The biggest barrier to getting on the housing ladder is building up a suitable deposit, and in the current climate, most lenders require at least a 10% deposit although a few will allow 5%. This guide explains why the size of your deposit matters and the sort of mortgage rates first-time buyers can expect to get.
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
A first time buyer is someone who is buying a home and has not owned a property before. If a couple are buying together and one person has been a homeowner in the past, they will not be regarded as first time buyers.
Not all mortgages are available to everyone and lenders often have products specifically for first time buyers and other deals just for home movers.
First time buyers mortgage rates vary depending on how much of a deposit you can put down. Many first time buyers only have a small deposit and this means fewer mortgages will be available to you. It also means first time buyers mortgage rates will be higher.
This is because a borrower with a smaller deposit is regarded as being riskier to lend to than someone with a larger deposit.
Lenders are also restricted in how much of this type of low deposit lending they can do. The Financial Services Authority, which is the regulator for the financial services industry, has strict rules on this.
The latest Bank of England figures are for the second quarter of 2020 (April, May and June) and show that just 1 in 20 mortgages (4.9%) had an LTV of 90% or higher, in other words a deposit of 10% or less.
So, if you are able to put down a larger deposit, you will have a wider range of mortgages to choose from. And you will be in a better position to qualify for the best mortgage rates for first time buyers.
When you are looking for a mortgage you need to think in terms of loan to value (LTV) rather than the deposit.
The LTV is how much in percentage terms the loan will be compared to the value of the property. So, if you have a £20,000 deposit and the property is going to cost you £200,000, that means you have a 10% deposit, therefore you will need a 90% LTV mortgage.
If you were lucky enough to have a £50,000 deposit, that would be 25% of the £200,000 so the LTV would be 75%.
The higher the LTV, the higher the risk to the lender, which will be reflected in a higher interest rate.
Mortgage rates have been extremely low for the past few years, some of the lowest in history. However, since Covid-19 forced a national lockdown from 23 March to 13 May, rates have started to creep up although they are still relatively low.
More than 7 out of 10 mortgages (73.3%) taken out in the second quarter of 2020 had an interest rate that was less than 2% above the Bank of England base rate (currently 0.1%, the lowest it has ever been). This is the latest data from the Bank of England.
The Bank of England’s latest data shows that mortgage rates are rising. The average 5 year fixed rate mortgage at 90% LTV has been around 2.5% for the past couple of years but started moving up in July 2020. At the end of October the rate for a 90% mortgage had reached 4.14%.
The 2 year fixed rate mortgage at 90% LTV ranged between 2.23% from Jan 2019 to 1.89% in April 2020. Since then, the rate has steadily increased to 3.55% in October, which is the highest it has been in more than 5 years.
There are very few 95% LTV mortgages around but the average 2 year fix has been hovering at 3% since the start of 2019. It began to rise in August 2020 and by the end of October the average rate 95% mortgage was 4.09%.
Similarly, with 85% LTV 2 year fixed rate mortgages the average rate in April 2020 was 1.64% but by 31 October it was 2.97%, the highest in six years.
Even a 2 year 60% LTV mortgage rate has gone up slightly from around 1.3% all this year until July and at the end of October the rate was 1.47%.
You can see from Table 1 how the mortgage rate rises the higher the LTV gets and how rates have risen this year.
Note that these mortgage rates are averages so some lower rates should be available.
Table 1: Average 2 year fixed rate mortgages 2020
|LTV||31 March||31 October|
Source: Bank of England
You may be surprised to know that the average first time buyer actually has an LTV of 77%, compared to 67.6% for home movers. These are the latest published figures by UK Finance, the trade body for the financial services industry, and are for December 2019; but it is very similar to December 2018 when the average LTV was 76.4%.
This is because some first time buyers are able to get help from the Bank of Mum and Dad who are able to gift their children money towards the deposit.
The average UK first time borrower is 32 years old, takes out a mortgage for £174,275 and has a loan to income ratio of 3.54. This means the average first time buyer annual household income is £49,230.
