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More tips for first-time buyers.

Owning your own home is a dream that many people have, but getting on the property ladder isn’t easy – especially with the current cost of living. In this blog, we’ll look at 4 things you can do to help you get a mortgage and into your first home.

But before we get to the four tips for first-time buyers, let’s look at the basics of what a mortgage is, and how they work…

A mortgage is a loan that is secured against a property. Unless you have inherited a property, or have enough money to buy a house outright with cash, you’ll need a mortgage to get on the property ladder. According to the Office of National Statistics, the average UK house price in February 2022 was £277,000 – that’s no small amount, and it’s unlikely that any of us could raise that kind of money without borrowing it.

When you apply for a mortgage, the lender makes an assessment on whether to lend you the money, and how much they will let you borrow, based on a variety of factors, such as:

  • Your employment and income.
  • Your credit profile and history.
  • The value of the property you want to buy.
  • Whether they assess the mortgage to be affordable.

Every lender is different and have their own criteria when it comes to lending, so you might find that while Lender A won’t give you a mortgage, Lender B will. There are hundreds of banks, building societies and specialist lenders out there, who cater to a wide range of customers and circumstances. This is obviously a good thing for you as prospective mortgage customer. However, there are some things you should do before you apply for a mortgage – and some things you should avoid – if you want to have a chance at getting the best rates (more on that later).

As mentioned above, a mortgage is a secured loan – meaning that it is secured against an asset, in this case, the property. This is to protect the lender’s investment in the event that a borrower fails to pay off the loan – if this happens, the lender has the ability to repossess and sell the property to get their money back.

When you buy a property with a mortgage, although the property is yours and you will be listed on the deeds, the lender retains a stake in it until the mortgage is paid off in full. This is shown on the deeds as a “legal charge” – which is basically a note showing that there is an outstanding loan secured against the property. Once the mortgage is paid off, the charge is removed from the deeds.

So, it’s important to remember that if you don’t keep up with the repayments, your home could be repossessed. That’s why your mortgage has to be affordable – something that both your mortgage broker and the lender will assess, but something that you should bear in mind when starting to look for your new home.

When it comes to paying back the mortgage, most mortgages last for between 25 – 30 years, during which time you’ll make monthly payments. There are two type of mortgages:

  • Capital repayment – with this type of mortgage, your monthly payments cover both the capital balance (the amount you borrowed) and the interest that is applied to the loan. At the end of the term, providing you have made all of your monthly payments, the loan will be paid off in full.
  • Interest only – with this type of mortgage, your monthly payments only go towards paying off the interest. The capital balance is not paid off at all. Because of this, interest only mortgages are cheaper than capital repayment ones. But, at the end of the term, the capital balance will be outstanding, and you will have to pay it off as a lump sum (usually by selling the property, or cashing in an investment or pension). Although interest only mortgages were more common in the past, nowadays they are mainly used for Buy to Let purchases, and are not generally available for first-time buyers.

That’s the basics of mortgages covered. Let’s move on to some tips….

1. Put together a deposit – the bigger, the better.

To get a mortgage, you’ll need a deposit. A deposit is a percentage of the property’s value, which you can provide in cash.

You’ll need at least a 5% deposit to get a mortgage – however, the bigger the deposit, the better, as it means you’ll have to borrow less. And the less you have to borrow, the less risk there is for the lender – which means cheaper interest rates for you.

This is because, amongst other things (like your credit profile, which we’ll talk about later) the interest rate of your mortgage is dependent on what’s known as the LTV – the Loan to Value. This is the amount you are borrowing compared to the value of the house you are buying, expressed as a percentage.

For example, let’s say the house you are buying is worth £200,000. You have a deposit of £20,000 – which is 10% of the property’s value. To buy the house, you’ll need to borrow the remaining £180,000 – which is 90% of the property’s value. So, your mortgage would have an LTV of 90%.

Generally speaking, the higher the LTV, the higher the rate. Mortgages at 90% – 95% LTV are more expensive than those at 60% LTV, so it pays to save as much as you possibly can for your deposit.

But that can be easier said than done. Remember that the average house price was £277,000 – putting together just a 5% deposit would mean having to save £13,850. That’s a lot of money to save, especially in today’s financial climate, with the cost of living seeming to increase every day.

There is no easy solution to this. When it comes to putting aside money for a deposit, there are only a few things you can do:

  • Cut back on what you’re already spending.
  • Make more money than you’re already earning (by getting a second job, working extra hours, or getting a promotion that comes with a pay rise).
  • Access cash from an asset you own (selling a vehicle, or cashing in an investment, for example).

For most people, making cut backs is the most workable way of saving for a deposit (and it goes hand in hand with our second tip about budgeting). It might mean not going to the pub as often, having a few less takeaways each month, shopping around and not buying “brand name” food items, or not going on a foreign holiday for a couple of years – every little helps and although you’ll be making sacrifices, those sacrifices will pay off when it comes to getting your mortgage.

There are also a couple of government schemes that can help when it comes to saving for a deposit, or accessing better mortgage deals with a smaller deposit.

The Lifetime ISA (LISA) is a savings account where the government will top up your savings every year. With a LISA, you can save up to £4000 each year and the government will top it up with an extra 25%. So if you save the full amount, the government will put in £1000 every year. You need to be between 18 and 40 years old to open a LISA, and you can use the funds to help you buy your first home if it’s worth up to £450,000. If you’re buying the property with another first time buyer, you can both use your LISAs towards the purchase.

The Help to Buy equity loan scheme is available for first time buyers in England who are buying a new build. Although it’s only available to people living and buying in England, there are similar schemes available if you live in Wales, Scotland or Northern Ireland.

