First Time Buyer Mortgage
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First Time Buyer Mortgage
A First Time Buyer Guide with Adam Messer.
What is a First Time Buyer mortgage?
There aren’t really any specific mortgages for First Time Buyers, although you get the odd special product or scheme for First Time Buyers. Help to Buy, when it was around, was just for First Time Buyers in its later days.
But there isn’t necessarily a dedicated First Time Buyer mortgage. You can have any mortgage from any lender that you qualify for.
What are the typical requirements to apply for a First Time Buyer mortgage?
The same rules apply, really, whether you’re a First Time Buyer or not. We’re going to need some documents to get you a mortgage: some payslips, bank statements and things to demonstrate how much you earn and where you work.
You need to show your income because you’ve got to be able to afford the mortgage. You’ll need a little bit of deposit as well. It might not be as much as you think – you can get a mortgage with as little as 5% deposit currently.
There’s even a lender at the time of recording this [August 2023] that will offer you a mortgage with no deposit. You have to have been renting for a year to qualify – it’s probably worth a podcast in its own right, this product.
But generally you need a 5% deposit, some income plus a good credit score. There are a few things we need to join together as part of the application to build a picture of everything for the lender.
What’s the minimum deposit required for a First Time Buyer mortgage?
5% is the minimum deposit, but there is that one 100% scheme. On this, the lender will look at giving you a zero deposit mortgage if you’ve rented for the last 12 months and can show that rental history. It doesn’t have to be in the 12 months leading up to your application – you could have rented for 12 months but moved out three months ago.
Your mortgage payment can’t be any more than your rent was. At the moment, with rates quite high that makes it a little bit tricky – your mortgage payment is going to be high, so the amount you can borrow isn’t very generous on that scheme. When it launched, rates weren’t as high as they are now. So it helped more people than it perhaps might at the moment.
What’s the maximum amount that can be borrowed?
How much you can borrow depends very much on your income. Let’s focus on people that are employed – because we’ve got a podcast coming up on the self-employed later on. So if you’re employed you will have a basic salary, but you might also have things like overtime, bonus or commission. That all goes into the mix.
Lenders won’t always use all of those extra bits, but they’ll all use your whole basic salary. If you get extra money on top of that, lenders won’t always include it in your borrowing calculation. It varies from lender to lender. Some are more generous.
We can also include benefits – child benefit, tax credits, child maintenance or disability allowances. Any income like that is usable income. All of that will go to how much you can borrow, and the lender will do a calculation based on the figures we put in.
The lender works out how much income you have each month and how much you can spend on the mortgage. They’ll use a stress rate in the background, which you might have heard people talk about in the news. They then come up with a figure they think you can afford each month – the affordability figure, and that sets how much you can borrow.
You can assume it’s about 4 to 4.5 times your income. The odd lender might offer a little bit more if you earn a lot. Some lenders are more generous if you earn over £100,000 a year.
What types of interest rates are available on First Time Buyer mortgages?
There are two main types of product to think about. The first is a fixed rate, and most people think they want a fixed rate. It’s going to be stable, and you’re going to know exactly what your payments are going to be for a set period of time – normally two years, three years or five years. 10 year deals are available as well. Fixed rates are good for budgeting and stability.
There’s also what we call a Tracker – a Bank of England base rate tracker mortgage. I’ve done a few more of these in recent months because they can sometimes be a little bit lower than the equivalent fixed rate product.
A base rate tracker follows or tracks the Bank of England base rate. If the base rate goes up, your mortgage payment goes up with it; if the base rate comes back down again, your mortgage payment comes down too.
So hopefully if interest rates come back down in a couple of years – that’s the theory – being on a tracker could be a good thing. We’re not expecting to get back down to 1% but they might come back to 3% or 4% over the years to come.
Being on a base rate tracker right now, as the rate is going up, probably isn’t the best thing – but a lot of tracker products don’t have a tie-in so there’s no penalty to come away from it. If you’re due to move, or you’ve got some more money coming in, or you need some flexibility for whatever reason in the short term, a tracker might be the way forward. There’s no penalty when you make an overpayment or when you move.
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What is the lender’s standard variable rate and why is it important?
Each lender has their own standard variable rate and they control whether it goes up or down. It’s usually loosely linked to the Bank of England but it doesn’t have to follow exactly.
That’s the rate you go on if you don’t do anything when your mortgage deal ends. So if we set you up with a fixed rate for two years, at the end of that time we will remortgage – to change lenders or at least change rates.
But if you don’t do anything and you just let it run, you will end up on the lender’s standard variable rate and pay a lot more than you need to. The variable rate is normally a lot higher than all their other rates – they rely on people being lazy. That’s why it’s always important to look for a new deal when your current one ends.
What are the pros and cons of fixed versus variable interest rate mortgages?
A fixed rate gives you stability, so you know exactly what your payment is going to be for two, three or five years. With a variable rate like a tracker, you don’t have that stability, but you can make the most of rates coming down. Plus, you’ve got no tie in so you can overpay or leave the deal whenever you choose with no penalty.
What government schemes are available to help First Time Buyers?
There’s not that much available at the moment. We did have Help to Buy until last year and that was really popular for First Time Buyers on new build homes. But that’s gone and nothing’s come along to replace it.