This compares to a home mover average mortgage of £184,912, loan to income of 3.33 taking the annual household income to £55,529.
When you take out a mortgage it is usually for a term of 25 years, although it can be longer - 30 or even up to 40 years with some lenders.
But you don’t necessarily stay on the same product for 25 years. Your first mortgage will be for a set number of years after which it will revert to the lender’s standard variable rate (SVR). This will be higher than the rate you have been paying so this is when you should remortgage, i.e look for a better deal.
The mortgage will either be a variable interest rate or a fixed interest rate.
A variable interest rate mortgage can go up or down and is usually linked to another rate, usually Bank of England base rate or the lender’s SVR. There are various variable rates but the most common are tracker and discount mortgages.
A tracker mortgage ‘tracks’ the Bank of England (BoE) base rate, which is currently at the historic low of 0.1%.
For example, if your mortgage is set at 2% above BoE base rate, your mortgage rate would be 2% + 0.1% = 2.1%.
If the BoE decides to change the base rate to 0.5%, your mortgage rate would go up: 2% + 0.5% = 2.5%.
The tracker mortgage can be for a set number of years or it can be a lifetime tracker which follows the BoE base rate for the entire life of the mortgage.
A discount rate is a discount off the lender’s standard variable rate and all lenders decide their own SVR.
For example, if the lender’s SVR is 5% and the discount is 2% for 2 years, that means the mortgage rate will be 3% (5% - 2% = 3%). At the end of the 2 years, your rate will automatically move onto the lender’s SVR unless you remortgage onto another product.
With a fixed rate mortgage, the interest rate remains the same each month so you have the security of knowing exactly what you will pay without the possibility of the rate going up or down.
Around 9 in 10 mortgages taken out now are fixed rate and more than half the mortgages issued at the end of 2019 had interest rates fixed for 5 years or longer, according to the Bank of England. These are typically 5 year fixed rates with LTVs of 60% to 85% and 10 year fixed rates where the LTVs are usually between 60% and 75%.
Fixed rates have been more popular than variable rates in recent years as people want to fix into a low rate rather than a variable in case Bank base rate goes up.
With the BoE base rate at 0.1%, people think there is only one way for it to go and that is upwards. So, if you fix your rate you won’t be affected if the BoE base rate rises.
However, they have recently asked banks how they would cope if the base rate dropped to zero or even a negative percentage, so that scenario can’t be ruled out. The European base rate, set by the European Central Bank, is currently 0%.
The question you need to ask is how long do you want your first mortgage deal to be? The main choices are 2, 3, 5, 7 or 10 years. The rates tend to get higher the longer the mortgage.
Table 2 shows the average rates for various 75% LTV mortgages. These examples are fixed rate and again, you can see rates have gone up since earlier this year.
Table 2: Average fixed rate mortgages at 75% LTV 2020
|31 March||31 October|
Source: Bank of England
Another important part of the mortgage to consider is the arrangement fee. Some mortgages have fees, others have no fees.
Generally, you will find that the lower mortgage rates come with higher fees and the higher mortgage rates have lower fees. This will impact on the cost of the mortgage so you will need to work out if it is cheaper to go for the higher rate and the lower fees or vice versa. It depends on factors such as the size of the mortgage. A good mortgage broker would be able to advise on this.
In many cases you can add the arrangement fee onto the mortgage but that means you will be paying interest on it for the life of the loan. For example, if the fee is £1,000 it is best to pay it up front if you can rather than paying interest on £1,000 for 25 years.
First time buyer mortgages also often have incentives attached to the mortgage such as a free valuation, free legal costs or cashback.
It’s an expensive business buying a house or flat and there are other costs to consider apart from the mortgage deposit, monthly repayment and arrangement fee. These include:
Buildings and contents insurance
Building survey - optional
If you're a first time buyer or looking to move house or remortgage, we can help you find the best mortgage deal to suit your needs.