Mortgage Guides

First time buyer mortgages - How to get on the ladder

Updated: Monday 20 February, 2012

By Martin Fagan

Planning to buy your first home? This guide explains mortgages in simple terms and shows you how to choose the best deal for your circumstances.

Buying a house is arguably the biggest and most important purchase you will make in your life, and the prospect of securing the finance on your first home can be very daunting.

Finding a property is stressful enough, but the prospect of securing a good mortgage can be just as off-putting. Since the "Credit Crunch" began in 2007, mortgage providers have been tightening their lending criteria and demanding ever-larger deposits, leaving some first-time buyers feeling they have no hope of securing a deal.

But don’t despair - there are still mortgages available for first-time buyers. If you have a regular income, a clean credit history and can put up a sizeable deposit, you are likely to remain attractive to banks despite the current economic climate. Even if you are lacking on these fronts, there are plenty of options which could aid your quest for a mortgage.

There are many things to think about when choosing a mortgage, especially since the difference between deals can be worth thousands of pounds in the long run, so it’s essential you look at all the options and shop around for the deal that best suits you.

In this guide we explain the basic types of mortgage available, show you what to look for in a mortgage and offer tips to help you get the best deal for your circumstances.

Download our complete guide to buying your first home

• How much can I borrow?
• How long will my mortgage last?
• How much will my mortgage cost?
• How much will I have to put down as a deposit?
• Types of mortgage
• Interest-only vs. repayment
• Extra help
• Hidden costs
• How to get the best mortgage deal

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How much can I borrow?

The amount you can borrow will be a crucial factor when it comes to finding your new home, as it is likely to determine the size and type of property you can afford.

In the past, lenders would offer to lend you an amount based on a multiple of your salary. However, in an attempt to lend more responsibly, these days most lenders will also carry out a more detailed assessment of your ability to repay the money you borrow.

Each provider will use its own method, but they all try to calculate your disposable income by looking at your total income minus bills, any other debts and current living expenses.

Having made a detailed assessment of your financial circumstances, a good mortgage broker should be able to advise you on how much you might be able to borrow.

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How long will my mortgage last?

The “mortgage term” or length of the mortgage agreement is typically between 20 and 30 years but can be any agreed length. The standard term is 25 years. Longer-term mortgages will result in lower monthly payments, however, you will be paying interest for a longer period of time, so the total cost will be greater overall. You should be realistic about how long it will take you to repay the loan.

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How much will my mortgage cost?

When considering buying your first property, it’s very important to work out how you will afford your mortgage repayments.

You can use our mortgage calculator to work out how much your mortgage will cost you. Simply enter the amount you are planning to borrow, the mortgage period and the interest rate you expect to get and it will calculate your monthly payments and the total cost of your mortgage.

At the time of writing, the Bank of England base rate is at the historically low level of 0.5% and has been since March 2009 and, although most experts agree that the only way for it to go is up, there is much debate about when it will rise again. Many economists feel it will stay unchanged for most of 2012 and probably for the first months of 2013.

If you’re considering taking out a variable rate mortgage or a short-term fixed-rate mortgage, it’s crucial that you work out how your repayments would change if your interest rate jumped 1%, 2% or even 5%, and consider how your finances would cope.

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How much will I have to put down as a deposit?

The bigger the deposit you put down, the more you are likely to be able to borrow and the better (i.e. lower) interest rates you are likely to be eligible for. According to the Council of Mortgage Lenders (www.cml.org.uk), the average deposit for first-time buyers in December 2011 was 20% and first-time buyers were 37% of the market that month. In the past, some lenders would offer mortgages for 100% of the property’s value, but these mortgages have now disappeared. Most lenders will lend up to 75% of the value of the property and some provide mortgages up to 90%. But the higher the loan to value ratio (LTR) the higher the interest rate you are likely to be charged.

If you haven’t managed to save up a substantial deposit, it may be worth seeking help from your family to bolster your deposit in order to secure a lower interest rate.

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Types of mortgage

The two basic types of mortgages you have to choose from are as follows:

• Fixed-rate mortgage - This type of mortgage offers a fixed interest rate for a set period of time. Opting for a fixed-rate mortgage can help you avoid increases in interest rates and because the rate is fixed, your repayments will be the same each month for a set period. This can be helpful for budgeting. Once the fixed-rate period has ended, the mortgage will revert to the lender’s standard variable rate (SVR).
• Variable-rate mortgage - This type of mortgage offers an interest rate that changes over time. Tracker mortgages are usually linked to the Bank of England base rate, while discounted mortgages are usually linked to the lender’s SVR. You can usually get an initially lower rate on a variable-rate mortgage than a fixed-rate mortgage. You will benefit from any reductions in the base rate or SVR, but need to think carefully about how your finances would cope if your interest rate increased. Deciding which type of mortgage best suits you is a big decision, and it is worthwhile discussing your options with an independent financial adviser or whole-of-market mortgage broker, who will be able to offer you advice tailored to your specific circumstances.

