First Time Buyers
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First Time Buyers
First Time Buyer mortgages with Carolyn Dunion.
The information provided is for Scotland and will differ in buying in the rest of the UK.
What is a First Time Buyer mortgage?
It’s a mortgage for someone who’s never owned a home or had a mortgage before – it’s their first step on the property ladder.
What are the typical requirements to apply for a First Time Buyer mortgage?
To be honest, there’s not a lot of difference in the requirements for a First Time Buyer mortgage as for anyone else. The same principles apply. The lender will be interested in your level of affordability – that’s your income, where it comes from, how reliable it is and how much you receive.
They’ll also be interested in your outgoings – the people that rely on you like children or adult dependents, plus your credit commitments like credit cards and loans. Importantly, because everyone forgets this, car finance will be taken into consideration.
Lenders will also look at your credit file, to see if you’ve missed payments before or if you’ve got a good track record. Sometimes if First Time Buyers have never had credit because they’ve been too busy saving, that can almost go against them – they can’t demonstrate that they can handle credit responsibly.
The age of the applicant will also be a factor in how long they will lend the mortgage for. Those are the main things that will be taken into consideration.
What is the maximum that can be borrowed for a First Time Buyer mortgage?
That will depend on the individual circumstances. Mortgages are granted on what the lender deems affordable for the client, not what the client thinks. I quite often speak to people who are paying X amount in rent and the mortgage is going to be cheaper, and they ask why they can’t borrow more. It’s a good question, but unfortunately it doesn’t work like that.
It will come down to your individual circumstances, and that assessment’s always worth doing with a broker. Each lender has its own calculation of affordability, so the maximum you can borrow can vary quite a bit from lender to lender. If you’re looking for the maximum possible mortgage, a broker can help make sure that you get that.
What’s the minimum deposit required for a First Time Buyer mortgage?
Generally, you need at least a 5% deposit. At the moment one product is available at 100%, which means you wouldn’t need any deposit in cash, although you would still need to pay your fees [podcast recorded in August 2023]. It’s for a very specific set of circumstances, so it wouldn’t suit everybody.
In Scotland, that 5% deposit is of the purchase price or the valuation – whichever is lower. So if you’ve got a property that’s valued at £100,000 and you have to bid £105,000 to buy it, the minimum cash deposit you would need is £10,000. It’s 5% of the £100k, then the £5,000 over and above is not included. The deposit is not 5% of what you pay for the property.
What are the types of interest rates available on First Time Buyer mortgages?
Interest rates are much the same for everybody. Depending on where the market is, sometimes lenders will offer favourable rates to First Time Buyers to try and win their business.
There’s a range of different products you can have, but the difference between a First Time Buyer mortgage and a mortgage for anybody else is almost imperceptible most of the time.
What are the pros and cons of fixed vs variable interest rate mortgages for First Time Buyers?
With a fixed rate mortgage the interest rate is set in stone for a period of time. That’s great if you want to have certainty in your budget – you’ll know what you’re going to pay whilst you’re in that initial window.
If you see Bank of England base rates going up, it doesn’t affect you while you’re in the initial window. If they come down, it doesn’t benefit you, of course. A lot of First Time Buyers are very keen on fixed rate deals – they’re getting used to budgeting and running a house, so it gives them a degree of certainty about their budget.
Variable interest rates haven’t been popular recently, because they’ve not been particularly beneficial. With a variable rate mortgage, depending on the product, your interest rate can change. It might move in line with the Bank of England base rate – so if that goes up, your mortgage payment will go up. If it comes down, your mortgage payment will come down.
If there’s a lot of uncertainty in the market, like there is now, that’s probably not beneficial for people. You do tend to find that variable products can be a little bit higher. But critically, variable interest rates there tend to have less early repayment charges.
If you’re on a fixed rate product and you wanted to sell the property and pay off the mortgage, you can do that, but there’d be a financial penalty called an early repayment charge. Often a variable rate deal doesn’t have that. So if you want to sell the property within a relatively short period of time, that flexibility might be the right thing for you.
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What government schemes are available to help First Time Buyers?
Not as many as there were, sadly. Although in Scotland there’s the government’s Lift Scheme – it’s a form of shared equity, which could be very beneficial for First Time Buyers who maybe don’t have a big deposit or a large income. That’s available, but there’s not very much else at the moment.
What documents do I need to get pre-approved for a First Time Buyer mortgage?
