A mortgage is, quite simply, a loan granted by a lender – usually a bank or a building society – for the purposes of buying a property.
Most mortgages work on a repayment (or “capital and interest”) basis, which means you pay back the amount borrowed (the capital) plus interest on a monthly basis over an agreed repayment term. By the end of the term, the mortgage loan is fully repaid and you own the property outright. If you fall into arrears with your payments, the lender has the legal right to take possession of your home.
Finding the best mortgage deal with incentives
For a first time buyer mortgage, there are dozens of mortgage lenders available in the UK, including high-street banks and building societies, and more specialised lenders who may only offer mortgages online or via mortgage brokers.
Incentivised mortgages are a great way for first time buyers to step onto the first rung of the property ladder and get something back for it.
First time buyers saving for a house deposit could receive significant support towards their goal with cash bonuses. Major UK mortgage lenders are beginning to offer lump sums to first time buyers who put money into savings accounts over a set time period whilst taking out a mortgage at the same time.
Just make sure you work out whether the cash lump sum is worth the rate of the mortgage. If you get £200 cashback, but you’re paying a higher rate each month, you may not be getting the best deal.
Low deposit mortgages
A small handful of lenders offer 95 per cent mortgages, but first time buyers will be hit by increased interest rates. As of December 2016, low deposit mortgages within the Help to Buy Scheme are no longer available. Instead, the Help To Buy equity loan, Help to Buy ISA and Lifetime ISAs have been rolled out by the government and are intended to help support those looking to get onto the property ladder with a mortgage, and save for a deposit on a home.
NOTE: Please be aware that Help to Buy ISAs will not be available to open from 30th November 2019. If you have a Help to Buy ISA already, they will continue to function as usual.
NOTE: The current Help to Buy equity loan scheme comes to an end on 31st March 2021. It will be replaced by a new Help to Buy scheme from 1st April 2021- 31st March 2023.
First time buyer mortgages
In order to revive the housing market, lenders are becoming increasingly innovative with their mortgage deals to first time buyers. Their incentives include loans based on how much rent you’ve previously paid for a property, mortgages for parents with a newborn child or child on the way and shared ownership mortgages. Other first time buyer mortgages include graduate mortgages, key worker mortgages, professional mortgages and guarantor mortgages.
No arrangement fees
It may surprise you to know there are often arrangement fees for mortgages. Keep an eye out for those lenders who will waive or reduce the set up fee, as they can be in the £1000s. You can often choose between paying the fee upfront or adding it to the mortgage, but if you decide to do that you’ll be paying interest on it.
If you’re already saving your deposit with a bank who offer mortgages, you may find there are incentives available as an existing customer. For example, if you have a Lifetime ISA with Skipton, they give you £250 cashback when you get a mortgage with them. As there aren’t many Lifetime ISA providers around, look carefully at which one you want to use as it may have an impact when the time comes to get your mortgage.
As part of your mortgage, your lender will need to do a property valuation. These are necessary to get the mortgage, but may be charged as an extra service. Keep an eye out for any deals or offers where the valuation included is free.
Incentives for the bank of mum and dad
If you’re receiving help from your parents or relatives when it comes to either your deposit or your mortgage, it seems fair that they should have an incentive too! With products like a Family Springboard mortgages, parents can put an amount that counts as your deposit into a saving account attached to your mortgage account. It sits in the account for a few years (collecting interest) and acts as collateral in case you were unable to pay your mortgage. After enough time has passed, the money can be removed from the savings account and you can continue paying your mortgage as usual.
Similarly, the Post Office offer a Family Link mortgage that uses 10% of a family member’s house as the deposit, and you make two repayments – one to your family member towards their mortgage, and the other towards your own mortgage. Your parents may not get any incentive from this, but you could split the £500 cashback to say thanks for the help!
Getting a great deal on your mortgage
There are thousands of different mortgage deals on the market at any one time, and they can change daily. With so much choice, finding the right mortgage as a first time buyer can be challenging, especially if you’re comparing incentives to get the best deal!
