Becoming a homeowner is a long process with dozens of things that you’ll need to do before you can pick up the keys to your property. The biggest step in the entire process is sorting out your mortgage.
As this is likely the biggest financial commitment that you will make in your life, it is important that you are well informed on every aspect of the process from how much you should save to your deposit, to the different interest rates available to you.
No matter what type of property development you are looking to invest in here’s our mortgage guide for first-time buyers covering all the major things you need to be aware of.
How big of a deposit will I need?
The most important thing you will have to figure out is how much you should expect to save for your deposit. Even if you take advantage of the government-backed schemes for first-time buyers, you will have to save a certain amount for your deposit if you are looking to secure a mortgage.
Not only will the size of your deposit affect how much a bank will lend you, but it will also affect the interest rates that you are offered as the bigger your deposit in comparison to the cost of the property you are looking to buy, the more favourable the interest rate on your mortgage will be.
For lenders, having a deposit not only signifies that you are financially responsible, but it also makes lending to you less of risk as they would only have to recoup a part of their losses should the price of your property fall significantly below what you paid for it. This is also the reason why buyers are always advised to put down more than the minimum deposit required if they can afford to do so.
So, exactly how much will you need to safe? Well, that depends on your income, if you are buying a property with the help of a government scheme, and what the sale price of the property you are looking to purchase is. The bare minimum that you will need to save is 5% of the property’s value. However, as we have already mentioned, having such a small deposit will mean that you won’t be eligible for the best interest rates on the market.
The commonly recommended amount is to put down a deposit that is equal to 20% of the home’s value as this opens you up to much better interest rates and a wider range of lenders. Of course, with a current average property price of £232,554 in the UK, a 20% deposit would mean that as a first-time buyer you’ll have to save a staggering £46,510.
Can I get any government help with my mortgage?
First-time buyers will be pleased to hear that the government currently has numerous schemes to help people get on the property ladder. From shared ownership to equity loans, there are several different ways that you can get some help to buy your first property.
The most widely known government-backed scheme is the Help to Buy ISA, although prospective buyers don’t have much time to take advantage of it as it is only available until 30th November. If you already have a Help to Buy ISA or open one before the deadline, the Government will match 25% of what you save. This could net you an extra £3,000 to go toward the price of the property you are looking to buy. It’s important to note that you only have until the November deadline to save as much as you can, and you must claim your bonus before 1st December 2030.
But worry not as there are plenty of other government schemes that you can take advantage of. The Help to Buy Equity Loan, for example, allows you to apply for a smaller mortgage using the minimum deposit, with the government loan making up the difference. What this means for first-time buyers is that you will only need to save a 5% deposit, take out a mortgage that covers 75% of the property’s value, and the government loan will cover the remaining 20%. To account for higher property prices in the capital, first-time buyers in London are eligible for a Help to Buy Equity Loan worth 20% – 40% of the property value.
Which type of mortgage should I choose?
A mortgage is likely the biggest financial commitment you will make in your life but like any other type of loan, it is important that you weigh up your options as there is more than one type of mortgage available to borrowers.
Fixed-rate mortgages are often a popular choice as they offer peace of mind that your monthly repayments will stay the same for the duration of your mortgage. As the name implies, if you have a fixed-rate mortgage, you will never have to worry about your monthly payments changing no matter how high interest rates go up. Unfortunately, this also means that you won’t see a difference in your mortgage payments if interest rates go down.
If you opt for a different type of mortgage, then once your initial offer is over you might find that your lender offers you an SVR (Standard Variable Rate) mortgage instead. Although these will vary from lender to lender, they usually go off the Bank of England base rate changes. So, if the Bank of England’s base rate drops or increases, you can expect your own mortgage rate to do the same, although banks can decide on the percentage they choose to increase or decrease by.
It’s worth noting that a standard variable rate mortgage is different from a discounted standard variable rate mortgage, and is often used to entice buyers by offering them favourable rates for the first few years of their mortgage. If you opt for a discounted standard rate mortgage, then your interest rate will always be a certain percentage below the standard variable rate offered by your lender. For example, if the SVR mortgage is 5% and you have an agreed discount of 1.5%, then your interest rate will be 3.5% until the standard rate changes.