Being a first time buyer can be an exciting time, but it also can be quite a daunting experience with lots of confusing options to think about.
Choosing the right mortgage deal is a crucial decision that can impact your financial wellbeing for years to come, so it’s important you understand the pros and cons of each choice.
In this blog post, I’ll look at some popular options and include some tips to help you better understand what type of deals provide the best mortgage for first-time buyers.
But be mindful that suitability of these options is heavily dependent on your personal circumstances, so working with a mortgage broker and getting independent advice that takes this into account is paramount.
Fixed Rate Mortgage
A fixed-rate mortgage is a popular choice among first-time buyers due to its stability.
This type of deal offers peace of mind as the interest rate remains constant throughout the initial deal term, so you can accurately budget for your monthly mortgage repayments.
Additionally, if interest rates rise, your payments won’t be affected.
First Homes Scheme
If you’ve never owned a home, there are a number of schemes to help first-time buyers get a foot on the property ladder.
One of the most popular is the First Homes Scheme, which is backed by the UK Government and allows first time buyers to buy a home 30% to 50% less than the market value.
This is usually only available to new build homes or someone who bought the property under this scheme.
Current eligibility is that you have to be 18 or older, a first time buyer and able to get a mortgage for at least 50% of the house price.
Eligibility is subject to change, therefore please check the Government website for further information.
Shared Ownership Schemes
Shared Ownership allows first-time buyers to purchase a share of a property’s full market value (typically between 10% to 75%), while paying rent on the remaining portion to the landlord (commonly a housing association).
This option is suitable for those with a limited budget, as it requires a smaller deposit and mortgage.
Over time, buyers have the opportunity to increase their ownership share through a process called “stair casing.”
Shared Ownership offers a stepping-stone to full homeownership, enabling buyers to get on the property ladder gradually.
Interest Only Mortgages – Can First Time Buyers Get One?
An interest-only mortgage in the UK is a type of loan where the borrower only pays the interest for a specified term.
As a result, the monthly mortgage payments are lower compared to a traditional repayment loan, where both the interest and principal are repaid each month.
The flip side is that the amount you owe at the start of the mortgage will be the same at the end, unless any voluntary repayments are made.
First time buyers do have access to interest only mortgages, however, lenders have strict eligibility rules for these type of repayment options.
It’s important to seek independent advice on this subject, as it poses a higher risk than taking out a mortgage on a capital and interest basis.
How Much Do First Time Buyers Need For A Deposit?
Saving for a deposit is often the biggest hurdle for first-time buyers.
The amount needed can vary depending on several factors, including the property’s price, mortgage type, your credit score and government schemes.
Mortgage lenders typically require a deposit of at least 5% to 10% of the property’s purchase price. The bigger the deposit you can provide, the more options you’ll have and the better mortgage rates you may be offered.
For example, a 10% deposit would require £20,000 for a property priced at £200,000, while a 20% deposit would amount to £40,000.
As discussed above, there are other government schemes such as Shared Ownership mortgages that can potentially allow a lower deposit amount. The minimum is usually 5% of the share you are purchasing.
For example, if you are purchasing a 50% share of a property valued at £200,000, your minimum deposit would be 5% of the share price (e.g., £5000), not the full property value.
Other Factors to Consider
Your credit score and credit history can affect the amount of deposit you need to put down.
For example, if you have had impaired credit so recent missed payments or defaults etc in the past you may need to put down a larger deposit due to the higher risk on the part of the lender.
The type of mortgage will influence the amount of deposit as well.
So for a Buy to Let property you plan to rent to someone, this usually requires a minimum deposit of 20% to 25% of the house price.
Can a First Time Buyer Buy with Someone Else who is not a First Time Buyer?
First Time Buyers can apply for a mortgage with someone else who is not a first time buyer.
However, in some circumstances, lenders do offer specific deals only for first time buyers.
In most cases, as long as one of the applicants is a first time buyer, then access to these products will still be available. This is another area where it’s important to check with your lenders criteria before applying.
The most common scenario is when mum or dad is going on the mortgage with son or daughter to help boost affordability.
The only time this can potentially cause some issues is due to stamp duty eligibility. If one of the buyers is not a first time buyers, this can affect eligibility to the stamp duty incentive, so it’s essential to check first with your solicitor whether this will affect it.
Are You Mortgage Ready?
Choosing the right mortgage as a first-time buyer involves considering various factors, including your financial situation, long-term plans, and eligibility criteria.
While the options mentioned above are popular choices, it’s essential to conduct thorough research and assess your individual circumstances before making a mortgage application.
Find out if you’re in a position to start the mortgage process with our mortgage ready check.
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