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First time buyer
What's a first-time buyer, and why does it matter?
A first-time buyer is someone who has never owned a home in the UK or abroad and is purchasing their first residential property. The property being bought, has to be where the buyer will live, and not somewhere that is planned to be rented out or used for commercial or business purposes.
First-time buyers can get specific offers that can make purchasing a home, and getting onto the property ladder easier. One of the biggest of these savings is on stamp duty.
What is a mortgage, and how does it work?
A mortgage is a type of loan that is used to buy a property or land. The lender will provide the money needed to purchase the property, and this is paid back to them in installments along with any interest or fees they might levy when the mortgage is agreed. Once the mortgage is paid off the buyer owns the property outright.
How much can I borrow?
Working out how much you can borrow, is dependent on how much you can afford. Typically, this involves assessing what deposit you are able to provide, what income and expenditure you are already committed to, and your credit score and history. Lenders will review not just what you can afford today, but also what this looks like long term.
Usually, most lenders will offer up to 4-5 times your annual income.
Do I need a deposit for a mortgage, and if so, how much?
Yes. Most lenders will need a deposit to be paid by you for the property. Normally, this is a minimum of 5% of the purchase price, but the bigger the deposit you put down, the cheaper the mortgage costs.
Why are mortgages cheaper when you have a bigger deposit?
When a house is purchased, whoever provides the money to purchase it has ‘equity’ in the house. For example, if buying a £100,000 house, with a £10,000 deposit, and a £90,000 loan; the lender would own 90% of the house (the equity), and you would own 10% of the house (the equity).
A lender uses this equity split to assess how much risk/reward there is. They work this out as Loan-to-Value (LTV), literally, what percentage of the property (‘the value’) is being funded by the loan. The lower the LTV, the lower the interest rate, and simply put, a bigger deposit will lower the LTV percentage.
What is stamp duty, and do I have to pay it?
Everybody that buys a house has to pay stamp duty, unless they fall under one of the exemptions, like being a first-time buyer, buying a property that falls beneath the stamp duty threshold, or if you’re being transferred the deeds to a property. Occasionally, there are also ‘stamp duty holidays’ where the government will reduce or waive some or all of the stamp duty.
If you buy a property that’s worth up to £300,000, you don’t have to pay any stamp duty. However, you do have to pay stamp duty on any amount over £300,000. This is worked out on a sliding scale that the government sets.
And if paying stamp duty seems daunting, whereas some people choose to borrow just the amount they need to buy their house, you can also borrow the amount you need to buy the house plus a little extra to cover fees like stamp duty.
Plus, if you are a first-time buyer then you will not have to pay stamp duty on the first £300,000 of any house that costs up to £500,000 (and only 5% on any proportion between £300k and £500k).
Other than mortgage interest, are there any other costs to consider?
Yes. The lender may charge fees for giving you the funds, processing the case, or completing specific tasks (e.g. valuation fees). Not all lenders charge these, and many offer products with reduced fees or no fees. Some lenders will even offer loans with incentives, for example, contributing towards your legal/conveyancing costs, or offering cashback.
Where there are fees, often you can choose whether to pay fees upfront or include them in the amount you borrow. And don’t forget, there are also costs like property searches, surveys, home insurance, moving costs, and stamp duty.
Are there different types of mortgage?
Yes. There are 4 main types of mortgage.
- Fixed-rate – The lender agrees on a single interest rate on your loan for a set period of time (typically between 2 and 15 years). You will then pay the same amount back to them every month until the ‘fixed period’ ends.
- Variable-rate – Unlike fixed-rate, the interest you are charged varies, and is based on the interest rate decisions made by the Bank of England. This means they arent predictable, and your monthly repayments can go up and down. Because of this, some months you might pay more than expected, while others you might pay less.
- Tracker mortgage – With a tracker mortgage, your interest rate ‘tracks’ the Bank of England base rate e.g. if the base rate is 1.25% you might pay the base rate plus 2% (3.25%). If the base rate changes what you pay will also change with it. Normally, a tracker mortgage has an introductory period (e.g. 2 years), and after this, you would move onto the lender’s standard variable rate.
- Discounted variable-rate mortgages – With a discount mortgage, you pay the lender’s standard variable rate (a rate chosen by the lender that doesn’t change very often), with a fixed amount discounted. e.g. if your lenders SVR was 5% and your mortgage came with a 2% discount, you’d pay 3%. Discounted deals can be ‘stepped’; e.g. with you getting one discount for the first year and a different discount for the next year
Are there any other schemes available to help first-time buyers?
