What is a First Time Buyer?

A first-time buyer is someone who is buying a residential property for the first time. HMRC have a strict interpretation of what a first-time buyer is, which is as follows: “an individual or individuals who have never owned an interest in a residential property in the United Kingdom or anywhere else in the world and who intends to occupy the property as their main residence.”

If you’ve never owned a property in the past, you’re classed as a first-time buyer, whereas if you’ve sold a property you’ve previously owned, you’re not classed as a first-time buyer. This also applies if you inherited your house from your parents or had a joint mortgage with your partner and broke up.

In this article we’ll guide you through the process of applying for a mortgage as a first-time buyer, giving you all the information you need to know.

Quick guide to the process

It can be daunting getting a mortgage for the first time, so we’ve broken down the steps for you. Below is a quick bullet point list of the steps involved before a broader section-by-section look at what each of these steps entails.

1. Putting down a deposit, how much you need to put down and how this affects your repayments
2. Calculating your affordability to determine how much you can pay each month
3. An affordability assessment that will determine how much you can borrow, which could lead to an agreement in principle
4. Various buying schemes you have access to as a first-time buyer, such as shared ownership, first homes scheme
5. Once you’ve found a house, you’ll go through a more in-depth and rigorous application process
6. Your income type can affect the type of mortgage offer you receive. Professionals will receive different offers to the self-employed for example
7. Your circumstances can affect your mortgage eligibility, for example, if you have bad credit, it’s likely fewer lenders will loan to you
8. Interest rates play a big factor in determining your affordability and monthly repayments
9. There are a variety of different mortgages you could get: fixed-rate, tracker, variable etc.

What deposit will you need?

A mortgage deposit is the amount you put down to buy a property and represents the equity you own. For example, if you have a deposit of £20,000 on a house valued at £200,000, your deposit is 10%, and the remaining 90% is the amount you’re borrowing.

Here are a few factors to consider:

• No deposit mortgages do exist but it’s unlikely you’ll be able to get a no deposit first-time buyer mortgage. You’ll need to save up to 10% to 20% of the value of your home to be attractive to most lenders.
• What you can borrow is a function of your deposit. As a general rule, the larger the deposit, the more you can borrow.
• Opening a Lifetime ISA is a good way to save a deposit. You can save up to £4,000 a year, with the government adding a 25% bonus on top.
• Lenders will want to see proof of deposit before loaning to you. You’ll need to provide evidence of money building up in a personal savings account for at least six months, for example. Or, in the case of a gifted deposit, a legal agreement confirming the money is a gift that will never need to be repaid.

How affordability affects first-time buyers

Mortgage affordability refers to whether borrowers can afford to repay the loan they want to take out. This refers to what you can repay each month and is separate from what you can borrow.

Here are a few points to consider:

• Borrowing is based on salary with lenders using income multiples to determine how much they are willing to borrow. Most lenders will offer 4 to 4.5 times your income as long as you meet their affordability criteria. Lenders will also consider loaning 5 times and 6 times under the right circumstances.
• Lenders will perform a mortgage affordability assessment to determine how much they could loan to you and whether they can accept your application. They will consider income multiples, your incoming and outgoings, a stress test to see if you could repay your mortgage if interest rates rise and work out your Debt to Income ratio.
• To get a better understanding of this, use one of our mortgage calculators, such as our affordability calculator, to see how much you can borrow.

Affordability assessment

Once you’ve undergone an affordability assessment, you’ll find out how much you can borrow and be able to get an agreement in principle (AIP). Here are a few points to help you understand this stage of the process better:

• An AIP is not a guarantee of how much you can borrow, as lenders will want to conduct further checks down the line. It should be considered a guide to how much you’ll be able to borrow.
• You can go direct to a lender or use a mortgage broker to help you get an AIP. The advantage of using a broker is they have access to areas of the market that aren’t visible to the general public.
• Once you’ve done the above, you can go and view houses and make an offer when you find one you like. It’s important to note that many AIPs are only valid for 30 days, but some can last for 60 to 90 days depending on your lender.

Buying schemes for first-time buyers

With the end of the Help to Buy scheme, you might not know what schemes are available to first-time buyers. We’ve listed some of the alternatives below to help you get on the property ladder:

• Mortgage Guarantee Scheme: The Mortgage Guarantee Scheme is a UK-wide scheme to encourage lenders to offer 95% loan-to-value mortgages. The government guarantees a portion of the mortgage allowing borrowers to apply with a 5% deposit.
• Shared ownership: Shared ownership allows you to buy a portion of a house while renting the remainder. You can buy between 25% to 75% of a property, giving you a smaller mortgage than if you were to buy the house outright.
• First Homes Scheme: The First Homes scheme offers newly built properties to first-time buyers and key workers with a discount of 30% off the market price. It’s aimed at encouraging people to stay in their local area instead of being priced out of the market.
• Deposit Unlock: Deposit Unlock is geared to first-time buyers looking to purchase a new build property with a 5% deposit without needing mortgage indemnity insurance.
• Help to Build: The Help to Build scheme differs from the others, as it only applies to those looking to build a property. You can get a mortgage with a deposit as low as 5% with the government providing 20% in the form of an equity loan and the remaining 75% being a self-build mortgage. If you want to build your own home, this is a good option.

