Buying your first home
Buying your first home is an exciting prospect, but figuring out how to get onto the property ladder can feel overwhelming.
Whether it's a Help-to-Buy ISA, Help-to-Buy equity loan or a shared ownership mortgage, there's plenty out there to help you on your way.
Here, we explain all you need to know to help you buy your first home.
Housing schemes for first-time buyers
Over recent years there's been a steady increase in the number of people purchasing their first home.
While the financial crisis of 2008 gave way to 'generation rent', financing options have responded to the needs of first time buyers in the current climate. These options have helped first time buyers increase by 75% since the year of the recession:
There's a range of government schemes designed to help first-time buyers. Equally, there's thousands of mortgages on the market all of which are theoretically available to first-time buyers. Banks and building societies also package specific deals for first-time buyers, which may include incentives such as cashback, low fees or a contribution towards legal costs.
Should I try Help-to-Buy?
Help-to-Buy is a government-backed equity loan scheme designed to help first-time buyers get a foot on the property ladder. It covers up to 20% of the cost of new-build homes, which means that you'll only need a 75% mortgage and a 5% cash deposit.
For people who don't have a lot of savings, Help-to-Buy can be a great option. The average loan for Help-to-Buy customers is just below £175,000, while regular customers receive average loans of slightly over £215,000.
How much can I borrow?
It's a good idea to work out roughly how much you can borrow before you go house-hunting. There is no point in picking your ideal home only to find that it is beyond your financial reach.
In the past, lenders traditionally calculated the amount you could borrow as a multiple of your salary. So, you might typically be granted a mortgage of three times your gross annual earnings.
But most banks and building societies these days also take into account the 'affordability' of the mortgage and will ask for details of your incomings and outgoings before they decide on a figure for how much they are willing to lend. They will also take into account the potential impact of future interest rate rises.
Our mortgage calculator will give you a rough idea as to the amount you should be able to borrow.
Fortunately, now is a good time to get a loan. In 2016-17, average loan advances to first-time buyers increased across the board, with buyers aged 40 to 50 and 50+ seeing particularly large increases. People aged 50 and over, for instance, saw their average loans increase from around £107,000 to £161,000.
However, your ability to get a mortgage isn't down to your salary and outgoings alone, your credit score is important, too. If you have suffered from bad debts in the past, your application for mortgage finance might be turned down, or you might be charged a higher rate of interest.
The importance of saving for a deposit
The more you can save up for a deposit, the better mortgage deal you are likely to get. Not every mortgage lender will offer a loan for 100% of the property's value, and those deals that are available will carry a higher rate of interest than loans for a lower percentage.
This percentage figure will be described as the 'loan to value' or LTV
More banks and building societies will lend up to 95% of the property's value - a 95% LTV. Here, you will need a minimum deposit of 5%.
You will have a wider choice still if you can put down a 10% deposit. However, the very best rates are reserved for borrowers with a big deposit - if you can put down 40% of the property's value, you're likely to get a lower interest rate in return.
It therefore makes sense to save as large a deposit as possible because you will have access to a wider range of mortgage products and be able to benefit from more competitive rates. The average deposit for a first-time buyer is substantially lower than it is for those already on the housing ladder, so even if you save up a little bit more, you'll give yourself a great chance of getting a better rate.
Fixing your mortgage rate
There are numerous mortgage deals but they broadly fall into two categories - variable rate and fixed rate.
Many first-time buyers favour fixed-rate mortgages because they allow them to budget with certainty. With a fixed rate, you know exactly how much you will have to pay out each month, so you don't need to worry about fluctuations in interest rates.
You can usually fix your mortgage for two, three or five years. But some lenders offer long-term fixes of 10 years or more.
It's important to think about how long you want to lock yourself into a mortgage for. Most will charge you a penalty - known as an early repayment charge - if you move out of the deal before the end of the fixed term. Therefore, most first-time buyers tend not to go for long-term fixed rate deals because circumstances can change in 10 or even five years.
If you're on a fixed deal, you'll need to react when the term comes to an end. You should shop around for another good deal with the same lender, or move your mortgage elsewhere if you find a more attractive offer.
The interest rates on fixed rate mortgages tend to be slightly higher than those on the best variable rate deals because you are paying for the security and peace of mind. The lender is essentially charging you extra to cover itself in case rates rise elsewhere.
Remember, variable rates can change at any point but usually do so if the Bank of England puts its base rate up. When that happens, variable rates will probably rise while a fixed rate will remain the same.
Our base rate calculator will help you work out how your mortgage repayments would be affected by interest rate fluctuations.
Variable mortgages
There are three types of variable rate mortgage.
Standard variable rates (SVR) fluctuate at the lender's discretion - it decides if and when to make an increase or decrease, and by how much. That said, movements will more than likely be triggered by alterations in the Bank of England base rate.
Tracker mortgages are directly linked to the Bank of England base rate - so the mortgage rate you pay might be 3% plus whatever the base rate is at the moment. If the Bank of England puts the base rate up by 0.25%, your mortgage rate will rise by the same amount.
The third type is a discounted rate. Discount mortgages are linked to the lender's standard variable rate (SVR), not the Bank of England Base rate.
Always make sure you understand how your mortgage works so that you do not pay a premium for a product that you don't need.
The cost of your first home
There's no hard-and-fast rule for how much you can expect to pay for your first home, although most first-time buyers pay between £100,000 and £200,000 for their homes. Of course, location is a big factor when it comes to cost, and average house prices in different areas of the country can vary dramatically.
Fees for first-time buyer mortgages
Don't forget to factor fees into your cost calculations. Most lenders charge an arrangement fee for your mortgage, which could be £1,000 or more. Some also levy a non-refundable booking fee of several hundred pounds.
Also, don't forget the other fees and costs associated with buying a home - you'll have to pay for a survey and for the conveyancing. Then of course, there's the cost of furnishing your first home.