Buying a home is likely to be the biggest financial commitment you will ever make and so it is important to arm yourself with as much information as possible. In this article we offer help for first time buyers and cover everything that a first time home buyer should know when getting a mortgage, including how much deposit you will need, how best to save for a deposit and understanding how first time buyer lenders work.
While we provide a lot of practical guidance in the information below, we want to keep the information relevant and concise and so we do not provide a detailed analysis of the individual lenders or their lending criteria. It is important to understand the value of seeking mortgage advice and speaking to a qualified independent mortgage specialist who can walk you through the buying a house process. Lenders are constantly changing their offers and the best mortgage brokers will have access to the whole of the market (unlike comparison sites and mortgage calculators) as well as having a detailed understanding of the lending criteria for each. I would recommend that you read this article in full first and foremost and once you understand the options available to you and the application process, seek the services of a qualified independent mortgage broker.
If you don't know a mortgage adviser whose opinion you trust then you can get your mortgage options reviewed for free online through Habito, one of the first online mortgage brokers in the UK. I've personally been into Habito's offices to see how they check through over 20,000 mortgages from more than 90 mortgage lenders before making a recommendation. The whole process can be carried out online (without the need for face-to-face meetings) which is useful for first time buyers looking to get on the ladder. Habito has a 5 star rating on Trustpilot from over 2400 customer reviews.
Can I get a mortgage?
Before you start looking at what mortgage options are available to you you need to make sure that getting a first time mortgage is the right choice for you. A lender will look into your finances in great detail and so it is important that you do the same in preparation. If now is not the right time, it is better to wait than to chance it and get rejected. Even if it is touch and go and you can just about afford it, it may be better to wait a little longer and give yourself a financial buffer.
How much can I borrow?
In the past lenders would multiply your annual income to work out how much they would be happy to lend you, but now it is focussed on affordability. Income is still a key consideration but it will be compared to your outgoings so that the lender can build up a full picture of your finances. There will be larger scrutiny on your fixed spending, such as loans or credit card repayments (as these can’t simply be stopped or reduced) and they will be less worried about discretionary spending like eating out (as this can easily be reigned in). Even if you have little or no debt, you may still fall foul of the affordability checks as lenders will often stress test your finances to see if you could survive an interest rate hike. The amount you can borrow will be based on the deposit you are willing to put down, the overall loan-to-value (LTV) which we will cover further down in this article and your affordability.
How much deposit will I need?
You will need at least 5%, but the more you can pull together the better. Having a bigger deposit has multiple benefits; it will mean you need to borrow less, you will have access to a larger number of lenders (meaning you have more choice) and you will also be likely to get a much better rate. Getting a deposit together is no easy task and there is no quick-fix. Some are lucky enough to be gifted money from parents or grandparents but others will have to cut back and save or perhaps earn additional money via a second job or side hustle. Whatever you do the fact remains that if you don’t have some sort of deposit it is unlikely you will be offered a mortgage.
What does loan-to-value mean? (LTV)
Lenders will often quote the ‘loan-to-value’ or ‘LTV’. Put simply this is the percentage of the property value you are loaned as a mortgage (The amount you are borrowing) In order to work this out you will need to know the property value, let's say this is £300,000, you then subtract the amount you have as a deposit, let’s say this is £30,000. This leaves £270,000 which you then divide by the total value (£300,000) then multiply by 100, which in this case equals 90%.
When you work out the numbers based on your current deposit amount, if the loan-to-value figure you come up with is higher than the one quoted by the lender, you will either need to save more money or pick a cheaper property.
Let’s use the same example as above and assume the lender will offer a mortgage based on a LTV of 85%. In order to work out the deposit needed, you just need to multiply the property value by 85% which equals £255,000. Deduct £255,000 from the total value of the property (£300,000) and you get £45,000. That means in order to be offered a mortgage from this particular lender, you would need to save a further £15,000 (as you currently have £30,000 saved in this example). Alternatively, you could look for a cheaper property altogether as this will automatically bring the LTV down.
What if the lender values my property less than the amount I have agreed?
Remember that the loan-to-value is based on the valuation that the mortgage company places on the property. If that value is lower than the price you have agreed, this will change the loan-to-value. Let’s use the example above
Expected loan to value
Property Price Agreed - £300,000
Current Deposit - £45,000
Loan-to-value - 85%
Lender's revised loan-to-value workings
Property Price Agreed - £300,000
Property Value (by lender) - £295,000
Lender will loan 85% - £250,750
Current Deposit - £45,000
Further deposit required - £4,250
As the property price was agreed at £300,000 but the lender only valued it at £295,000, the buyer will need to increase the deposit in order to meet the agreed purchase price (In this case a further £4,250).