There is a maximum property purchase price, which varies, depending on where in England you live. You’ll need at least a 5% deposit, and the government will contribute up to 20% of the property’s value in the form of a loan. The loan is interest-free for 5 years, after which you’ll be charged at a rate of 1.75%. Depending on how much you borrow from the government, using the Help to Buy scheme could mean that you’ll only need a 75% LTV mortgage.

The Help to Buy scheme is due to end on 31 March 2023, and will close to new applicants on 31 October 2022, to give enough time for transactions to complete before the scheme is wound up.

But what if you don’t qualify for the schemes above, or you’re struggling to put together any kind of deposit?

In this instance, a guarantor or family assisted mortgage might be a suitable option.

This is a specific mortgage product, where a parent or other close family member acts as a guarantor for you, taking on some of the risk and the liability for the mortgage.

The family member will do this by using their savings or their own home as security against the mortgage, and by agreeing to cover the payments if the borrower cannot. Guarantor or family assisted mortgages can sometimes mean that you can get a mortgage without a deposit – as the collateral provided by the family member takes the place of the deposit.

Not every lender offers these products, and the criteria will vary from lender to lender. However, generally speaking, the family member will need either enough savings or equity in their home to provide the collateral and a good credit profile. They will also have to receive legal advice, to ensure that they are fully aware of the risks involved and are happy to proceed.

2. Budget, budget, budget.

When you’re buying your first home, you’ll have a lot of additional costs, on top of your monthly mortgage payments, such as:

  • Solicitor’s fees.
  • House survey costs.
  • Buildings insurance.
  • Stamp Duty Land Tax (if, as a first time buyer, the home you are buying is worth more than £300,000.)
  • Removals costs.
  • Costs of decorating and kitting out your new home with furniture and appliances.

All of these costs can add up, so it’s important to factor them into your budget when you first start thinking about buying a house.

Another thing to keep in mind when working out your budget is how your spending behaviour might look to a prospective lender. When you apply for a mortgage, the lender makes an assessment about how much of a “good customer” you’re likely to be. They want to know that you can manage your money, which will give them some confidence that you’ll be able to pay the mortgage.

Lenders will assess your spending habits, and some will want to see several months’ worth of bank statements. They’re looking to confirm information you gave them about your income and expenditure, but they’re also looking for some level of financial stability.

In the few months before you apply for a mortgage, you should make an effort to be as financially responsible as possible (making yourself as appealing to a potential lender as possible in the process):

  • Watch the spending – no one is saying that you can’t enjoy life, but be careful of any excessive or frivolous purchases, and watch out for those little impulse buys that add up to a lot at the end of the month.
  • Stay out of your overdraft – try to limit the use of your overdraft facility. Lenders want to see that you can manage your money, and being in your overdraft every month could suggest to them that you’re not able to balance your income against your outgoings.
  • Don’t gamble – in most cases, lenders don’t like to see evidence of gambling on your bank statements. If you do still have a little flutter, then be prepared to answer a few questions – the lender will want to make sure your gambling isn’t a problem.
  • Avoid taking out credit – taking out credit prior to applying for a mortgage might make the lender think you’re struggling unless you have a good reason for it. And you should definitely not take out a pay day loan. Having a pay day loan within 12 months of applying for a mortgage will most likely end your application before it’s begun – certainly as far as lenders who offer the best rates are concerned. It doesn’t matter if you paid it back on time, or what the reason was – most lenders see a pay day loan as evidence that you ran out of money that month, so will be extremely concerned about how you would cope with an additional monthly mortgage payment.

3. Clean up your credit file.

Your credit profile is another deciding factor in whether or not you’ll get a mortgage, but also what type of mortgage rate you’ll get. Before making an application, you should take the time to check your credit report to make sure that your score is as good as it can be.

Although different lenders assess your credit file in different ways (and how they do this is kept a closely guarded secret) there are some things you can do to give your mortgage application the best chance of success:

  • Make sure you’re on the Electoral Roll.
  • Close down any bank accounts or credit accounts that are not in use, particularly ones that are linked to old addresses.
  • Don’t use any more than 50% of your available credit limit.
  • Make your payments on time – if any accounts are behind, bring them up to date as soon as you can.
  • Pay off your credit card in full each month if you are able – this will help to improve your overall credit score. This is especially important if you are using a credit card to build your credit score.
  • Report any inaccuracies to the credit reference agencies to get them corrected or removed.

There are several credit report services out there, but Check My File is the only UK credit report service to use data from the 4 main credit reference agencies (Equifax, Experian, TransUnion and Crediva). Sign up today for a free 30-day trial.

But what if you have bad credit, such as County Court Judgements (CCJs) and defaults?

Having bad credit isn’t the end of the world – there are lenders out there who specialise in bad credit mortgages or mortgages for people with CCJs. You might not get the lowest rates on the market, but they are still competitively priced and affordable.

4. Speak to a whole of market mortgage broker.

When you’re buying your first house, there’s a lot to think about and even more to – but shopping around yourself to find the right mortgage doesn’t have to be one of them. A whole of market mortgage broker isn’t tied to just one lender, and can access a much wider range of products. A whole of market broker is uniquely placed to find you the right mortgage that best suits your individual needs and circumstances.

A mortgage broker will know which lenders are likely to accept your application, and which lenders might not – especially if you have bad credit – which means you’re not wasting time or having your credit profile affected by failed applications.

They’ll also be able to assess your situation and provide advice on things that you may not have considered, like life insurance, critical illness cover or income protection – products that go hand in hand with a mortgage, and help to protect you, your family and your home.

If you’re a first time buyer and are looking for a mortgage, or if you have any questions about what you’ve just read, then give us a call at Dragon Finance and speak to one of our whole of market brokers. We’ll talk you through the process, find a mortgage that’s right for you, and help you take the next steps towards owning your first home.