Taking out a mortgage is a big deal, but it's how most people buy their first home. It doesn't need to be overwhelming when it's actually pretty straightforward. We'll explain how it all works in this guide.


What to Expect When Buying Your First Home

Buying your first property should be exciting – it’s the place you’ll call home and where you’ll start a new life. That's why we've written this First-Time Buyer's Guide: to explain everything you need to know about purchasing a property so you can embark on your house-hunting mission with confidence and can concentrate on what it’s really all about – finding your first home.


What is the Definition of a First-Time Buyer?

To qualify as a first-time buyer, you must have never acquired a major interest in a residential property or an equivalent interest in land situated anywhere in the world.

Why does it matter if you’re a first-time buyer? Because first-time buyers currently receive coveted Stamp Duty relief and are eligible for certain schemes. These benefits can make a real difference to the costs you face when buying a home – but obviously, not everyone qualifies as a first-time buyer.

It doesn’t matter whether you purchased the property alone or with others – if you purchased the property with other people then you all need to meet the first-time buyer criteria.

You won’t qualify as a first-time buyer if:

  • You previously inherited or were given a property as a gift
  • You previously acquired a property through a financial institution on behalf of a person under an alternative finance scheme
  • You were added to the title deeds of a property someone else purchased

However, you may still qualify if:

  • You previously acquired a property as a trustee, unless you’re also a beneficiary of the trust
  • You own or previously owned non-residential or mixed-use property, but only if the property does or didn’t include dwelling
  • The interest you acquired was the grant or assignment of a lease with less than 21 years to run

Taking out a Mortgage

Buying a home is the most expensive purchase you’ll ever make, but people do it all the time. How? They take out a mortgage.

A mortgage is a big loan. You borrow money from a lender to buy a property. Eventually, you pay back the loan with interest. This typically happens over time via regular payments – otherwise known as a traditional repayment mortgage – or in one big hit after many years – normally called an interest-only.

You have to put down a deposit when you take out a mortgage. The deposit is a percentage – a minimum of 5% - of the value of the property you want to buy. The mortgage amount makes up the remainder, up to 95% of the property’s value; this is the loan-to-value or LTV.

A mortgage is a type of secured loan, which means it’s secured against the property you buy. The lender’s interest in the property is noted with the title deeds at Land Registry. This gives them the ability to repossess the property if you can’t maintain the payments. You could also lose your deposit, depending on the sale price at the time of repossession.

Monthly Payments

Paying your mortgage each month isn’t really that different from paying rent, only instead of sending your money to a landlord, you give it to a mortgage lender. Whether you opt for a repayment or interest-only mortgage will determine what your monthly payments are made up of. 

Repayment Mortgage

The most common type of mortgage is a repayment mortgage, this is where you pay back a bit of your mortgage debt each month with some interest. The part that goes towards paying your outstanding mortgage debt is called a “capital payment”. If you meet your repayments throughout the term of your mortgage – which is normally 25 - 30 years but can be any almost any term you want - then you’ll pay back the full amount of money you borrowed plus all the interest charged during the term of the mortgage. It’s only after you make your final payment that you’ll own 100% of the equity in your property – this is when the lender no longer has any rights because you’ve paid everything you owe and now it’s all yours. The maximum LTV available for a repayment mortgage is 95%.

Interest-Only Mortgage

There’s another type of mortgage called an interest-only mortgage. Like a repayment mortgage, an interest-only mortgage can be almost any term you want, however the maximum LTV currently available is 75%, not 95%.  This is one of the reasons interest-only mortgages are less common among first-time buyers - who usually require a high LTV - but they’re still an option if you find they suit you better.

As the term “interest-only” suggests, you only make monthly payments on the interest being charged. No payments go towards reducing your mortgage balance. Your actual loan debt, which you used to buy your home, remains the same until the end of your mortgage term. That’s when you have to pay it all back in one go. This is another reason why interest-only mortgages are less popular among first-time buyers: you must have the means to repay your mortgage at the end of the term and be able to provide evidence that your plans will be enough to clear the outstanding balance at that time.

You can find out more about the different types of mortgages, interest rates and repayment vehicles in our guide: Mortgage Types Explained.

Interest

Interest rates are how banks and building societies make money. They charge you for borrowing money because that’s the service they’re providing you with. The amount you pay in interest is calculated by applying your interest rate – expressed as a percentage – to your outstanding loan amount. You pay your interest each month, usually alongside your capital payment. There are different types of mortgage interest rates: fixed, tracker, variable, etc. You can learn about these in our guide on mortgage types.

A fixed rate repayment mortgage is often a popular choice for first-time buyers. With this kind of mortgage, your total monthly payment is made up of 2 elements – interest and capital. In the beginning the total monthly payment is mostly interest as the mortgage balance is at its highest – and the interest is worked out on the total amount of outstanding debt.

However, your total monthly payment also includes a capital payment towards the mortgage balance, so each month your mortgage balance – or overall debt – reduces. As your monthly payment to the lender does not change, the amount that you pay in interest falls slightly and the amount towards your mortgage balance continues to increase for the duration of the fixed rate period.