We do have First Time Buyer ISAs – in fact, anyone can have this. A Lifetime ISA lets you pay in each month and then the government gives you a bonus either on retirement or when you buy your first house.
The bonus can change over time but I think it’s 25% now. It’s something everyone should have – a Lifetime ISA.
Some lenders do have their own schemes like the 100% mortgage but nothing has replaced Help to Buy.
What documents do I need to get pre-approved for a First Time Buyer mortgage?
You need to prove you are who you say you are – with proof of ID and proof of address. We need the most recent three months’ payslips to prove your income and we need three months’ bank statements as well.
Some people get worried about showing bank statements because they’ve got all sorts of weird and wonderful things on them. A handy hint for you: if you’re sending money to your partner or friends and you will be applying for a mortgage soon – avoid the funny transaction references like ‘money for drugs’ as that can be embarrassing.
But the lender really is just looking at your bank statements to make sure your monthly expenditure is within your means. If you’re always going over your overdraft, that doesn’t look good. If you’re in your overdraft, that doesn’t matter as long as it’s agreed.
No-one’s going to worry that you spend x amount on Just Eat every week – we’re not worried about that. But lenders don’t like to see payday loans or a lot of gambling on your statement.
If you’re self-employed there are other things we might need, but it’s more bespoke depending what you do and how your business is set up. Generally we need your last couple of years’ figures, whether you have a limited company or are a sole trader. We’ll talk more about self-employed mortgages another day.
What are the steps in applying for a First Time Buyer mortgage?
The first thing you need to do is get prepared. Before you start looking on Rightmove, you need to set a budget. We see so many people that do this the wrong way round and get bad news at the end, that they can’t afford the property they want. That’s not good.
So speak to a mortgage broker first to work out how much you can borrow and how much it will cost you. Make sure you’re comfortable with the monthly payments and that will give you a budget.
Once you know exactly what you’re going to be spending you can start looking for houses. You can go to an estate agent knowing you’re good for the money. Again, I see so many people that come to us because they’ve seen a house they like. They’ve made an offer and had it accepted. Everything’s great… but then we go to do the mortgage and they realise they are £50k short.
Don’t use online calculators either, because as we said earlier there are all different sorts of income. It’s quite complicated to know what income to put in the box on the lender’s calculator and that will have quite a dramatic effect on how much they’ll lend.
So once you know your budget, find a house you like and have an offer accepted, we will do the mortgage application. We need a solicitor at that point to help you buy the property.
What are the most common mistakes to avoid when applying for a First Time Buyer mortgage?
The big one is what I just said – viewing a house you really love, in your mind you’ve already moved, picturing where your things will go… Then it turns out you can’t actually afford it.
Another is debt. Having too much debt can affect how much you can borrow. There’s nothing wrong with a bit of debt as long as it’s well managed. Loans and credit cards won’t cause you a problem in getting a mortgage, but they will impact how much you can borrow.
So if you could actually pay off debts over the next few months before you start looking for properties, that would be good – even if it means you’ve got a slightly smaller deposit. It will probably help your affordability to get debts paid off.
The other mistake people make is not looking after their credit score. If you accidentally forget to pay a credit card bill or or miss a loan payment, that shows up on your credit score. Lenders will look at your history and wonder – if you didn’t pay your NatWest loan last month, are you going to pay this mortgage back?
So always make your minimum payment on your credit card. Never miss loan payments because that is a major factor. If we end up having to go with specialist lenders that do loans for people with poor credit, then your rate’s going to go higher.
Can I qualify for a First Time Buyers mortgage with bad credit?
Potentially, is probably the answer. It depends how bad the issue is. If you’ve got a few missed or late payments from a year or two ago, that won’t cause too much of an issue. We can probably still get you a high street lender.
More recent missed and late payments will cause a problem for a lot of high street lenders. Even if they’re loans and credit cards not secured on a property, that’s a red flag for a lender.
If you start missing payments on your credit commitments you could end up with defaults. If you get a default on your credit score, that’s bad – and it will stay on your credit history for six years. If the default was four or five years ago it might be okay, but we’re probably going to have to go to a specialist lender at a higher rate. The more specialist we go, the more deposit you need.
The worse your credit file is, the less likely you will be able to buy with a 5% deposit. You might need 15% or 20%. But time heals all wounds – when it comes to credit score, things are gone and forgotten after six years.
What happens if I miss a mortgage payment on a First Time Buyer mortgage?
If you miss a payment, ultimately, nothing’s going to happen. No one’s going to come and take your house away for one mortgage payment, especially now. Lenders have to give you time.
But it is going to go on your credit report. We talked about remortgaging at the end of your fixed rate deal – if you’ve missed a payment on your mortgage, even just one in the last year, that’s a major red flag to a new lender. We definitely don’t want to be missing mortgage payments.
If you do miss payments, you’ve got some time before lenders will be talking about repossession. But that’s where it will end up. There’s a massive warning on everything we do, on every page of the website and every document you see from the mortgage lender. If you don’t pay your mortgage, your home will be repossessed – and we’ve seen it happen. So if you’re going to miss any payments, don’t let it be on your mortgage.
Your home may be repossessed if you do not keep up with your mortgage repayments.
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