What help is available to first time buyers?
Lenders have tightened up their lending criteria in recent years and it has become increasingly harder for first time buyers to get on the property ladder. There is however some light at the end of the tunnel in the form of first time buyer schemes such as equity loans and shared ownership schemes. We will cover all of them below and their purpose, either to help build a deposit more efficiently or to help bring down the loan-to-value.
What is a Help to Buy ISA?
No longer available, the Help to Buy ISA was set up by the Government in 2015, in order to help first time buyers save for their first home. It provided a tax efficient way of saving as it included a 25% boost from the government. The Help to Buy ISA was phased out on 30th November 2019 in favour of the Lifetime ISA. You can read more about Lifetime ISAs below.
What is a Lifetime ISA?
Similar to the phased out 'Help to Buy ISA', a Lifetime ISA can be used to save towards your first home (taking advantage of the 25% government boost), but it can also be used to save towards retirement. You have to be aged between 18 and 40 to open a Lifetime ISA and you can put in up to £4,000 per year (until you are 50). The government will add up to £1,000 a year and the Lifetime ISA counts towards your annual ISA limit which for the 2020/21 tax year is £20,000.
You can transfer money from any other existing ISA (including a Help to Buy ISA) into a Lifetime ISA, however it is limited to the Lifetime ISA allowance, which is currently £4,000 for the 2020/21 tax year. If you have already contributed to your Lifetime ISA in a given tax year, then you can only transfer what is left of your annual allowance. As with other types of ISA, you can only make contributions into one Lifetime ISA in each tax year.
You can hold cash or stocks and shares in your Lifetime ISA, or have a combination of both. When you turn 50, you will no longer be able to pay into your Lifetime ISA or earn the 25% bonus. Your account will stay open and your savings will still earn interest or investment returns.
Withdrawing money from your Lifetime ISA
You can withdraw money from your ISA if you’re:
- buying your first home
- aged 60 or over
- terminally ill, with less than 12 months to live
- You’ll pay a 25% charge if you withdraw cash or assets for any other reason.*
The 25% charge is to recover the government bonus received but will apply to the whole savings pot, meaning you may get back less than you have paid in. To use a simple example, if you pay in £200, you will receive a £50 bonus. If you were to withdraw this, a 25% charge would apply to the £250 (totalling £62.50) meaning you would only get £187.50 back (a loss of £12.50). You are free to transfer your Lifetime ISA between LISA providers and doing so doesn't affect your annual payment limit and will not attract a withdrawal fee. If you transfer funds out of a Lifetime ISA and then into another ISA, this will be considered a withdrawal and will attract a 25% charge.
*The 25% withdrawal charge has been reduced to 20% until 5th April 2021. This means if you need to access your Lifetime ISA savings prior to 5th April 2021, you will only have to pay back the government bonus. This is expected to be for a limited time only and is in response to the current financial crisis.
Buying your first home using your Lifetime ISA
You can use your savings to help you buy your first home if all the following apply:
- the property costs £450,000 or less
- you buy the property at least 12 months after you open the Lifetime ISA
- you use a conveyancer or solicitor to act for you in the purchase - the ISA provider will pay the funds directly to them
- you’re buying with a mortgage
If you are interested in learning more about the Lifetime ISA, we go into more detail in our article Lifetime ISAs explained - are they the best way to save
What is a Help to Buy equity loan?
The Help to Buy equity loan scheme was launched in April 2013 and will run until March 2021. It is only available on new build properties in England and anyone can benefit from the scheme (not just first time buyers) Scotland, Wales and Northern Ireland offer similar schemes but operate slightly differently.
The government will lend you up to 20% of the cost of your newly built home, so you’ll only need a 5% cash deposit and a 75% mortgage to make up the rest. You won’t be charged loan fees on the 20% loan for the first five years of owning your home.
As a result of providing this assistance, the government has an entitlement to a share of the future sale proceeds equal to the percentage contribution required to assist your purchase. For the first five years of Help to Buy home ownership you will pay an initial monthly management fee of £1. This will continue until the loan is repaid. After five years, the equity loan will be subject to an additional interest fee (collected from you on behalf of Homes England by Homes England’s Mortgage Administrator) of 1.75% per annum on the outstanding amount of the equity loan. From the fifth anniversary of the loan this fee will increase each year by the increase (if any) in RPI plus 1%.
The scheme is designed so that you pay back the loan when you sell your property, giving the Government 20% of the sale price. The government therefore share the proceeds from the rise (or fall) in property prices
Who is eligible for a Help to Buy equity loan?
- anyone in England interested in buying a new build property (until March 2021)
- buyers must always provide a 5% cash deposit contribution (5% of the full
- buyers must take out a first charge mortgage with a qualifying lender
- the maximum purchase price is £600,000
- the property purchased must be your only residence
What is Shared Ownership?