Term of Your Mortgage

Your mortgage term is the period over which you pay your mortgage. It’s typically 25 - 30 years but varies on a case-by-case basis. The length of time you agree on will affect your monthly payments as well as the total amount you pay in interest, so it’s important to work out your monthly budget before making any final decisions. It’ll give you a better idea of the term you’re realistically looking at, based on the repayments you can afford. The shorter the term, the less you pay overall - but the higher your monthly payments.


Deposits for First-Time Buyers

You have to save up for a deposit if you want to take out a mortgage. First-time buyer deposits are typically 5% - 15% of the total market value of the property but can be more.

The amount you’re able to put down in deposit helps determine how big of a mortgage you’ll need. The bigger your deposit, the less you need to borrow from the lender and the less you’ll have to pay in interest. Larger deposits usually give you access to more competitive mortgage rates because they result in a lower LTV, which gives the lender more security so they can consider charging a lower rate of interest. Read more about deposits in our Deposit Guide.

There are some mortgages where the buyer doesn’t have to put down any deposit; these have sometimes been called 100% mortgages. The name is misleading as your parent or other relative still has to provide something in place of a deposit, like cash savings or the equity in their own home. If this sounds like something you’d like to consider, then call us on 0344 346 3672 and speak to an adviser who’ll explain your options in more detail.


First-Time Home Buyer Benefits

Whenever you hear about first-time buyers, they’re usually at the centre of some big scary story about how they’re struggling to get on the property ladder.  Property values – and therefore deposits - have increased, so there’s no debate that buying a home is more expensive than it used to be.

However, there are actually some nice benefits to being a first-time buyer.

Stamp Duty Exemption

Stamp Duty is the tax paid on residential property purchases. As a first-time buyer, you typically pay less Stamp Duty than everyone else. The amount you’ll pay ultimately depends on the value of the property you’re purchasing.

On Properties up to £300,000

You’ll pay £0 Stamp Duty Tax.

On Properties up to £500,000

You’ll pay 5% Stamp Duty on a property worth over £300,000. The 5% will only be payable on the amount from £300,001 - £500,000, unless you’re buying a shared ownership property. In this case, you won’t pay any Stamp Duty on a shared ownership property worth up to £500,000.

Over £500,000

If you’re buying your first home and it’s worth more than £500,000, you won’t receive any Stamp Duty relief. It doesn’t matter whether you take part in a shared ownership scheme or not - you’ll pay Stamp Duty at the standard rate. We explain how the different rates work in more detail in our Stamp Duty guide.


Help in Raising a Deposit

There are 2 government schemes which offer support in building up a deposit. There are the Help to Buy: ISA and Lifetime ISA. They’re both a type of savings account where you store money you want to put towards your deposit. This isn’t all they’re useful for though. With ISAs, the government gives you a bonus that’s a percentage of the amount you contribute to the account. The bonus isn’t a loan - you don’t have to pay it back.

Help to Buy: ISA

The Help to Buy: ISA is only available to first-time buyers purchasing a property worth up to £250,000, or £450,000 in London. You put up to £200 into a savings account each month and the government adds a 25% bonus. You can receive a maximum bonus of £3,000 towards your deposit.

Lifetime ISA

You can take out a Lifetime ISA if you’re 18 - 39 years old and you’re either a first-time buyer or saving for retirement. It’s like a Help to Buy: ISA, except that it’s also used by people saving for retirement and you can only use your savings to buy a property that’s worth up to £450,000. You can save up to £4,000 a year and the government will add a 25% bonus, i.e. a maximum of £1,000 a year.


Help with Low Deposit

There are also 2 types of government scheme aimed at helping people with small deposits. These are the Help to Buy: Equity Loan and Shared Ownership.

Help to Buy Equity Loan Scheme

This Help to Buy scheme is offered to people who want to buy a new build property and are either previous homeowners – who don’t own a property now – or first-time buyers. You can borrow up to 20% of the property’s value in England and Wales and 15% in Scotland. This means that, if you need a 25% deposit, you must only save 5%. The equity loan would cover the remainder of the deposit.

Shared Ownership

Shared ownership is where you part-buy and part-rent a home from a housing association. It’s only available to first-time buyers or previous homeowners. As you’re only buying a portion that is often less than 50% of the purchase price, you take out a much smaller mortgage – which requires a proportionately smaller deposit than if you were buying the whole property. You can choose to gradually increase your share of the property until you own it outright by a process called “staircasing”.


Additional Costs

There are some additional costs that come with buying a property for the first-time. It’s best to be aware of these from the outset, that way you won’t get any nasty surprises along the way. We’ve provided an easy to understand breakdown below.

Stamp Duty Tax

As we explained above, you’ll only pay Stamp Duty as a first-time buyer if you’re purchasing a property worth over £300,000 – and even then you’ll still receive some relief, unless the property is worth over £500,000.

Valuation/Survey

Your mortgage lender will need to confirm the value of your property before they lend you money. While your mortgage application is being processed, the lender will arrange a valuation for lending purposes.  Some lenders might not charge you for this, depending on the type of mortgage product you select.

