Best Mortgages For First-Time Buyers

If you’re trying to get onto the property ladder, finding the best mortgages for first-time buyers could make a huge difference to your finances for years to come. Here are the top picks to assess.

Being a first-time buyer can be frustrating. You’ve never had a mortgage before, and it’s easy to be bamboozled with unfamiliar technical jargon.

Let’s peel back the layers and get to the heart of the matter. Knowledge is power – and in the first-time buyer mortgage market, this power could save you thousands of pounds.

Best Mortgage Providers For First-Time Buyers

There are many mortgage products designed for first-time buyers, but not all are equal. Here is our pick of the best market providers for first-time buyers.

Accord

Best For: First-Time Buyers With A Low Deposit

If you have a minimum of £5,000 saved as a deposit, you could borrow up to £495,000 with a 6.39% interest rate fixed for five years. There’s no mortgage fee, either.

The downside? When the fixed term ends, if you can’t find a lender willing to offer you a mortgage with a low LTV you will be at the mercy of Accord’s SVR, which may be higher than elsewhere.

Perrena

Best For: Long-Term Financial Stability

Another specialist mortgage lender, Perrena offers mortgage terms of 20 to 40 years with a fixed rate throughout. This means you’ll never need to worry about a rise in interest rates – though you won’t benefit from falling interest rates.

You can borrow up to six times your income, with deposits as low as 5%. You’ll only need to pay an early repayment charge if you repay the mortgage within the first five years.

First Direct

Cheapest Fixed-Rate Deal

At the time of writing, First Direct have a mortgage product with a fixed rate for five years of just 4.78%. The product fees are £490, and you’ll need at least a 10% deposit.

You can make overpayments without charge, though there is an early repayment charge of between 3% and 2% during the first five years.

Skipton Building Society

Best For: Renters

This is an excellent option if you are a renter with a good track record of paying your rent but have a low (or even zero) deposit.

You can borrow up to £600,000, with the exact amount based upon your rental record and your affordability to pay (you may also be asked to provide proof of your household bills). There are no completion fees, and the interest rate will be fixed for five years.

What Is A First-Time Buyer Mortgage?

If you’ve never owned a property before, a first-time buyer mortgage could be the help you need. However, the first thing to understand is that they don’t differ too much from regular mortgages. You borrow money to buy a property, repay the amount you owe, and pay interest while you still have capital outstanding (money owing to the lender).

So, why are first-time buyer mortgages even a thing? Because the small differences between first-time buyer mortgages and regular mortgages can make a significant advantage for you.

For example, you may be able to benefit from a higher loan-to-value (LTV). This is the amount of money a lender will allow you to borrow compared to the property’s value.

A first-time buyer mortgage may require as little as a 5% deposit. Having to save less to get on the property ladder means you could be a homeowner sooner.

You may also benefit from lower mortgage arrangement fees, and other incentives like help with legal fees or cashback deals that could help with furnishing your first home.

You may even be offered a discounted rate for the first couple of years, before the interest rate reverts to the lender’s Standard Variable Rate (SVR). This lower interest rate will mean you pay less when it’s usually hardest to make the payments.

Lots to think about, isn’t there?

The main thing is to not get fooled into thinking that incentives and other first-time buyer offers are free. Normally, you’ll be required to pay a higher interest rate than you might do otherwise. Which is why you must focus on finding the best mortgage for you, without getting hypnotised by the shiny things that lenders dangle in front of you.

How Does A First-Time Buyer Mortgage Work?

First-time buyer mortgages work like other different types of mortgage.

You’ll borrow the value of the property less your deposit. Most lenders allow you to add your mortgage fees and other upfront costs to this.

To protect themselves against you not being able to repay the mortgage, it will be secured against the property. If you default on payments, your home could be repossessed, and you’ll be left without a roof over your head.

You can borrow the money to buy a property in two main ways.

The first, and most common, is a capital repayment mortgage. With this type of mortgage, each monthly payment includes an amount to cover the interest and an amount to pay a little off the capital outstanding. By the time your mortgage term ends, you will have repaid what you borrowed.

The second major mortgage type is an interest-only mortgage. Here, you only pay the interest each month. Consequently, you monthly mortgage payments will be lower, but at the end of the mortgage term, you will still owe what you borrowed.

With this type of mortgage, it’s crucial to ensure you will have the means to repay the capital you borrowed when the mortgage matures.

The following two charts show the difference between a 25-year repayment mortgage and 25-year interest-only mortgage with £180,000 borrowed at 7%.

In this example, with the repayment mortgage you will pay a total of £381,659, including £201,659 in interest.

