Buying your first home is exciting, but trying to settle your first mortgage can be tricky.
This is what you need to know to get your first home loan.
What is a first-time homebuyer?
In the true sense of the term, first-time homebuyers refer to people who purchase real estate but have never owned it before.
This includes owning property or land with others in the UK or abroad. It also includes inherited houses.
If you want to use one of the government programs designed to help first-time homebuyers, such as the one outlined below, this is what judges you.
How does a mortgage work?
The vast majority of first-time homebuyers need a mortgage to purchase a home. This is a loan you get from a bank or building society. You usually need to deposit at least 5% of the purchase price of the property as a deposit and borrow the remaining money.
Suppose you want to buy a house worth 200,000 pounds. To get a mortgage, you need to pay a deposit of at least £10,000 (5%) and then borrow the remaining £190,000 (95%). The 95% figure in this example is called the loan-to-value (or LTV) ratio, which is a common mortgage term. Once up and running, the borrower repays part of the mortgage and interest every month during a period called the maturity. This usually runs for 25 years, but can be shorter or longer.
The government’s recent mortgage guarantee program has paved the way for more access to 95% of mortgage transactions. They offer a range of payment methods, including fixed interest rates and variable interest rates, some with interest rates lower than 4%.
Nonetheless, the more money you save as a deposit, the less money you need to borrow. More importantly, if you have more deposits, you will get a lower mortgage interest rate.
How much does it cost to climb the housing ladder?
It depends on where you buy. Some parts of the UK are much cheaper than others.
However, according to national house price indices such as Halifax and the National House Price Index, even the average house price in the UK is now around £250,000-260,000.
To get a mortgage for a house worth £250,000, you need £12,500 to pay a minimum 5% down payment.
In terms of additional expenses, borrowers also need to consider legal fees, mortgage fees, survey fees, relocation fees, and land registration fees. Not to mention the cost of decorating a new home.
For more expensive properties, stamp duty may also be required. Stamp duty is a tax paid by buyers of residential properties in the UK. The amount paid varies according to the value of the relevant property (described below) and the status of the purchaser. At the time of writing (July 2021), first-time homebuyers in London are eligible for stamp duty discounts.
What types of mortgages are there?
There are many forms of mortgage loans. For example, a fixed-rate mortgage will keep your monthly payment at a fixed interest rate for many years.
At the same time, tracking mortgages follows the Bank of England’s benchmark interest rate and will fluctuate accordingly.
People who have a savings account at a mortgage lending institution can use to offset mortgage loans. Here, the amount of your savings matches the amount you owe, and you only need to pay the interest on the remaining debt. Therefore, your savings will not earn interest, and you will not be charged the same amount of mortgage interest.
A guarantor mortgage is a place where parents or relatives promise to pay any missed mortgage repayments if you can’t afford it. This can help first-time homebuyers afford larger properties, despite the risks of the guarantor.
What does a mortgage broker do?
The mortgage broker will search the market and try to find the best deal for you. They may find a mortgage that you cannot find yourself because some lenders have “broker only” transactions.
The broker should know which lender is best for your situation. This may be especially valuable if you have only a small deposit or are self-employed.
Some brokers are free to clients because mortgage lenders pay them commissions. Others charge fees. If in doubt, please ask.
How much can first-time homebuyers borrow?
It depends on how much money you have saved as a deposit, your salary, your expenses and your credit score.
The lender will look at all this information in a comprehensive way to determine if they think you are a reliable borrower and determine the highest mortgage they are prepared to lend you.
But in the best case, the maximum amount you can borrow is usually about 4.5 times your annual income.
When should you apply for a first-time homebuyer mortgage?
Before you start looking at the property, it is best to obtain a mortgage agreement “in principle” from the lender. This will show how much money you can borrow and prove to the real estate agent that you are buying seriously.
This document does not mean that you promise to obtain a mortgage from the lender, nor does it guarantee that the lender will give you a mortgage.
However, this is a useful first step. Once you have found your dream home, you can contact the lender and the lender will then proceed with the mortgage application based on the property and comprehensive affordability checks.
Is there a plan to help first-time homebuyers?
Due to the pandemic, there are various measures that can help first-time homebuyers initially ascend the property ladder.
Take the current stamp duty exemption as an example. In England and Northern Ireland, this means that first-time home buyers do not have to pay stamp duty on properties valued at no more than £300,000. A 5% tax is then levied on values between £300,001 and £500,000, after which the standard stamp duty applies.
Help-to-Buy is a government program that provides equity loans to borrowers buying new houses in the UK, up to 40% in London and up to 20% elsewhere. You only need to raise a 5% down payment, and the rest of the money will be raised through a lender who specializes in “helping to buy” a mortgage.
Fair share
Shared ownership is another approach used by some first-time homebuyers: You buy part of the house from the landlord (usually the local housing association) and then pay the remaining share of the rent.
You can buy a larger share later and try to get 100% of the shares.
Lifetime Personal Savings Account (Lisa) is a useful way to save money quickly. You must be 18 to 39 years old to open one of these tax-saving savings accounts. The money can be used to buy your first home worth £450,000 or less, or to save money for future life.
You can pay £4,000 to this account every year until you are 50 years old. The government will add a 25% bonus to your savings, up to a maximum of £1,000 per year.