Lenders will want ID – so a passport or driving licence. They’ll want proof of address, which can also come from your driving licence – assuming you’ve got the right address on it – or a utility bill. If First Time Buyers are still at home with parents, sometimes they don’t have that, so your licence can be useful.
Lenders usually want to see three months’ bank statements with your salary going in, and three months payslips. We’ll also need evidence of where your deposit is coming from.
I did have a client once who was very concerned about identity theft. The moment they got their payslip, they shredded it. But of course, from a mortgage perspective, it was a nightmare. They had to request the payslips from their employer and it took weeks… So this is a time to be accumulating those documents – not shredding them.
What are the steps to follow when applying for a First Time Buyer mortgage?
The first thing to do is to speak to somebody like myself to get an idea of your affordability and your budget. As part of that, we would get what’s known as a Decision in Principle.
When you get a mortgage, it is based partly on you, your affordability and your credit worthiness and partly on the property being suitable security for the lender. We can only get so far until you’ve actually had an offer accepted.
So job number one is to make sure you can get accepted for a mortgage and know what you might be able to afford. Then you can go off and look for houses, which is the fun bit. Once you’ve got an offer approved, a solicitor will usually help you with that and we quite often will chat that process through with clients. People can use us as a sounding board.
Once the offer is accepted that’s when things get really frantic. We need all the documents and we’ll speak at length about specific mortgage products and submit the application.
What are the most common mistakes to avoid when applying for a First Time Buyer mortgage?
Obviously, don’t shred all of your documents! One other thing to highlight is that sometimes, First Time Buyers have moved around quite a lot. If you’ve lived in a few temporary rental properties, having your address history as accurate as possible on your documents is really helpful.
Some clients come in and their driving licence has one address, their bank statement has another, their payslip is different again, and although there might not be anything necessarily wrong with that, it can be a red flag to the lender. They will then ask further questions, so be mindful to keep everything at the same address.
What happens if I miss a mortgage payment on a First Time Buyer mortgage?
When you set up your mortgage, the lender will set up a direct debit for you and take the payment from your bank account. If they go to take the payment and you don’t have sufficient funds there, or you have cancelled the direct debit by mistake, the most important thing is to act quickly.
So if it’s an admin error, because you’ve deleted the direct debit, get in touch with them immediately and make the payment. If you’re having difficulty affording the payment, phone them. Every lender has a dedicated department to chat with you about that.
They’re obliged to help you stay in your home so they’ll very often set up payment plans or discuss your situation and how you can get back on track. If you are talking to them, they will be quite happy. If you just don’t speak to them and you’ve missed that payment, that’s when it can start to impact your credit score.
Can I qualify for a First Time Buyer mortgage with bad credit?
Yes, is the quick answer. But it really depends on your circumstances. If you’ve very recently been declared bankrupt, you’re probably unlikely to be accepted. If you’ve just had some issues with credit in the past, there are certainly lenders with a more relaxed attitude.
It also depends on the issue. For example, if it’s a mobile phone contract where you’ve missed a payment, lenders tend to be quite relaxed about that. If it’s a bigger credit card or a loan, that’s more of a problem, but time is a great healer with these things. The longer it’s been since you had any kind of credit issue, the more likely you are to be accepted.
Some lenders specialise in this kind of field – but you might be required to put in a bigger deposit to get approved. If you have any kind of credit issues, speak to a broker like myself. We can look at your credit report with you and work out where you would fit in with the adverse lenders. I’ve certainly had clients where if they waited just another month they could be approved. We’ve waited patiently for their credit file to be updated, and then gone ahead.
Is stamp duty applicable for First Time Buyers when buying your first home?
In Scotland we now have what is known as land and buildings transaction tax (LBTT). It replaced stamp duty and so everyone calls it stamp duty – which is very confusing, particularly for First Time Buyers. They might think they’re being taxed twice, but it’s just one cost.
The LBTT could kick in, depending on the purchase price. At the moment [podcast recorded in August 2023], there is a form of First Time Buyer Relief. It means you can pay more for the property before you’ll incur any LBTT cost.
If you’re buying a really quite expensive property it will be payable, but it’s on a sliding scale. We would explain all that as part of our initial consultation. We would have an idea of your property budget and would discuss whether LBTT would be a factor to consider.
Your home may be repossessed if you do not keep up with your mortgage repayments.
The information provided is for Scotland and will differ in buying in the rest of the UK.