Buying your first home should be one of the most exciting moments in life – your chance to live in a property you own, rather than rent from a landlord.
However, it’s a milestone that can take years to reach as you save up enough money for an initial deposit towards that first flat, bungalow, terraced or semi-detached house. Even when you are ready to get on to the property ladder, there is still a series of important decisions to make.
At Lloyds, its expert team can help you choose the right first-time buyer mortgage for you, and fully explain what all the different elements of the process are. Don’t worry if this takes you time to get to grips with.
The first thing to recognise is no single mortgage will be right for everyone; there is not a one-size-fits-all solution for this major life event. Looking through a long list of mortgage types and offers may make you apprehensive about your choice.
But with a lender such as Lloyds, the worry over taking these big decisions can soon be eased. As the number one direct lender for first-time buyers, Lloyds is on this journey with you.
What are the mortgage types for first-time buyers in the UK?
First-time buyers mainly have a choice of two mortgage types in the UK – fixed, one where the mortgage interest rate is fixed for a period, and tracker, where it tracks the Bank of England base rate of interest. (There is a third type – variable – but the interest rates are usually higher.)
Lloyds recognises that nothing in the first-time buyer mortgage process should take away from the sheer joy of becoming a homeowner for the first time. That’s why when you’re looking to buy your first property, you might need guidance on the many different words and phrases you do not yet understand.
All you need to know is available with simple explanations on the Lloyds website or through My First Home, one of the features on Lloyds’ smartphone app for existing customers.
Any mortgage you apply for as a first-time buyer is an entirely personal (and personalised) decision dependent on your individual circumstances. Lloyds can offer support during this process as you ask yourself: What is the best mortgage for a first-time buyer in the UK?
To begin with, there are three main types of mortgage: fixed, tracker and variable.
Fixed
With a fixed-rate mortgage, everything stays the same for an agreed initial period (the length of your mortgage deal). This is different from your mortgage term, which is usually associated with how long you expect to take to pay back the entire mortgage (often 20-40 years).
With a fixed-rate deal, your interest rate is fixed and so your payments will be set at the same amount per month. This type of mortgage can help you budget with greater certainty, and your deal will usually last between two and 10 years. If predictable monthly payments are your priority, a fixed-rate mortgage could be the best option for you.
Tracker
The Bank of England (BoE) base rate of interest is critical to any tracker mortgage you might take out. When the BoE interest rate goes up, your mortgage interest rate will usually go up by the same amount. However, when it goes down, your mortgage interest rate will usually go down by the same amount. This offers less certainty when it comes to budgeting.
Variable
A variable rate mortgage usually refers to a lender’s standard variable rate (SVR). This might be the interest rate you move to once a fixed-term or tracker term ends, unless you choose a new deal or apply for a remortgage. SVRs often have higher interest rates than mortgages that are fixed or on a tracker. It’s worth understanding what moving to a standard variable rate could mean for you at the end of your first mortgage term, and making sure you have a plan for what to do next with your mortgage.
It is important to consider that some lenders offer trackers with a cap, meaning these have interest rates that can only go down to a certain level. With this in place, you may not receive the full impact of the Bank of England’s reductions in its base rate. However, Lloyds does not have caps in place so you will always get the entire advantage from any Bank of England interest rate reduction.
What other factors influence mortgage options for first-time buyers in the UK?
Many factors will influence the mortgage choices for a first-time buyer in the UK, from the amount of deposit they have to put down to the interest rates available on the loans.
The amount of deposit you can afford to put down alongside your mortgage to fund your first property purchase will determine many other choices you need to make along the journey.
For example, larger deposits mean you could borrow a lower mortgage amount – and this is how a lender such as Lloyds works out what is known as your loan to value (LTV).
If you were looking to buy a £250,000 home with a £50,000 deposit then a £200,000 mortgage would see your LTV at 80%. However, the same home bought with a £25,000 deposit and a £225,000 mortgage would put the LTV at 90%.
Lloyds does offer a low-deposit option for first-time buyers where only 5% of the property value is needed upfront allowing the mortgage element to represent 95% of the purchase price.
However, the cost of your property must not exceed £600,000 to be eligible, while other exclusions and conditions may apply. It’s also very important to understand that the higher your loan to value, the higher your monthly payments could be in general, and the interest rate you pay on your mortgage may also be much higher than mortgage offers with a much lower LTV. Full details of this specific mortgage deal are available on the Lloyds website.
Buying your first property with a 95% mortgage might also raise the risk of so-called “negative equity”. This happens when the property you have bought falls in value compared with the price you originally paid for it and so you could end up owing more than it is worth.
What other mortgage options are available for first-time buyers in the UK?
First-time buyers in the UK have many different mortgage options, each with their own advantages and restrictions. These include mortgages with Lloyds Bank needing just a £5k or a 5% deposit.
Some lenders will offer first-time buyers the chance to purchase their first property with a smaller fixed deposit. For instance, Lloyds has a £5,000 deposit mortgage to help get you on the property ladder sooner, without having to save for a larger deposit.
This £5k Deposit mortgage for first-time buyers also comes with a five-year fixed interest rate, but it is subject to a number of exclusions and conditions; this includes the purchase being worth no more than £300,000 and no less than £102,000. The deal is also not available for new-build properties. Full details of this mortgage product are available on the Lloyds website.
What are the mortgage payment options for first-time buyers in the UK?
First-time buyers in the UK are likely to have a repayment mortgage, where the monthly payment covers the interest on the loan and also pays off part of the loan amount.
How much you repay on your mortgage each month as a first-time buyer depends on whether you have chosen a fixed-rate or tracker-based mortgage, the interest rate that deal is charging, and the length of time your mortgage lasts.
With a repayment mortgage, your monthly payment will go towards paying back the whole amount you have borrowed over time. The payment comprises two elements – the interest you are being charged on the loan (usually calculated daily and paid monthly) and the balance remaining on your mortgage from what you originally borrowed.
In the early years of your mortgage, much of what you pay each month will be towards the interest portion of the entire loan, but over a longer period of time it will begin to reduce what you owe on the property by greater amounts. All mortgages with Lloyds come with an annual statement to show what you have paid in the past 12-month period and how much you still owe.
How do I choose the best mortgage lender for me?
Choosing the best mortgage lender comes down to a combination of factors, including interest rates, fees, your deposit, affordability, flexibility and total cost.
The best mortgage lender for you will be the one that offers the products that meet your needs and circumstances. The interest rate is key, and different lenders may offer different rates depending on how much deposit you can put down – so it’s worth double checking. Fees, affordability, flexibility and total cost are also part of the jigsaw so take all of these into account when deciding. Another factor is to consider how much advice and support your lender can provide – this is likely to be a long-term relationship so you need to feel confident and comfortable.
For more information about first-time buyer mortgages from Lloyds, see the dedicated section on its website.
Think carefully before securing debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage. Lending is subject to status.
