Getting a mortgage…the three words that drive fear into the hearts of twentysomethings everywhere. In this guide, we will cover deposits, the various types of mortgage deals available (especially those for first time home buyers), and the process of getting a loan.
What is a deposit?
The first thing to do when thinking about getting a mortgage is to decide on how much of the property you can afford to buy outright – this is called the deposit. The remainder is loaned to by a lender who charges interest until it is repaid in full. Check out the developments on HomeViews to get an idea of what your deposit could get you around the country.
What is loan to value?
The portion of the property value that you’ve paid for with your deposit, compared to the amount the lender has provided, is called the loan to value (LTV). Here is an example:
- Take a property with a value of £200,000
- If the buyer is able to provide £40,000, that is 20% of the purchase price
- Therefore, the LTV is 80% – the percentage of the full price that has been loaned
- 80% of £200,000 is £160,000 – the amount that the lender provides
LTV varies from mortgage to mortgage. The larger the deposit you put down, the less the lender has to put down, and the lower your interest rate will typically be. The best mortgage rates are usually available with a 40% deposit (60% LTV).
How much interest will I pay on a mortgage?
There are two main types of mortgage – fixed-rate and variable-rate – and interest rates vary depending on which type of mortgage deal you opt for.
Fixed-rate loans provide an interest rate that does not change over time. Generally, the shorter the agreed term of repayments, the higher the monthly payments are. However, a loan repaid over a longer time frame ultimately means spending more on interest. The typical lifespan of a loan is 25-35 years, and you will be paying interest for the duration of this.
The benefit of getting a mortgage with a fixed rate is that repayments are constant, allowing you to budget. Also, if interest rates rise, the borrower is unaffected. Let’s take our previous example of a £160,000 mortgage:
- If you have borrowed £160,000 for 25 years at an interest rate of 3%, you will be charged £67,583 in interest over the lifetime of the mortgage
- Combine this with the repayments on the capital borrowed, and the total you will repay over the full term is £227,583
- So, you will be paying back £9,103.32 per year, or £758.61 per month
With variable-rate (or adjustable-rate) loans, the interest paid monthly fluctuates with interest rates. Your interest rate is reviewed and adjusted every six months to every year. For example:
- If your interest rate begins at 3% when you take out your £160,000 loan, you will be paying £758.61 interest per month
- However, if it jumps to 5% the following year, you will be paying £935.68 per month
- But again, if your interest drops to 1.5%, you will only be paying £639.87 per month
Typically, getting a mortgage with a variable rate works out cheaper in the long run. However, the security of a fixed-rate mortgage might be worth the extra cost.
What type of mortgages are there in the UK?
There are many variations on the two types of UK mortgage (fixed-rate and variable-rate). Here are a few examples:
- Discount mortgages: With a discount mortgage, interest is pegged at a set rate below the lender’s standard variable rate. Different lenders have different standard variable rates (SVRs), so don’t assume that a bigger discount means a lower interest rate. Let’s think about our £160,000 mortgage again:
Bank A is offering a 2% discount on an SVR of 5%. So you are paying 3% interest, which comes to £758.61 per month
Bank B is offering a 1.5% discount on an SVR of 4%. So you are paying 2.5% interest, which comes to £717.87 per month
- Tracker mortgages: Tracker mortgages are a type of adjustable-rate mortgage – they move in line with national interest rates, plus a few percent.
- Capped rate mortgages: With these deals, your rate of interest moves in line with the lender’s SVR but cannot rise above a certain level. The advantage of this is that the lender is protected from extreme rate jumps. On the other hand, the cap and starting rate tend to be quite high, so it may end up being more expensive long term.
- Offset mortgages: With an offset mortgage, you can use your savings to make a dent in the capital you owe, therefore reducing the amount of interest that you pay. You will need to open a current or savings account with your lender and link it with the mortgage.
As you can see, there are many types of loans for many different purposes. Make sure that you do a mortgage comparison to find the best mortgage deal for you before committing.
What mortgage deals are there for first-time buyers?
There are plenty of mortgage deals that cater specifically to first-time home buyers. Many of these come with high LTVs for those with less to spend on a deposit. Here are some examples of such loans:
- Guarantor mortgage: A guarantor mortgage is designed for people with a small deposit – some of them even have an LTV of 100%. This type of mortgage guarantees repayment through a guarantor – a family member or friend who agrees to their own property or savings being used as collateral should you fall behind on your mortgage repayments.
- Shared ownership mortgage: Another way to ease the burden of a deposit is by paying only part of it, in return for part ownership of a home. With a shared ownership property, you buy between 25% and 75%, taking out a mortgage for your share and paying rent on the remainder. As time goes on, you can buy a larger portion of the property until you own all of it.
- Help to Buy mortgage: Unfortunately, this popular scheme for first time buyers has now ended. During the life of the scheme, over 350,000 people accessed equity loans to use towards their deposit, with five years of interest-free repayments. Click here to read our guide on what your options are as a first time buyer after the scheme.
What repayment term should I opt for?
Another important thing to consider is the period of time over which you want to pay back your loan, which will depend on the monthly repayments you can afford. A mortgage paid back over a longer period means smaller payments. However, it also means paying interest for longer. For example, say you take out a £160,000 mortgage to be paid back over 25 years, with an interest rate of 3%:
- You will be paying £6,400 back per year of the amount borrowed, plus £2,703.32 in interest. That comes to £9,103.32 per year, or £758.61 per month.
