First Time Buyers

What are the typical requirements to apply for a mortgage as a First Time Buyer?

What defines a First-Time Buyer is very straightforward. You’ve never owned a property in the UK or elsewhere in the world before. That’s a First-Time Buyer. That means you’ve never been on the ‘title deeds’ of a property in the UK.

Some lenders consider you eligible for First-Time Buyer products if you have not owned a home for a certain number of years. There aren’t many of those, but they do exist.

To apply, we need to know your deposit and how much you can afford to put down as a down payment. We need to know if you’re employed or self-employed. We need to know your income and credit history to establish which lenders will accept you and at what rates.

We need to know your age to determine the length of the mortgage. We also need to know how much you can afford to pay and what your household makeup is. Are you single or a couple? Do you have children? Do you have different types of income?

What is the maximum amount that can be borrowed for a mortgage as a First Time Buyer?

The amount you can borrow as a First-Time Buyer varies from person to person and is based on several variables. It’s based on your income, whether you’re PAYE-employed, self-employed, or a limited company director.

It’s also based on your current age and retirement age to determine how long the mortgage term can be and what credit commitments you have. Some people may have no credit and no debt whatsoever. Other people may have things on finance or credit cards. You may have student loans. All those factors combine to give the maximum amount you can borrow.

The amount also varies from lender to lender because each one uses a specific calculation based on all those factors. There can be significant variation.

We often hear people say they can borrow 4.5 times their income. That is a very rough and crude way of establishing what you can borrow—that’s not actually how mortgage lenders calculate it. It can be used as a rough estimate, but it’s not sensible to rely on that.

It’s worthwhile speaking to a qualified mortgage broker who can delve deep into your requirements and circumstances to give you a bespoke amount. That gives you your maximum budget based on what you can afford – so that you can still have a life because, ultimately, we don’t just live to pay a mortgage.

What’s the minimum deposit required for a First Time Buyer?

Again, it varies from lender to lender. Most lenders, but not all, require at least 5% of the purchase price. If you are buying a home at £100,000, that would be £5,000; at £200,000, it would be £10,000.

The minimum is generally 5%, but there are some specific schemes with lower deposit requirements. These are quite niche, and you should definitely speak to a broker before considering them. They have many ‘lending criteria’ that you have to meet.

Of course, the more deposit you have, the better because you’re borrowing less. Hopefully, that means you should pay less interest over the term of the mortgage. It can make having your mortgage approved a little bit easier, but don’t let that put you off. Speak to a broker, and let us guide you on your options.

What types of interest rates are available on a mortgage for a First Time Buyer?

The different types of products available for a First-Time Buyer will depend upon factors such as deposit level, income, etc. However, there are two main types: fixed and variable.

Within each category, there are subcategories. You have discount variable rates, standard variable rates, tracker mortgages, etc., but generally, you’ll choose between fixed or variable.

What are the pros and cons of fixed versus variable interest rate mortgages for First Time Buyers?

One of the plus points of fixed-rate mortgages for First-Time Buyers is that you know exactly what you’ll be paying for a predefined period of time.

However long that mortgage is fixed, the interest rate won’t change so that you can budget easily. Regardless of what happens in the economy, your mortgage won’t be affected.

The downside is that if interest rates fall, you won’t benefit—you’re tied in for that period of time. But another plus point of fixed-rate mortgages is that if interest rates rise, you’re protected.

With variable interest rate mortgages, we typically think of tracker rate mortgages, which follow an external index – generally the Bank of England base rate. The pros are that if the Bank of England decides to reduce the base rate, then your mortgage payments will fall. The downside is that if the Bank of England raises the base rate, your mortgage payments could become more expensive.

That can make budgeting a little bit trickier—you don’t know exactly what you’ll be spending on your mortgage month to month. But often, tracker rate mortgages come without any redemption penalties.

If you had a windfall and received £100,000, you could potentially pay that off your mortgage without any penalties. That’s great because you’ve reduced your borrowing.

With fixed-rate mortgages, there tends to be a limit on how much you could overpay without incurring a penalty.

Lenders set this penalty at various levels, so it’s important to ask your broker how much you can overpay and the penalties so you know what you’re getting into at the start.

But basically, if you want stability, security, and ease of budgeting, then fixing it may be the right option. If you’re happy to accept an element of variability and volatility, or you’re expecting a significant windfall or want to make huge overpayments, perhaps a variable interest rate mortgage could suit you better.

What government schemes are available to help First Time Buyers?

There are various government schemes to help First-Time Buyers. Some help with deposit building, such as the Lifetime ISA (LISA), where the government will give you a top-up if you’re a First-Time Buyer and you opened an LISA before you’re 40.

They give you a top-up on the deposit you’re saving, up to a maximum of £4,000 per year. So, in any 12-month period, you could save £4,000, and the government would top it up by 25% up to £5,000. That can help you build your deposit faster. Note that this can only be used to buy a home.

Other schemes, such as shared ownership, allow you to purchase a share of the property. There’s also the Mortgage Guarantee Scheme, where the government underwrites a proportion of your mortgage so that mortgage lenders can offer 95% mortgages, and you only need a 5% deposit.

In this scheme, the government underwrites the lender, not you, as the mortgage holder. But it can help because it means the default deposit level is lower, reducing the time it takes to save and hopefully get you on the property ladder [podcast recorded in July 2024].

What documents do I need to get pre-approved for a mortgage as a First Time Buyer?

The documents you need as a First-Time Buyer are vitally important because we have to use them as evidence for the lender that you can actually afford the mortgage and prove who you are.

Every application will require proof of ID, such as a passport, driving licence, or birth certificate. Ensure they’re valid and up to date, in the correct name, and, on a driving licence, registered to your correct address.

Lenders want to know where you live when doing their credit check. We use council tax bills, utility bills, a driving licence, bank statements or credit card statements for address verification. A lender wants at least a three-year address history to establish if you are eligible for their mortgage.

Next is income documents. This will vary depending on whether you’re employed or self-employed. If you’re employed, lenders generally require at least three months’ pay slips. Depending on the lender, they may also request an employee’s reference. They may ask for a work contract if you’ve just started in your role. We would typically ask for a P60 as well.

If you’re self-employed, it depends on your type of self-employment. If you’re a sole trader, mortgage lenders may ask for the most recent two years of tax calculations and corresponding tax year overviews. That’s not the case for all lenders; some will ask for more, some will ask for less.

If you are a limited company director, they may ask for tax calculations and tax year overviews, but they may also request accounts.
Next, we need to know your credit history. It goes back quite some time, so the easiest route is to provide a credit report. It’s effectively a report on how you have managed your credit and how much credit you’ve had now and in the past. It also shows you your credit rating. That can prove vital when getting pre-approved for a mortgage.

We also need bank statements. You might think a pay slip evidences your income, but the bank statement shows the income being paid in, and that’s really what matters. If you’re employed, we’ll ask for three bank statements, and they need to tally with your pay slips.

If you’re self-employed, we may require personal and business bank statements. Depending on the lender, they may wish to establish that your business is in good health with plenty of income coming in and supports the income from the tax documentation.

Lastly, it’s about evidencing your deposit. If you’re getting a gift from a family member, we need bank statements from that family member.