You could use any of the First-time buyer Government schemes to buy a new house:
- Help to Buy Equity Loan – If you’ve got a deposit of at least 5%, you can borrow 20% of the remaining deposit balance from the government (or 40% if you live in London). This equity loan is interest-free for the first five years, and from year six, you’ll be charged an interest on the loan amount. This is instead of taking out a 95% mortgage and is called an equity loan.
- Lifetime ISA – If you are aged between 18 to 39 and trying to save up for a new home deposit, you can save into a Lifetime ISA where cash is topped up with a 25% bonus by the government. You can pay up to a maximum of £4,000 a year into the account, which can be a cash ISA or a stocks and shares ISA, and claim an annual government bonus of up to £1,000. You can use this money to buy a property costing up to £450,000.
Buying a property
What is a mortgage and how does it work?
A mortgage is a type of loan that is used to buy a property or land. The lender will provide the money needed to purchase the property, and this is paid back to them in installments along with any interest or fees they might levy when the mortgage is agreed. Once the mortgage is paid off the buyer owns the property outright.
How much can I borrow?
Working out how much you can borrow, is dependent on how much you can afford. Typically, this involves assessing what deposit you are able to provide, what income and expenditure you are already committed to, and your credit score and history. Lenders will review not just what you can afford today, but also what this looks like long term.
Usually, most lenders will offer up to 4-5 times your annual income.
How much deposit do I need for a mortgage?
Most lenders will need a deposit to be paid by you for the property. Normally, this is a minimum of 5% of the purchase price, but the bigger the deposit you put down, the cheaper the mortgage costs.
What is a mortgage in principle?
A Mortgage in Principle is a letter/statement from your lender to confirm how much they will be able to lend you and basically says “we haven’t given them the money yet, but they’re eligible to borrow this much money”.
When you’re ready to make an offer on a property, a Mortgage in Principle document will be useful to show the seller that you’re serious and, in a position, to buy their property.
Are there different types of mortgage?
Yes. There are 4 main types of mortgage.
- Fixed-rate – The lender agrees on a single interest rate on your loan for a set period of time (typically between 2 and 15 years). You will then pay the same amount back to them every month until the ‘fixed period’ ends.
- Variable-rate – Unlike fixed-rate, the interest you are charged varies, and is based on the interest rate decisions made by the Bank of England. This means they arent predictable, and your monthly repayments can go up and down. Because of this, some months you might pay more than expected, while others you might pay less.
- Tracker mortgage – With a tracker mortgage, your interest rate ‘tracks’ the Bank of England base rate e.g. if the base rate is 1.25% you might pay the base rate plus 2% (3.25%). If the base rate changes what you pay will also change with it. Normally, a tracker mortgage has an introductory period (e.g. 2 years), and after this, you would move onto the lender’s standard variable rate.
- Discounted variable-rate mortgages – With a discount mortgage, you pay the lender’s standard variable rate (a rate chosen by the lender that doesn’t change very often), with a fixed amount discounted. e.g. if your lenders SVR was 5% and your mortgage came with a 2% discount, you’d pay 3%. Discounted deals can be ‘stepped’; e.g. with you getting one discount for the first year and a different discount for the next year
How does the mortgage get paid off?
Most lenders will set up a monthly repayment. Depending on the mortgage chosen, your monthly payment can either pay off a bit of the amount you borrowed and the interest each month or just the interest. Below are the two most well-known repayment types –
- Capital repayment – over the course of the mortgage repayment, each payment will pay off a proportion of both the initial amount lent (the capital), and the interest being charged. When the last monthly payment is made, the debt is repaid. This is the most common repayment type.
- Interest-only – over the course of each repayment the interest on the mortgage is paid off, however, at the end of the loan term, the whole of the initial amount lent (the capital) will also need to pay off (usually from another means, savings, financial policies etc).
What other costs do I need to budget for?
You might have to pay various fees and charges upfront while buying a new property. Some of the additional costs associated with buying a property include:
- Stamp Duty
- Solicitors fees
- Property surveys and valuation fees
- Lender arrangement fees
- Miscellaneous costs such as home insurance, moving costs, purchase of white goods, etc.
Can I pay my mortgage off early?
This varies by lender. However, you may have to pay early repayment charges (known as ERCs) depending on the mortgage product. Some mortgages limit overpayments to a percentage of the amount owed and you’ll be charged a fee if you exceed that limit.
What documents will I need to apply for a mortgage?
