortgage for a First Time Buyer?
A First Time Buyer can enjoy the same rates as a normal borrower, in terms of fixed rates and variable type rates – which are normally trackers or discounts.
Most First Time Buyers go for a fixed rate because they want stability, having never had this kind of commitment before. You want to know that your payments are fixed.
If you’re looking for that extra big mortgage that goes beyond the 4.5 times income, you might be pushed towards one or two lenders with special schemes for First Time Buyers. These insist upon you taking a five year fixed rate.
That’s because if your payments are not going to change for five years lenders don’t have to stress-test them quite so rigorously. By the time that five-year window ends, undoubtedly your income will have gone up – so they are lending against your future income.
So it’s normally fixed rates for a First Time Buyer, but there are other options.
What are the pros and cons of fixed versus variable interest rate mortgages?
It’s an argument of stability versus flexibility. A fixed rate is going to give you stable payments for two, three or five years or longer if you want. But the flexibility is less.
These mortgages will allow you to overpay small lump sums either monthly or in one hit. But if that lump sum is generally greater than 10% of the whole mortgage, there are early repayment charges.
The variable rate options generally come with more flexibility. You can overpay as much as you like, so you get more flexibility and less stability.
The other important thing is that fixed rate mortgage payments won’t go up and won’t go down. We’ve been seeing rates go up so much recently, and a lot of people take comfort from that.
But we’re moving into a cycle now where rates are starting to come down – so you could argue that a variable rate mortgage, which will track the Bank of England base rate, might be attractive.
The problem is that they’re starting from a higher point than a fixed rate deal. You’ve got to be fairly confident that interest rates are going to come down a fair bit.
Lenders are not idiots. They price these rates based on what they think will happen. Normally it comes down to stability versus flexibility – unless you really do believe rates are going to come down a lot.
What government schemes are available to help First Time Buyers?
It’s fair to say that these have reduced. There used to be Help to Buy where you could buy a new build home with an interest-free government loan for five years. It gave you a bigger deposit. That has ended – I wouldn’t say it’s gone for good, as it’s a great tool for stimulating house builders, and the government has a target to build new homes.
Something slightly similar is the First Home scheme where as a First Time Buyer on certain developments you can get between 30% to 50% off the sale price. There are not many of these developments around, but they can be useful on new build properties.
The main point of assistance now is what used to be called the Help to Buy ISA. It’s now the Lifetime ISA, and it’s a savings vehicle where if you put money in and use it for a qualifying house purchase, the government will give you a bonus.
When I last checked, you can put up to £4,000 into that ISA each year and when you use it for a house, the government will give you an extra 25%. If you’re not planning on buying a property yet, starting one of those is not a bad idea at all.
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What documents do I need to get approved for a mortgage as a First Time Buyer?
In effect, there are two stages for approval. First you have the Decision in Principle stage, which is basically a computer making a decision based on risk algorithms. Then, you have full human underwriting.
You can get a Decision in Principle before you’ve even found a property. A mortgage broker will talk you through that. It’s based on affordability, which we can do anonymously – we don’t even have to put an application in to work that out. It will also examine your credit profile, looking at how you run your credit card, your mobile phone and your bank account.
We will get Decision in Principle early on in the process, because although it’s not guaranteed that they will lend you the money, it’s a very good indication. It’s the best you can do before you put an offer in on a property.
If you’re going out and viewing properties, knowing that a particular lender has already agreed to a mortgage in principle for a certain amount of money is a massive help. Not only does it give you the confidence to make an offer, it also gives estate agents the confidence to accept it, knowing that you are well prepared.
Once that offer is accepted, the next part of the approval process is a full application. We tell the lender the address of the property and send them your payslips and bank statements. Lenders won’t do that part of the process until you’ve had an offer accepted on a property.
Are there any other steps to follow when applying for a mortgage as a First Time Buyer?
It’s a long process, buying a property. It’s stressful, too, because there’s so much going on.
I would suggest that the ideal process is first of all to speak to your mortgage broker and make sure what you’re looking to do is possible. They might even say that you could go higher and look at slightly better properties.
We will then move to that Agreement in Principle or Decision in Principle, where a lender indicates they will lend you the money. Then, go and view properties. When you’re ready, make an offer on that property and if it is accepted, we will start the full application process.
You will also need to appoint a solicitor – we’ll help you with that. We will check that the firm that you want is on the lender’s panel, or we’ve got a panel ourselves for you to choose from.
After the underwriting and legal processes start, we move you towards exchange of contracts – where you don’t own the property yet, but you are legally required to complete the transaction.