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Interest-only vs. repayment

There are two main ways to repay your mortgage:

• Repayment method - With a repayment mortgage you will make monthly repayments that comprise a tiny bit of the capital you borrowed and the interest generated by the capital still outstanding. You will make these repayments for a set period (the mortgage term) until you have paid off the mortgage completely, as with each monthly payment you chip away at the sum borrowed so, as the mortgage term progresses, you repay a greater proportion of the capital and less interest. This is the most common way to repay a mortgage and you’re guaranteed to have repaid the capital by the end of the mortgage term
• Interest-only method - With an interest-only mortgage your monthly payments only cover the interest generated on the capital you borrowed and, because you’re only paying interest and not repaying capital, the monthly payments are lower than a repayment mortgage. You will make these repayments for a set period (the mortgage term) and at the end will have to repay the amount you borrowed in a lump sum. To get an interest-only mortgage you will need to be able to prove to the lender that you have an alternative repayment vehicle in place - such as an insurance policy (generally and endowment) or investment account such as an ISA - that will repay the outstanding loan at the end of the mortgage term.

Whatever type of mortgage you choose, you should make sure you fully understand the terms of your mortgage before you sign on the dotted line.

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Extra help

There are a range of government schemes available to help you buy your first home, and it’s worth having a look at what you might be eligible for.

For example, the government’s “HomeBuy” schemes are available to tenants of a council or housing association, people on the housing register, key workers (such as teachers, nurses and police officers) and first-time buyers who are unable to afford a property.

Typically these schemes allow you to buy an affordable share of a new-build flat or house. Instead of having to fork out for the entire property, you get a mortgage to fund the part you’re buying and pay rent on the remaining portion.

You can find out more about HomeBuy schemes and other low-cost home ownership schemes on the government’s website (www.direct.gov.uk).

Or read more about shared ownership schemes and shared equity schemes

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Hidden costs

When a lender sells you a mortgage, some of the potential charges may not be pointed out to you. Taking out a mortgage is a huge responsibility and it is absolutely crucial that you read the small print. Some important things to watch out for:

• Exit fees / Redemption penalties - Mortgage lenders will often charge you penalties if you later decide that you want to move your mortgage elsewhere. These charges vary but can be up to 5% of the amount owed or specified number of months’ interest if you pull out early, so it’s worth checking them before you sign up.
• Buildings Insurance - All mortgage lenders will insist on you having buildings insurance, but you do not necessarily have to take it out from the lender - shop around to get a better deal.
• Payment protection insurance (PPI) - Technically, this ensures your repayments will be covered should you fall ill or have an accident. There has been media frenzy recently about banks overcharging for PPI and charging you for it automatically. There has also been a raft of complaints that PPI policies are useless and riddled with so many exclusions that most people are paying for a policy that offers them no protection whatsoever. Payment protection is not a necessity, so make sure you're certain it's what you want before taking out a policy.
• Life Assurance - Although not compulsory, it is definitely something you should consider when taking out a mortgage, especially if you have dependents. A life insurance policy will ensure the remaining debt on your mortgage will be paid off should you die. Again, it’s often best to buy this separately from your mortgage as it's possible lenders will sell you an overpriced package.
• Additional costs of taking out a mortgage - With any mortgage you will be required to pay stamp duty, conveyancing, valuation and survey costs (these are unavoidable). Over the last year, the number of mortgage lenders charging "booking fees" or "arrangement fees" has increased dramatically. The costs can run to £1,500, so make sure you find out what your mortgage lender charges.

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How to get the best mortgage deal

The most important thing to do when choosing a mortgage is to shop around and compare deals from a number of providers. Getting a slightly lower interest rate could save you hundreds, if not thousands, of pounds during your mortgage deal period.

For many first-time buyers it will be a good idea to use a mortgage broker, who can talk you through your borrowing options and explain the types of deals that may be available to you. They may also have access to deals unavailable on the high street. Make sure you pick a “whole of market” broker rather than a “tied” broker who can only recommend mortgages from a limited number of providers.

A good “whole of market” mortgage broker will be able to help you get mortgage quotes from lenders and arrange an “agreement in principle” which is an agreement from a mortgage lender that in principle they will lend you a specified amount of money as long as the property you find is satisfactory to them.

Find the best mortgage for you with our mortgage comparision service, or calculate your monthly repayments with our mortgage calculator.

Download our complete guide to buying your first home

THINK CAREFULLY BEFORE SECURING ANY DEBTS AGAINST YOUR HOME.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.