Here’s how to get the most for your money:
Use price comparison sites – This is a good way to get a quick overview of some of the best deals on the market, including mortgages from smaller or more specialist lenders. However, be aware that some comparison sites make more money by referring customers to affiliated lenders, so recommendations of a particular headline rate may not be as impartial as they first appear.
- Shop around – This method involves the most legal work, and may involve comparing mortgage deals directly by visiting high-street branches, phoning around or checking lenders’ websites. This approach may help you find the best rates on the high street, but you could be missing out on potentially better deals from less mainstream lenders.
- Deal with a mortgage broker – Mortgage brokers and independent financial advisers often have access to the widest range of mortgages from both mainstream and specialist lenders, and can provide impartial advice on the mortgage that best suits your needs, as well as dealing with the application on your behalf. Many lenders also have specialist broker-only mortgage deals that may be better than equivalent high-street rates.
- Seek specialist advice – It’s important to seek specialist mortgage advice tailored for a first time buyer. Any reputable mortgage advisor will have a deeper understanding of the first time buyer market and will inform you of the best deals and incentive schemes to suit your financial requirements. The first time buyer mortgage market is fiercely competitive so be sure to liaise with a lender that informs you of all possible discounts and incentives.
Whichever route you choose for your first time buyer mortgage, bear in mind that the best deal doesn’t necessarily always equal the lowest interest rate. For example, you should consider whether you are happy with a variable mortgage rate, or would prefer a fixed-rate mortgage. It’s also important to take into account other costs such as mortgage arrangement fees, valuations and other costs, which can vary significantly from one deal to the next. You may not be able to find incentives on all aspects, but do the maths on which one works out best for you, and ask your broker for their input.
Agreement in principle
Once you’ve selected a lender and the type of mortgage you want, your next step should be to get an agreement in principle. Different lenders may have their own name for this – such as a “decision in principle” or a “mortgage promise” – but it’s basically the same thing: a provisional agreement to lend a certain amount based on the information you provide – such as your employment details, salary, credit commitments etc. – and an initial credit check.
This isn’t the same as a full mortgage offer, which will involve further underwriting checks, employers’ references and so on. However, it provides a good indication of how much you are likely to be able to borrow, and having an agreement in principle can work to your advantage when negotiating an offer on a property- it shows the seller that you have already taken steps to arrange a mortgage and are serious about your commitment as a first time buyer.
Note: You don’t have to commit to a mortgage with the lender who gave you your agreement in principle, it might be that a better option comes along later!
Applying for a mortgage as a first time buyer
It typically takes several weeks to process a mortgage application from beginning to end. You can help this along by being prepared. It’s always worthwhile getting a copy of your credit records beforehand so you know whether there is anything in your credit history that might affect your application – this could be something as innocent as a missed payment or dispute with your mobile phone company or a utility provider. You can obtain your credit records from any of the three UK credit reference agencies:
You should also gather together any other documentation that will be needed to support your mortgage application, such as bank account statements and payslips (typically for the most recent three months).
It can help to obtain a direct address or named contact for your employer’s Human Resources department, to allow the lender to request or follow up on reference requests. If you are self-employed or a freelance worker, make sure you have up-to-date copies of your accounts, and be prepared to answer any questions about the sustainability of your income, particularly if your profits or income has varied from year to year.
For more information on getting a mortgage as a first time buyer, look at our First Time Buyer’s Guide to Mortgages.
The mortgage offer
Once your application has been approved, you will receive a formal mortgage offer, and a copy of the lender’s mortgage terms and conditions. Copies of the documents will also be sent to your conveyancing solicitor or licenced conveyancer, who will review them and can provide any further advice or guidance you require to understand your rights and obligations under the terms and conditions.
Congratulations - between the deposit you’ve saved and your mortgage offer, you now have the funding in place to buy your first home!