First-time buyers’ guide to mortgages

So you've made an offer on your first house or flat and it's been accepted - congratulations! But before you get the keys and move in, you'll need to arrange your mortgage. 

This guide looks at the different types of mortgages available, what you’ll need to do before you apply and what to do about home insurance. 

Applying for your first mortgage can be overwhelming, and there are a few things you need to know first. Read on to find out which kind of mortgage could be right for you, what to look out for when comparing mortgage rates and how to apply for a mortgage. 

Different types of mortgages

The first thing to consider is what type of mortgage you want. The two main types are repayment mortgages and interest-only mortgages.

Repayment mortgage

A repayment mortgage repays the capital on the loan as well as the interest. In the earlier years the share of the payment towards the capital is small but it will increase as the term of the mortgage decreases so it will chip away at your debt over time. If you were to keep your mortgage for the full term, you would owe nothing to the lender at the end of the term.

Interest-only mortgage

For first-time buyers, it’s almost impossible to get your hands on an interest-only mortgage with the current lending criteria, but that could change at any time. Essentially, it does what it says on the tin. If you borrow £200,000 with an interest rate of 5%, it will cost you £10,000 a year – you only pay back the interest.

You will still owe the £200,000 throughout the lifetime of the mortgage term so you will never pay off any of the debt (unless you make overpayments), and at the end of the mortgage term you would still owe £200,000.

Mortgage rates

Once you’ve decided between a repayment mortgage or an interest-only mortgage, you then have the option of a fixed-rate mortgage or a variable rate mortgage.

Fixed-rate

A fixed-rate mortgage will fix your interest rate regardless of changes to the UK economy. So if you start out with a 5% interest rate on your mortgage, you’ll usually keep that rate for the specified offer rate provided by your lender. A fixed rate usually reverts back to the lender Standard Variable Rate (SVR) after the offer period is over.  

Variable rate

A variable rate mortgage will usually move the interest rate up and down which could change your repayments month on month. The main cause of this is due to changes in the UK economy, but other factors do impact. Variable rate mortgages are more complicated and fall into three categories:

• Trackers – the rate of your mortgage is fixed to an economic indicator, usually the Bank of England base rate
• Standard variable rates – a mortgage lender has a standard variable rate which roughly follows the Bank of England base rate. This offer is not normally offered to new customers
• Discount rates – a discount is applied to the standard variable rate a mortgage lender offers. This discount is normally limited to a specific time period.

Repayment charges are usually applicable while in a special rate offer so be careful not to tie yourself into a deal for too long if you think your circumstances might change or you plan to move on in the future.

If you’re not sure how much you can borrow, use a mortgage calculator to work out your monthly outgoings including the repayment and interest repayment.

Sometimes it's worthwhile looking at the overall cost of the mortgage rather than just the best interest rates. It can be cheaper to go for a higher interest rate with lower fees than a lower interest rate with more hefty fees upfront. A mortgage adviser should be able to guide you on this.

What do I need to do before I apply for a mortgage?

Here are four things to consider before applying for a mortgage:

1. Get your credit report

First things first, get your hands on your credit report online to check your credit score. Three of the main companies in the UK that provide credit reports are:

• Experian
• Equifax
• ClearScore

ClearScore offers free access to your credit score and you check this as often as you like without affecting your credit rating or score. If your score isn’t looking great don’t panic, there are ways for you to improve it. Check out Admiral Loans' guide on improving your credit score.

2. Prepare proof of income

If you’re self-employed you’ll be asked to provide your accounts and bank statements and if you’re employed you’re normally asked to give three months’ worth of payslips and bank statements

3. Reduce your debts

This will show a mortgage lender you can manage your finances responsibly and they’ll be more likely to lend to you. The lender will look at all your outstanding debts including student loans, car finance and credit card bills.

4. Save as much as you can for a deposit

The bigger the deposit the bigger the choice of mortgages that'll be available to you - a bigger deposit's seen as a lower risk to the lender so you’ll get better rates. 

Make sure you take all of the fees that coincide with a mortgage into consideration (there a quite a few to be aware of). We have a handy guide about the true costs of buying a home which will give you a good understanding of all the costs involved with buying a property.

The main charges to look out for when setting up a mortgage are:

Arrangement fee

This could be a fixed fee from your lender or a percentage (roughly 1.5%-2%) of your loan and can usually be added to the loan

Valuation fee

This will cover the cost of an inspection of your new property. Budget around £250 for this. Some lenders offer an upgrade on a valuation to a Homebuyers Report which is more in depth or a full structural survey at an additional cost

Legal fees

A solicitor will be able to handle all of the legal aspects of buying a new property for you. The Money Advice Service will be able to provide more information about legal fees

Stamp duty

The costs depend on the price of the property and where you're buying. First-time buyers in England and Northern Ireland benefit from an exemption meaning no Stamp Duty is paid on properties worth up to £300,000.

In Wales, Land Transaction Tax (LTT) replaced stamp duty in April 2018 so buyers can't take advantage of the exemption. The current LTT threshold is £180,000 for residential properties.

Home-buyers in Scotland pay Land and Buildings Transaction Tax rather than stamp duty, and the threshold is £175,000.

Do I need home insurance to get a mortgage?

Buildings insurance will cover the cost of fixing your home if it’s damaged and it’s normally a condition of your mortgage. An important thing to take note of is that you don’t have to take out a policy with your mortgage provider; shop around to find the best home insurance policy that suits you.

Once you have moved into your new home you should consider adding contents insurance to your policy too - this will protect all of the belongings in your new home. Try using our contents calculator to get an estimate of what your contents are worth as undervaluing your contents could leave you at risk of being under insured.   

In addition to home insurance, mortgage advisors strongly recommend first-time buyers take out life insurance and critical illness cover.

Beware of offers from your bank

Your bank may well make home insurance a condition of their offer, but what’s more, many will try to steer you towards their own insurance products. At a time when you have a lot on your plate it often feels easy to take their offer and have done with it, but the chances are you can get a better deal if you shop around.

They’ve been known to pile on the pressure on people to take a deal. For example, sometimes they insist on checking your policy to make sure it gives the right kind of cover. Some have been known to also charge a fee for not taking their insurance. It’s all part of an attempt to push you towards selecting their policy. Stick to your guns and take time to find the policy which works best for you – it may be the bank offers the best deal but it’s still best to compare your options.

Save money on home insurance

You’ll also want to save some money on your new home insurance. After all, buying a house is expensive and if there’s any time you’re likely to be short of money it’s now. The good news is there are ways to save money. Here are three simple ways:

1. Combine your car and home insurance: it can save time, as we mentioned before, but can also help reduce the cost of home insurance 
2. Install security: visible security systems can be off-putting to burglars, reducing your risk of a break-in
3. Higher excess: this is the amount you pay towards the cost of a claim. A higher excess could mean lower premiums but you should always make sure this is something you’d be able to afford in the event of a claim.

Ultimately, it’s all about making the process as affordable and stress-free as possible. Arranging home insurance for your first home can be stressful, but with a little preparation it’s easier than you might think. For a little more help, why not read our complete guide to buying home insurance?