If you get one, a first time buyer’s mortgage works no differently to any other mortgage.
What distinguishes first time buyers mortgages from others is the fact that they typically represent a much larger percentage of the price of a home than others – if you are just starting out on the property ladder, you have no home to sell to contribute to the cost of a new one.
So, let’s take a look at the key features.
How much can I borrow?
For most first time buyers, of course, that is the key question – and, as for other types of mortgage application, there are no hard and fast rules.
How much you can borrow depends mainly on how much you earn. Your income determines the affordability of your mortgage, as the lender calculates whether you are likely to be able to afford the mortgage repayments throughout many years of borrowing.
The amount of your income available to pay a mortgage is also limited by the amount you are spending each month on other stuff, like having a life and eating. So, lenders also look at your regular outgoings, paying particular attention to existing obligations for repaying outstanding debt.
Finally, any mortgage company will consider your credit rating, look how you have managed borrowing and other credit in the past, and assess whether you can be trusted and are likely to maintain the repayments on the mortgage.
After those three main factors have been put into the melting pot, the lender then “stress tests” the calculations by considering whether the mortgage is still going to be affordable if interest rates rise, you fall sick, you lose your job, or you or your partner gets pregnant.
But can I get a rough idea of how much that might be?
To give you a very broad illustration of how much you are likely to be able to borrow, most lenders offer a simple, online calculator, where you key-in your income, outgoings and credit status.
Subject to the more detailed considerations made by the lender once you make your formal application, the amount you may borrow is typically around 4.5 times your income (or the joint incomes of you and your partner if you are looking for a joint mortgage). But that’s a very rough guide, so be sure to speak with an adviser to get a more accurate answer.
How much deposit will I need?
Saving up for your deposit as a first time buyer is likely to be the most challenging part – though again, there are no hard and fast rules.
Quite simply, the more you can save, the bigger the deposit you have to offer, the greater your chances of success in securing a mortgage to buy your first home. That is because:
- the more you put down as a deposit, the less you need to borrow; and
- by convincing the lender how serious you are about buying your home, the wider your options on the types of mortgage offered and the more competitive the rates of interest.
What lenders are looking at is the Loan to Value (LTV) of the mortgage – the size of the mortgage in relation to the price of the home you want to buy.Typical LTVs are between 60% and 95% – that is to say, lenders are generally prepared to lend somewhere between 60% and 95% of the price of your home. The flip-side, of course, is that you therefore need to find the remaining 40% to 5% of the purchase price. On a home costing, say, £200,000, therefore, you might need a deposit of between £10,000 and £80,000! Best get saving now then, hey?