Application Process

Once you’ve found a house you like, you can begin your mortgage application and build up to making an offer. Here are some of the steps you will go through once you start the application process:

• You’ll need the services of a solicitor to ensure all the legalities of buying a property are met. These include:
  • Carrying out searches, such as a local authority search and an environmental search.
  • Transferring funds
  • Obtaining new title deeds
  • Agreeing on a completion date
  • Make a formal mortgage application
• Your lender will do their own valuation of the property to ensure it’s worth what you’re paying for it. However, getting an independent valuation too is a good idea, which will flag any defects or problems that may cost you more later.
• You’ll need to have several documents ready once you start your application, these include and are not limited to those listed below:
  • Proof of income (typically your last three months’ payslips or 2-3 years certified self-employed accounts. You may also need to show three months’ bank statements)
  • Your latest P60 form (showing how much you earn and the tax you pay each year)
  • proof of ID (passport or driver’s licence)
  • Proof of address (a utility or credit card bill)
  • Evidence of your deposit (for example, a savings statement)
  • Evidence of any bonuses or commission
  • Credit reports
  • Estate agent details
  • Solicitor details

How income types affect first-time buyers

The type of job you have can affect your mortgage application. The process will be different for a high-net-worth individual than for someone who works in a supermarket for example.

Here are a few things to consider:

• Lenders are more likely to offer favourable rates to professionals, such as Doctors, lawyers and teachers, as most lenders class them a lower risk due to a more stable income.
• If you’re self-employed or a contractor, it can be trickier to get accepted by lenders. You will need to provide the lender with more detailed evidence about your financial situation, backed by 12 months to 2 years of accounts.
• It can be harder to get a mortgage if you work part-time or on a zero-hour contract. You will need to show regular hours worked through payslips and bank statements and will likely have access to a smaller pool of lenders.

Circumstances that affect your eligibility

Your mortgage eligibility can be affected by your personal circumstances and market circumstances. Below are some of the circumstances that will affect your eligibility:

• If you have bad credit, you can still get a mortgage but fewer lenders are likely to loan to you.
• The higher your credit score, the more likely you are to be offered the best available rates. Lenders will conduct a mortgage credit check to determine how risky it would be to offer you a mortgage.
• If the Bank of England base rate is likely to rise and increase interest rates, lenders are less likely to loan before this decision has been made.
• Lenders are also more likely to tighten their criteria if the economy is in a recession or experiencing a downturn.

How interest rates affect your repayments

One of the biggest factors affecting your affordability and monthly repayments is the interest rate. If a rise in interest rates has caused your mortgage rate to rise, your repayments will cost more.

Here’s a table to help you visualise how changes in interest rates can affect your repayments based on a 30-year mortgage term:

The type of mortgage you have also affects how changes in interest rates will affect your repayments. For example, if you have a 5-year fixed-rate mortgage, your rate will remain the same regardless of changes in the interest rate, while a tracker mortgage will rise and fall with changes in the Bank of England base rate.

The various types of mortgages you can get are explored in the section below.

Different mortgage types

Once you’ve gone through all the above steps, you’ll need to decide what mortgage type to get. Ideally, you want the one with the lowest interest rate, but it’s rarely that straightforward.

Below are some of the typical mortgage options you could look to get:

• Fixed-rate mortgage: A fixed-rate mortgage locks in an interest rate over a set period. For example, you could get a five-year fixed-rate mortgage at an interest rate of 3%. No matter what happens your rate will remain the same over those five years. Once your term has ended, you will need to remortgage to another arrangement whether that’s fixed-rate or another of the options below.
• Tracker mortgage: A tracker mortgage tracks the Bank of England base rate. When the base rate rises, so does your mortgage rate and vice versa. They’re a good option when interest rates are low, but if rates are high, you can end up with higher monthly repayments.
• Standard variable rate mortgage: A standard variable rate (SVR) mortgage is the interest rate you’ll be moved onto once the initial period of a fixed-rate or tracker mortgage ends. Bear in mind, that rates on this type of mortgage tend to be higher than others.
• Interest-only mortgage: An interest-only mortgage is where you only pay back the interest on your loan each month. Your monthly repayments will be lower, but you will still need to repay the initial loan once you’ve paid the interest.

Knowing which mortgage type to get as a first-time buyer can be confusing. This is where the services of a mortgage broker can help you. They can consider your circumstances and financial standing to recommend the best mortgage deal for you.

Brokers have access to a wider range of lenders, with some of the market not available if you decide to go alone.

Speak to one of our OMA®Verified experts to discover the best deal available to you, and get advice on handling the application process. We can put you in touch with a broker who specialises in first-time buyer mortgages to ensure you get your application off to the right start.