If you are unable to get a mortgage on 100% of a home, shared Ownership (sometimes referred to as Share to buy) offers you the chance to buy a share of your home (between 25% and 75% of the home’s value) and pay rent on the remaining share. It is a great way of getting yourself onto the property ladder as it allows you to buy a bigger share in the property (referred to as staircasing) when you can afford to. You need to think carefully before you apply as it will restrict your options when you come to sell and there are fewer lenders that offer shared ownership mortgages.
Who is eligible for Shared Ownership?
- your household earns £80,000 a year or less outside London, or your household earns £90,000 a year or less in London
- you are a first-time buyer, you used to own a home but can’t afford to buy one now or are an existing shared owner looking to move
Things to consider before entering into a shared ownership arrangement
- fewer lenders to choose from
- restricted options when it comes to selling
- shared ownership properties are sometimes sold on a leasehold basis
Can shared ownership properties be converted to freehold?
A shared ownership property will not automatically become a freehold property once the equity share has increased to 100%, in fact, some housing associations never sell the freehold. Housing associations have the right to retain the leasehold if they wish to, even if the owner is able to buy the property outright and increase the equity share to 100%. It would be wise therefore to discuss the possibility of buying the freehold before you enter into a shared ownership arrangement.
What is the starter homes scheme?
If you are aged between 23 and 40 and are a first time buyer you may be eligible for the starter homes scheme which is designed to help a first-time buyer with a discount of 20% off the purchase price of a new build home. This is a new scheme and the full details are yet to be released. Keep an eye on the starter homes website in the coming months.
What other options are there?
If you are struggling to get a mortgage on your own you could consider applying with siblings or friends, with some lenders allowing joint applications of up to four people. Pooling the salaries together will help, but remember you'll likely need a larger property and there may be complications if and when you decide you want to move.
Bank of Mum and Dad
It is not just the deposit that mum and dad can help with, there are a number of mortgages available that can incorporate their finances. These are fairly complex and you will need to have some open and frank conversations with your family. Something to consider if your parents are keen to help.
Will I have to pay stamp duty as a first time buyer?
First time buyers in England and Northern Ireland are usually not required to pay stamp duty on the first £300,000 for homes worth up to £500,000, however, a temporary stamp duty holiday was introduced in July 2020 meaning the threshold currently stands at £500,000. First time buyer stamp duty is applicable on properties worth more than £500,000, and the relief will not apply in this case. Some lenders will have offers where they will either help with stamp duty or pay the total amount and some developers offer deals to pay the stamp duty when you purchase one of their homes.
A summary of the stamp duty rates prior to the introduction of the temporary stamp duty holiday is below:
|Property Value||% payable (Residential)|
|Over £125,000 - £250,000||2%|
|Over £250,000 - £925,000||5%|
|Over £925,000 - £1,500,000||10%|
Stamp Duty Holiday
On the 8th July 2020, a temporary stamp duty 'holiday' was announced in the chancellor's Economic statement. The stamp duty threshold has been increased to £500,000 in England and Northern Ireland until 31st March 2021. Stamp duty is payable at 5% on all purchases between £500,001 and £925,000 and the next £575,000 (between £925,001 to £1.5 million) is taxed at 10%. Anything over £1.5 million is taxed at 12%. Stamp duty is expected to return to the previous thresholds (shown in the table above) from 1st April 2021.
There is no way to guarantee your chances of being accepted by a lender, but there are lots of things that you can do to boost your chances and we have summarised these below
- check your credit score and take action if something doesn't look right (update addresses etc)
- get on the electoral roll
- pay off any outstanding debt, preferably to within 15-30% of your credit limit (and avoid payday loans altogether)
- pay off and stay out of your overdraft (if you don't need it, get rid of it to avoid temptation)
- save up more than the minimum deposit (offering more than the minimum will boost your chances of being accepted)
- simplify your banking (having multiple accounts with multiple inter-account credits and debits will make it harder for a lender to understand your finances)
- reduce your monthly commitments (cancel any unused or unwanted subscriptions)
Make sure that you research all of the options available to you. If you find that there isn't anything for you right now then don't panic, things will change.
Contact a mortgage adviser, such as the online broker Habito, who can help you get a mortgage or at least tell you what your options are, for free.
Use our Quick tip section above to help better your chances and keep your eye out as new schemes will inevitably be introduced. The mortgage world is a competitive one and lenders are constantly developing new products and introducing new rates and so just because there isn't anything right now, it doesn't mean to say that there won't be some time soon. We will continue to update this article as and when information becomes available and when new schemes are introduced.
Good luck and happy house hunting.
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