- The amount that you will repay (borrowed amount + total interest), comes to £227,583.
Say you take out the same loan with the same interest, but this one is to be paid back over 35 years:
- You will be repaying £4,571.42 per year, plus £2,816.05 in interest. That comes to £7,387.48 per year, or £615.62 per month – that is £142.99 less than what you would be paying with the previous deal.
- However, the total amount that you will repay comes to £258,562 – much more in the long run than the 25-year term.
Bear in mind, this example is discounting extra costs like mortgage insurance, debt, and fees.
How do I apply for a mortgage?
You get a loan from a bank or building society, each of which has their own range of products. You can do a mortgage comparison of specific deals online before approaching your lender.
If the choice is a little overwhelming, a mortgage broker can help you with mortgage comparisons. They can also advise you on special cases such as buy to let mortgages and self-employed mortgages.
What are the stages of a mortgage application?
Getting a mortgage deal usually happens in two stages. When you first meet with your lender, they will ask you questions to determine your financial situation.
During the second stage, the lender will conduct a more thorough check. For this, you will need to provide evidence of salary, outgoings, debts, and credit score. The lender will assess your information and ‘stress test’ your finances to decide how much they want to lend you. To get a mortgage quote, try a free online mortgage calculator.
If your application is accepted, then the lender will provide you with a ‘binding offer’ and documents explaining the terms of your mortgage. You will have seven days to reflect on the offer, during which time the lender cannot alter or withdraw their offer.
What is the average mortgage rate for first time buyers?
UK average mortgage rates have been falling since 2009, which was, until recently, very helpful for first time buyers. In fact, February 2022 saw a new low for 10-year fixed mortgages, at just 2.2%. However, the Bank of England has recently risen interest rates multiple times in response to rapid inflation.
This has caused mortgage rates to go up markedly. In November 2023, the average five-year fixed-rate mortgage rate in the UK is 4.95% (for transactions with a loan-to-value ratio of 60%). The average standard variable rate (SVR) is 8.18%. While this increase may not be good news for those struggling to get on the property ladder, it may dampen the pandemic-induced hike in house prices.
Is it harder to get a mortgage as a first time buyer?
A recent study conducted by Aldemore Bank revealed that first time buyers often struggle to get a mortgage. Small deposits, a bad credit profile and errors meant only one in five first timers secured a mortgage straight away in 2021. Failure to join the electoral roll and self-employment were also major reasons why applicants were turned down. This means that the acceptance rate has fallen since the pandemic, possibly because people are trying to secure bigger mortgages to match rising house prices.
How much deposit does a first time buyer need?
After the turbulence brought out by Brexit and COVID-19, you may wonder how much deposit first time buyers need in 2023. According to Zoopla, 10% is the minimum most banks will accept. However, government schemes such as 95% mortgages and Shared Ownership may help with budgeting. A bigger deposit will help you secure a cheaper mortgage, so more is better.
How much can a first time buyer borrow?
How much a first time buyer can borrow depends on their annual salary. The maximum you can borrow from most lenders is between 4 and 4.5 times your annual income. The lender will also consider any outstanding debts, general household bills and childcare expenses to determine affordability. You can get a rough idea of what you could borrow by using a mortgage calculator.
Who qualifies as a first time buyer?
You qualify as a first time buyer if you have never owned residential property before, in the UK or overseas. If you have bought or owned a property before, including through an inheritance, you aren’t a first time buyer. If you’re making a joint mortgage application, both parties must not have owned or inherited a residential property to be considered a first time buyer. Spouses count as a single buyer, so to apply to first time buyer schemes, you must both meet the criteria.
How many months’ salary do you need for a mortgage?
Generally, you need to provide evidence of the past 3 months’ salary to qualify for a mortgage. Paper Payslips or emailed PDFs both work fine for most lenders. Banks use this as proof that you are currently working and being paid the amount you have specified on your application.
How do banks verify income for a mortgage?
Other than reviewing your pay statements, banks or other lenders may choose to verify your income for a mortgage by directly contacting your employer. They can then confirm all the details you’ve provided. Alternatively, they may simply ask for an employment verification letter, which is a signed letter from your employer confirming your current employment, basic salary, benefits and so on.
How much deposit do I need for a £300k house?
The exact deposit you’d need to buy a house worth £300,000 would depend on your own circumstances and the market conditions. Most lenders would require you to put a deposit of between 5% and 20% of the property’s value. For a £300,000 property, this would mean a deposit of between £15,000 and £60,000.
Is 2023 a good year to be a first time buyer?
The landscape of the UK property market is changing, and whether it’s a good time to be a first time buyer depends heavily on your financial position. Interest rates are rising, making mortgages more expensive and unattainable for some. However, partly as a result of this, house prices have also stagnated across the country and are dropping in many places.
If you’re a first time buyer with a low deposit and you’re hoping for a large mortgage to help you buy that first property, it’s going to be harder for you in 2023 than it has been for a while. If, on the other hand, you’ve saved a big deposit and you only require a mortgage with a small loan-to-value (LTV) ratio, this could be a good time to buy.
So there you have it, getting a mortgage isn’t as scary as your parents would have you believe. True, mortgages are major financial commitments. But most people agree that the joys of home-owning make the commitment thoroughly worthwhile!
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