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First Time Buyers

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First Time Buyers

First Time Buyer Mortgage

Simon Hart talks to us about First Time Buyer mortgages.

What is a First Time Buyer mortgage?

It’s a mortgage available to someone who is a First Time Buyer. With the majority of lenders, there aren’t often specific mortgages available exclusively to First Time Buyers. But on occasion, First Time Buyers can actually access preferable mortgage products or features that might not be widely available to those who have purchased a property before.

For example, sometimes banks or lenders will offer an element of cashback – perhaps a few hundred pounds here or there. It’s given as an incentive because you are a First Time Buyer and will go towards the costs associated with buying a home – legal costs, a survey or something along those lines.

What are the typical requirements to apply for a mortgage as a First Time Buyer?

Not having owned a property before, or not having owned a property for quite some time, would class you as a First Time Buyer.

Whether or not you’re a First Time Buyer doesn’t necessarily affect the general requirements for obtaining a mortgage. You would need an income, a fixed abode and a certain level of deposit – which can vary.

What is the maximum amount that can be borrowed for a mortgage as a First Time Buyer?

This can vary greatly. Generally, your borrowing is influenced by what lenders determine as your affordability. Looking at the level of income you receive, as well as any fixed outgoings that you might have, lenders determine how much they’d be willing to lend to you.

That can be influenced by your level of deposit and by different types of mortgage product. If you’re taking a mortgage over a longer term, for example, they might allow you to borrow a slightly greater amount. And with higher levels of deposit, you present less risk to the lender because they’re not investing such a significant proportion in the property. They might allow slightly higher borrowing on those levels as well.

There used to be a general rule of thumb around income multiples – taking your income and multiplying it by between 4.5 and 5.5. That’s quite a difficult metric to use exclusively now. Interest rates have changed quite a bit in the past few years and that influences what you can borrow – so it is really on a case by case basis.

What’s the minimum deposit required for a First Time Buyer?

Generally you’ll need a minimum of 5% deposit. A few factors that can influence this – 5% may not always be acceptable. For example, it can be affected by the type of property being purchased, whether that’s a flat or a house.

The location of the property is a factor, and certain flats have a leasehold with a certain number of years remaining. If that’s below a certain number, you might require a slightly higher deposit.

5% is the minimum – with some lenders it would be 10% and others even 15%.

What are the pros and cons of fixed versus variable interest rate mortgages for First Time Buyers?

This is one of the key decisions you’d be making when deciding on which mortgage to take. Ultimately, what’s most important to you would help you make that decision.

One of the main benefits with a fixed rate mortgage is the comfort of having a consistent mortgage payment over a certain period of time. It allows you to budget effectively, knowing month on month what is coming out of your bank account.

The downsides for a fixed rate product are that should interest rates fall, you might not be able to access those without quite significant penalties. You’re stuck with that deal for that period of time.

The other type you can take is a variable rate mortgage product. The most common option is a tracker product. These offer greater flexibility, which is the main positive about them, with no penalties – or far smaller ones – if you wanted to pay the loan off early.

The downside is you don’t benefit from that consistency of a fixed rate product. Your monthly payment might fluctuate during that product period. With tracker products, your interest rate is linked to the Bank of England base rate. As that base rate rises or falls, so does your mortgage payment.

What is an Agreement in Principle? Does everyone need one?

This is absolutely the best place to start before you properly embark on your property search.

Mortgages are pretty complex, so understanding how much you can borrow is not as straightforward as it used to be. Clients often come to me saying they’ve just done basic online affordability calculations and each one provided vastly different figures.

An Agreement in Principle, sometimes referred to as a Mortgage in Principle or a Decision in Principle, is preapproval from the lender on the amount you’ll be able to borrow. It’s not a guarantee that you can have a mortgage – this will depend on a few other factors and the property details.

But it’s as close as you can get to being approved for a mortgage until you actually find a property and submit a full application. An Agreement in Principle will give you an exact figure for how much a bank would lend you, so when you search for property you know how much you can borrow, plus the amount you have as a deposit.

They also run a soft credit search – there’s no hard footprint on your credit profile. It’s not going to impact your credit score. But you’ll have the confidence that the lenders have had a look at your credit profile and are happy to lend money to you.

