If you’re a first-time buyer, the mortgage market can seem like a minefield. With literally hundreds of mortgages to choose from and a range of government-backed initiatives to help you onto the property ladder, trying to find the right mortgage can be daunting.
So, we’ve put together a comprehensive guide to everything you need to know. Keep reading for information on the various government schemes that are available, and the main types of mortgage that you can choose from.
Government schemes for first-time buyers
Just as there is a comprehensive choice of new builds you can buy, there is a wide range of ways you can purchase your new home.
One of the major benefits of buying a new build property is that it allows you to access a whole variety of schemes, initiatives and incentives offered by the government. Help to Buy is perhaps the best known. It isn’t just one scheme but comprises several different initiatives that are aimed to help you buy your own home.
Help to Buy been an enormous success since it began with hundreds of thousands of buyers using it, especially first-time buyers.
All these government schemes have qualifying criteria such as maximum property values or minimum savings. And, for most government initiatives, buying a new-build home is an essential part of the qualifying criteria.
However, as a buyer of a new home you'll open up a whole world of opportunity in terms of extra financial help you could receive. Here's more information about some of the government schemes on offer.
Help to Buy: Equity Loan
Under this scheme, the government gives a loan of 20% towards the cost of your new build home. You put down 5% of the property price and so you’ll need a 75% mortgage.
The loan is interest free for five years after which you pay a low rate of interest. With a 25% deposit in place you also benefit from the better terms that come with a 75% mortgage.
Help to Buy ISA
For every £200 you save in a Help to Buy ISA, the government gives you £50 (25%). This means if you save £12,000 (the maximum amount), you will receive an additional £3,000 from the government, giving you a total of £15,000.
There is no catch to receiving this money as long as you save at least £1,600 (the minimum government bonus is £400).
If you put a certain amount in each month, then you receive the government bonus. And, every individual can open a Help to Buy ISA. So, if you’re planning on buying a home jointly, you could receive up to £6,000 in government help towards your purchase. Find out more about Help to Buy ISA.
Help to Buy: Shared Ownership
This is a part-buy/part-rent scheme where you buy a percentage of the property to begin with, and then pay an affordable rent on the remainder of the property until you want to buy the remaining shares in the new home.
When you feel you can't afford the full asking price, it’s nice to know there's a way you can just pay around 25% of the purchase price to begin with and pay the rest later when you can afford it.
You could buy a home through Help to Buy: Shared Ownership in England if:
- Your household earns £80,000 a year or less (£90,000 a year or less in London)
- You are a first-time buyer, you used to own a home but can’t afford to buy one now or are an existing shared owner looking to move.
Find out more about Help to Buy Shared Ownership
Starter Homes Initiative
The Starter Homes Initiative is a government scheme which aims to make 100,000 new homes available for first-time buyers under the age of 40. The buyers of these new build homes will be entitled to a 20% discount.
Types of mortgages
Once you have considered the various government schemes that are available, you will then have to think about what type of mortgage you want.
These are some of the main types of mortgage that you can consider:
- Fixed rate – Your mortgage repayments will be fixed for a specified term. Whatever happens to interest rates, you know you will pay the same amount for a fixed period. Read more about fixed rate mortgages.
- Tracker rate – Your mortgage rate is directly linked to the Bank of England base rate. When the base rate rises, your interest rate and repayments will rise. When the base rate falls, your interest rate and repayments will fall. Read more about tracker mortgages.
- Variable rate – your interest rate and repayments are linked to your lender’s Standard Variable Rate (SVR). These rates typically follow the base rate, but your lender can raise or lower their SVR at any time, and they don’t have to pass on rate cuts or rises. Read more about variable rate mortgages.
- Offset – any savings you have are ‘offset’ against your mortgage balance. It can help you to reduce your total interest costs and pay back your mortgage faster, but interest rates can be higher. Read more about offset mortgages.
These days, most mortgages are arranged on a ‘capital and interest’ (or ‘repayment’) basis. This means that every payment you make includes part of the loan you borrowed plus some of the interest. If you make all your repayments, your mortgage will be paid off at the end of the term.
The alternative is an ‘interest only’ mortgage although these are not generally available. Under an interest only mortgage your repayments only consist of the interest on the loan, meaning the amount you borrow never reduces. At the end of the mortgage term you must repay the capital through other sources, such as savings or an inheritance.
Things to bear in mind when you’re considering a first-time buyer mortgage
Your mortgage is likely to be the biggest financial commitment you ever make. So, it’s generally recommended that you seek the advice of a professional (such as an independent financial adviser or mortgage broker) before committing to a loan. This can help you to find the most appropriate mortgage for your circumstances.
You should consider the following when applying for mortgages:
- Affordability – a lender will want to prove that you can afford the mortgage. Can you afford the monthly repayments, even if they rise?
- Deposit – the bigger the deposit you can put down, the better your choice of interest rates. If you can put down a bigger deposit, you’ll generally benefit from lower interest rates.
- Commitment – are you tied in to your mortgage deal? Are there early repayment charges if you come out of the deal early? Will your lender allow you to overpay if you want to without you incurring a penalty?
- Fees – What are the costs of setting up the mortgage? Read more about mortgage fees and costs.