The documents you need will differ from lender to lender, but most lenders will want to see:
- At least 3 months of bank statements
- At least 3 months of payslips or 1+ year of self employed accounts
- Proof of ID
- Proof of address
In addition, some lenders may request supporting documents relating to your deposit, your tax returns (if self-employed), any additional income (e.g bonus, commission, tax credits etc), and evidence of right to reside if you are do not hold citizenship or residency
Remortgage
What is a Remortgage? and how does it work?
A Remortgage is when you switch your existing mortgage to a new deal. It’s important to stress the two parts: the new deal and the new lender, because the term remortgage is often misunderstood. If you don’t change your lender or the amount you’re borrowing but want to change to a different rate, this is known as a mortgage product transfer. If you’re staying with the lender but want to change the deal, this is known as a further advance. It’s the combination of the two changes, the deal and the lender, that’s defined as a remortgage. A remortgage is a type of mortgage transfer, due to this you must already have a mortgage to get a remortgage.
How does remortgage work?
When you take a remortgage, your new deal/lender effectively pays your old mortgage off early and replaces it with a new one. Taking a remortgage doesn’t mean taking out a second mortgage or moving house as this new mortgage is still secured against the existing property.
Why should I consider remortgaging?
Taking a remortgage or not depends on your personal circumstances and needs. You may choose to remortgage for the following reasons:
- Reduce your current interest rate and monthly repayments – for many this is the biggest incentive to change.
- Raise cash by releasing equity in your home – to do some home improvements, which may add more value to your home.
- Borrow more over a longer period
- Consolidate your debts into lower payments – such as paying off credit cards.
- Replace a deal that’s coming to an end – Usually, the introductory deals, such as discount mortgages often only last from two to five years. Once they expire, you’ll automatically be transferred to your lender’s variable rate which can be much higher.
- Gain more flexibility in your payments - This could be to reflect a change in your financial circumstances. There are flexible mortgage options that enable you to miss payments, overpay, pay extra or offset the mortgage against your savings.
- Fix your payments so you’re protected against future interest rate rises
- Move away from your current lender. Perhaps you’ve experienced poor customer service or prefer to use one that’s online.
When should I consider taking a remortgage?
You can take a remortgage anytime you want. There are usually costs involved when remortgaging to a new deal. So, you might want to consider the following factors:
- When is your current fixed rate mortgage deal due to end?
- Can you save money by remortgaging, even after paying arrangement and exit fees?
- Do you own enough equity in your current property?
When shouldn’t I consider taking a remortgage?
You should consider the timing, money and your personal situation when deciding whether to take a remortgage or not. Some of the reasons why you might not remortgage include:
- The cost of fees and charges involved don’t outweigh the savings.
- You have little equity in your home.
- Your credit rating has dropped.
- Your financial situation has deteriorated.
- Your home’s property value has reduced.
- You are already having a good deal.
Do I need a deposit for a Remortgage?
No. You do technically need a deposit for a remortgage, but it doesn’t need to be money like you’d save up for a mortgage. Instead, your house (or property) acts like a deposit to let you get access to better rates and deals.
How many times can I remortgage?
You can remortgage as many times as you want. There’s no limit on the number of times you can remortgage or when, however, you might find it harder to get approvals if you’re applying for remortgages that run concurrently.
How long does a Remortgage take?
On average, it usually takes about 6 weeks to remortgage because they’re slightly more complicated than your average loan. You’ll need to have your property valued and work with solicitors and lenders.
What documents will I need to apply for a remortgage?
Normally, you will need to provide the same set of documents that you would give while applying for a mortgage. Most lenders will want to see:
- At least three months of bank statements: to get an idea of your circumstances and check if you can afford the mortgage repayments.
- At least three months of payslips to see proof of income.
- Your ID to make sure you are who you say you are!
- Proof of address to verify your address and full name for the last three months.
In addition, some lenders may request for
- Tax returns: if you’re self-employed, a lender might want to see tax returns as a proof of income.
- Evidence of additional income: if you earn a bonus or commission or extra money from overtime, your lender might want to see evidence of this.
- Evidence of other income: if you get government support, tax credits or child benefit, your lender might want to see evidence of those.
- Evidence of right to reside: if you’re from overseas but buying in the UK, lenders might want to see things like visas or other right to reside documents.
What are the various costs involved in remortgaging?
The cost of taking a remortgage may vary depending on your personal circumstances. You may want to budget for these costs:
- Early repayment charges to your existing lender
- Exit fee to your existing lender
- Arrangement or product fees to the new lender
- Valuation, Conveyancing fees
- Legal fees
- Mortgage advisor fees