There could be something on your credit profile that you’re not even aware of that could prevent you from doing what you want to do. So unless you get this done quite early on in the process, it could disrupt your entire property search.

Finally, when you start to view property, estate agents often want to know that you’ve looked at the financing. If you are in competition against another buyer, you’ve got your Decision in Principle ready to go, and they don’t, you’re in a better position to have your offer accepted. 

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What documents do people need to get preapproved for a mortgage?

To get an Agreement in Principle approved the documents are almost the same as for the full application. What’s needed will depend on your individual circumstances and your employment or self-employment situation.

For an employed individual, the documents we would need to see are passports and the last three months’ payslips and bank statements. We need a bit of address history and maybe proof of residency in the UK if you’re a foreign national. That’s pretty much it.

If you are self-employed there are further documents you would need. It’s really just evidence of identity, income and your commitments. They allow me to confirm the affordability for that Decision in Principle.

What are the steps to apply for a mortgage as a First Time Buyer?

Initially, have a mortgage consultation with a broker. We’ll go through lots of key questions as part of a fact-find from my perspective. We’ll ascertain what you want to do and how to do it. We’ll determine what level of budget is appropriate for you.

A lender might say they will lend you a certain amount of money, but you might have a personal budget in mind. You might not want to stretch your borrowing to the absolute maximum.

We would then get a Decision in Principle, so you can confidently start your property search. You’ll do viewings with estate agents and hopefully find something you like. When you do find a property, there’s no harm in running the details past your mortgage broker before making an offer. It could impact the application as certain types of property can be problematic from a mortgage perspective.

Perhaps the property you have in mind has associated costs. For example, leasehold flats may have a service charge or ground rent, and the lender would want to understand those costs to you per month. The Decision in Principle we’ve attained didn’t have those commitments in mind.

When making an offer, you can share my contact details with your estate agent. I’m always happy to take a call to verify your financing and it can sometimes add a little bit of weight to your offer. If all goes well and your offer is accepted, we would then submit the full mortgage application.

We might need a refresh on the information we took initially. I would then provide an ‘illustration’ for the loan explaining the terms and conditions, payment amounts and your commitments as a borrower. If you’re happy, we would then submit the application to the lender and provide the documents required.

Then the lender would want to do a valuation of the property to check it from a lending perspective. They’d conduct the underwriting on your documents as part of the application and if all goes to plan, you would receive the mortgage offer – the formal document approving the application and confirming the borrowing available to you. It varies slightly, but the mortgage offer is generally valid for about six months to give you time to complete the purchase.

How can a First Time Buyer avoid some of the most common mistakes when applying for a mortgage?

Seek advice early on, before you decide you’d like to buy a place. You may not be aware of things that can impact an application: how long you’ve been working for a company, for example, or the type of pay you receive, especially if it’s variable.

Maybe not all your income can be included on an application and that might impact how much you could borrow. Also, think about what a lender would want to see in the lead up to applying for a mortgage – managing your payments and bank accounts well is a good place to start.

Avoid having any missed payments and don’t make multiple credit applications in the lead up to applying for a mortgage. Lenders want to see a positive pattern where you are managing your finances successfully.

What happens if I miss a mortgage payment as a First Time Buyer?

It’s certainly something to try and avoid at all costs. Even one accidental missed payment can significantly impact your credit score, impacting your future ability to apply for credit.

If you own a property and you are having difficulty meeting your payments, contact your lender as soon as possible to discuss your options. Be totally honest and upfront about your situation. They may be able to assist, temporarily at least, and then find a more long term solution.

It’s always a better course of action than just missing a payment and trying to hide from it.

How can a mortgage broker help with a First Time Buyer mortgage application?

Hopefully I’ve given some clarity about how a mortgage broker works and what we’re here to do. Ultimately we’re here to assist you throughout the entirety of a very complex process, advising you at key milestones about the best course of action.

We’re there from the outset all the way through to completion – and thereafter, because your mortgage journey doesn’t end at the point that you buy the property. You might need some further advice once you have a mortgage, and in future to help with remortgages.

You would seek an expert’s advice in lots of elements of life and I would agree that when getting a mortgage as a First Time Buyer, speaking to a broker is the best course of action.