You might need a survey in addition to a valuation for lending purposes. There are 2: a homebuyer report and a full structural survey.

Part of a homebuyer report includes a valuation, but the difference between a homebuyer report and valuation for lending purposes is that the surveyor also prepares a report for you on the state of the property. This report identifies any work that might be necessary both immediately and in the near future.

A full structural survey is much more detailed and is only really necessary if you plan on doing extensive work to the property, it was built before the 1900s, it’s of unusual construction, or if you feel that there might be problems with the actual structure – e.g. if it’s had underpinning due to subsidence in the past.

Legal/Conveyancing

It’s unsurprising that there are a lot of laws and legal requirements involved in buying a house. You’ll need a good conveyancer or solicitor to guide you through the minefield of contracts and ticks in boxes. Your conveyancer or solicitor will also represent you by liaising with the seller’s solicitor, that way they can make sure everything is completed on schedule and your purchase goes smoothly.  Conveyancing fees can vary quite a bit, so it’s worth asking for several quotes if you want to keep the cost down. We can give you a free quote for conveyancing services with JC Legal.

Mortgage Broker Fee

A mortgage broker manages your entire mortgage application. At John Charcol, we not only guide you through the application process, fill out the paperwork and find the best rates for your needs and circumstances, we can help you move into your new home, set up service providers and more with our exclusive concierge service. Our purpose is to make buying your first home what it should be – enjoyable.

Removal Fees

You’ll usually have to pay removal fees to transfer your possessions from your previous residence to your new one, so you may need to budget for this.

We can arrange removals for you with our convenient concierge service. It’s one of the benefits that come with being a John Charcol customer. Did we mention we arrange it all for free?


Steps to Buying a House for the First Time

Now you know a bit more about what’s involved in buying your first home, you’re ready to learn about the process you’ll go through.

1Talk to a Mortgage Broker or Adviser

It’s best to speak with a broker right from the outset. It’s during your talks with an adviser that you establish how much you could potentially borrow and which type of mortgage would suit you. You may even be able to get a Decision in Principle, which is basically a promise from your lender that, based on the information you’ve given them, they’ll lend you money. A Decision in Principle goes a long way in the eyes of a seller; it shows you’re serious and financially able to purchase their property.

2Find a Property

This is the best bit. Searching for a home can quickly become stressful, so try to remember that it’s also really exciting. Shop around, speak to estate agents – and don’t be afraid to view a property more than once.  

3Put in an Offer

Think you’ve found “the one”? Then you’re ready to make an offer. The estate agent will be able to advise you on whether to make an offer at asking price or slightly below. Be prepared to negotiate if the seller is underwhelmed by your first offer.

4Offer Acceptance

Success! The offer on your home has been accepted, now you can proceed with your mortgage application.

5Make a Formal Mortgage Application

You’ll ideally already have a Decision in Principle at this stage, therefore your mortgage adviser should be in a position to proceed with your formal mortgage application. This is when the lender checks different documents, like your passport, proof of earnings, etc. It’s also during this processing period that the lender organises a valuation of the property to make sure it’s worth the value you want to borrow. Once they’re satisfied, they’ll send a formal mortgage offer to you, your solicitor and if you used one, your broker.

6Conveyancing

Conveyancing is where the solicitors or conveyancers draw up contracts for the purchase and check everything is as it should be. They look for onerous clauses in the title deeds and check any leases for things that might cause you or the lender problems later down the line. The conveyancer also takes care of things like the local authority search and land registry amendments.

7Exchanging Contracts

The exchange of contracts is when your solicitor and the seller’s solicitor quite literally exchange contracts. It’s an important part of the process because once contracts are exchanged, you become the owner – but only on paper. You won’t have paid for the property at this point however you will have legally agreed to buy it on a specified date. It’s at this point that you must hand over your deposit money. It’s also the last point beyond which you cannot withdraw from the purchase without losing money.

8Completion

Completion is after you’ve exchanged contracts and paid for your new home in full – i.e. any mortgage money plus deposit. Money will have been transferred to the seller’s solicitor and the keys released to you. Exchange and completion can happen on the same day but completion can sometimes take up to 2 years or longer after exchange if, for example, the property is a new build and won’t be finished for a while. The average time between exchange and completion is 2-4 weeks.

The time it takes from that first, initial application to completion varies on a case-by-case basis.


Insurance

No lender will loan you money for a property without buildings insurance – and this is the minimum level of insurance that you need.

There are other types of insurance you should think about when applying for a mortgage.

Here are the main types of insurance:

  • Buildings insurance – this is required by all lenders
  • Contents insurance – it’s not a necessity when you take out a mortgage, but it protects everything within your home in case of an accident or theft
  • Income protection insurance – this helps ensure that your monthly payments will be covered if you’re unable to work due to sickness or injury
  • Specialist – this isn’t for everyday circumstances, but if your property has a special construction feature, is in a high-risk area, will be unoccupied for long periods of time, etc.

While we’re processing your mortgage application, our in-house team can find and arrange suitable insurance for you, using our panel of trusted insurers.

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