Finally comes the big day, completion, when the money is handed over, you get the keys and you move in.
What are the most common mistakes to avoid when applying for a mortgage as a First Time Buyer?
There’s two, I would say. The first one is budget. Many First Time Buyers might be coming from living with parents or friends. So knowing what it actually costs to live in the big wide world is quite important – and we can help you with that.
We can look at what your food bill’s going to be, council tax, utility bills and all those kinds of things. If you’re coming from rented accommodation it’s easier, because you’ve experienced that. But you won’t be used to putting money aside for repairs and renewals to your property – your landlord would have been taking care of that.
Plus, from personal experience when I was a First Time Buyer, when you’re looking at properties, you walk into the first one and think it’s wonderful. But there are more!
You may well go back to that first property, but do your research, view properties you like more than once and at different times of the day.
The more research you do on a property, the better. But just don’t think the first one you’ve seen is the right one, because often it’s not.
What happens if someone misses a mortgage payment as a First Time Buyer?
The first thing to do if you think that’s going to happen is contact your lender. You may have overpaid, for example, in which case they can pull against that instead.
If you miss a payment by a day or two, you’re probably okay, but if it’s missed by more than a month it will show on your credit report. It is going to affect your credit score, so if you try and get new credit somebody might pick up on that.
Your credit report goes into a lot of detail. It will show your payment history every single month going back for up to five years. Missing one month will affect that credit report and your credit rating.
One payment is not the end of the world. If you miss three or more payments in a row, so you are three months in arrears, that’s when a lender is likely to start repossession proceedings.
It takes a while, but they’re going to start to lose patience at that point. If things are difficult, speak to your lender. There’s something called the Mortgage Charter in place now and all the major lenders subscribe to this. It’s a commitment to help you make mortgage payments more affordable now that we have higher interest rates. So if you find yourself in that situation, always speak to your lender.
Can I still qualify for a mortgage as a First Time Buyer with bad credit?
Yes. I’ve literally had an enquiry today on this and explained to the client that it’s not the end of the world. There are lots of factors in the lenders’ decision-making process.
If you’re wanting a 95% mortgage, so you only have a 5% deposit and you’ve got a credit problem, it could be difficult. But on the other hand, if you’ve had three credit blips but you’ve got a 40% deposit it’s probably not a problem at all.
Lenders are assessing risk all the time. The severity of the problem, when it occurred, when it was repaid, whether it’s a fixed deal and the size of your deposit all go into the pot. If you had a tiny blip three years ago and you’ve got a 10% deposit or more, we’d probably be able to go with a high street lender at perfectly normal rates.
If it’s more severe than that, or more recent, you’re probably going to be moving into the secondary market. It’s not a bad thing. The rates are more expensive to reflect the risk, but it gets you on the housing ladder. If you can keep things clean for the two, three or five years you’re with that lender, we can hopefully remortgage you back into the mainstream for lower rates.
Can I get a Buy to Let mortgage as a First Time Buyer?
It’s possible, but it is difficult. A Buy to Let mortgage is based primarily on the rental income the property will achieve. That’s the case whether you’re a First Time Buyer or not. As long as you’ve got the minimum deposit and it meets the Buy to Let affordability rules, they will do it.
But if you don’t own property already, lenders are concerned that you’re going to bend the rules. You might get a mortgage on a Buy to Let basis and never let it out and move into it. Whether that’s your plan or not, that’s their default position.
So many lenders won’t take First Time Buyers, but one or two will. These require you to fit the residential affordability rules, though, looking at your earned income. A Buy to Let mortgage is more expensive than a residential one. It can be done but will be underwritten differently.
Another thing to flag is that as a First Time Buyer you only get reduced stamp duty rules when you buy your first home. Do you want to use it up on a Buy to Let?
How can a mortgage broker help me with a First Time Buyer mortgage application?
Many First Time Buyers come along with no knowledge – or a little bit which could be incorrect. A mortgage broker is a fountain of knowledge and I’ve been doing this for 30 years.
Buying a house is confusing. It seems like a minefield. A good mortgage broker will help you through that and will explain things you don’t understand. We take the time to look at possibly better ways of doing things and help manage your expectations.
I sometimes have to tell First Time Buyers that a certain budget is out of their reach. On the flip side, others might be looking at a two-bedroom flat but we could get them into a small house. We set those expectations of affordability and timescales and we take the pressure off you, but make sure you still feel part of that transaction. You know exactly what’s going on.
Please note: YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS.