The interest-only mortgage may be around £220 per month cheaper, but it will cost a total of £495,000: £315,000 in interest payments plus the repayment of the £180,000 borrowed when the mortgage matures.

Years ago, when I took my first mortgage, 25 years was the standard mortgage term. Today however, most mortgage providers offer mortgage terms of up to 40 years.

A longer mortgage term could reduce your monthly repayment, but you’ll end up paying more interest in total. That’s an equation you’ll need to balance.

How Much Can You Borrow?

Mortgage providers used to calculate how much you can borrow with a strict formula based on your salary (or joint salaries, if buying with someone else). However, these regulations were relaxed long ago, and now your affordability to manage the repayments on a mortgage is the biggest factor.

To determine this, the lender will assess your income and outgoings, other debts you have, and your credit score.

Lenders will also consider how big your deposit is: the bigger your deposit, the more you’ll be able to borrow, though this is not the only advantage of saving a large deposit.

Finally, a lender may also risk-rate your financial situation on your ability to pay if mortgage rates were to rise. Again, this used to be a regulatory requirement, but was removed in August 2022.

Why Is A Bigger Deposit Better?

While there are now an increasing number of mortgage providers offering 95% LTV mortgages (meaning you only need a 5% deposit), if you put down a larger amount you could benefit in two ways.

First, your monthly payments will be lower: the less you borrow, the less interest you’ll pay, and the less capital you’ll need to pay. In the mortgage example I detailed above, if you were to borrow £160,000 instead of £180,000, your monthly payments on a repayment mortgage would be approximately £1,131 instead of £1,272.

Secondly, lenders tend to offer better mortgage terms to borrowers who require a lower LTV. Usually, with a 95% LTV you’ll pay a higher interest rate than you would with an 85% or 90% LTV.

Over the term of your mortgage this could make a sizeable difference to how much you repay in total, as well as making it more challenging to repay your mortgage early.

What Help Is Available For First-Time Buyers?

There are several schemes that will help you save a deposit for your first home or to buy your first home.

While I think that some of these schemes contribute to high property prices (for example, it was noticeable that when the Stamp Duty Land Tax threshold was increased for first-time buyers, sellers responded by increasing asking prices), if you can get help onto the first rung of the property ladder, why not take it?

First Homes Scheme

Only available in England and to those with an income (or joint income) of less than £80,000 (£90,000 in London) who can get a mortgage for at least 50% of the property’s value.

The property that you are buying must be a new home built by a developer or a home that you buy through an estate agent and that has not previously been bought using the scheme.

This scheme is administered by local authorities, and priority is usually given to key workers (normally doctors, nurses, police officers, teachers, etc.). You will also be given preference if you are a member of the armed forces, former spouse or widow/widower of a member of the armed forces, or veteran if you left the armed forces within the previous five years.

Forces Help To Buy Scheme

This scheme helps members of the armed forces to buy their first home. You can get an interest-free loan up to 50% of your salary and a maximum of £25,000.

You will need to have at least six months to serve remaining. You can use the loan to pay for costs (including legal fees and estate agent fees) as well as toward your deposit.

Shared Ownership

If you cannot afford to buy a home, you might be able to buy part of one. The Shared Ownership Scheme is aimed at those with a lower income who cannot afford the deposit and mortgaged payments.

You don’t need to be a first-time buyer, though first-time buyers form most of the buyers under this scheme.

The idea is that you buy between 25% and 75% of the property, and pay rent on the portion you don’t own. Over time, you can increase how much you own until you own the entire property, if you wish.

You will still need to pay a deposit based on the portion of the property you are buying.

Right To Buy

Without the Right To Buy Scheme, my wife and I would have needed to wait much longer to buy our first home. This scheme allows you to buy the property you live in, providing it is a council-owned property or a property that has been transferred to a housing association while you have been living in it.

The discount depends upon how long you have been a tenant, and can be as high as 70%.

95% Mortgage Guarantee Scheme

This is indirect help for first-time buyers, as it has encouraged mortgage providers to lend 95% of property value, by guaranteeing a portion of losses if they need to repossess the home.

This scheme only protects the lender, and not the borrower – if you do default and have your home repossessed, the financial effect on you is not cushioned.

Lifetime ISAs

A Lifetime ISA (LISA) is designed to help you save a deposit faster. The benefits are so good that you can only deposit up to £4,000 a year into a LISA – you’ll get a 25% bonus added to the amount you save, as well as any interest or growth.

But be warned, you must use the proceeds toward buying your first home or your retirement. If you withdraw the proceeds for any other reason, the penalties could mean you get back less than you put in.

Mortgages For Renters

Something that has infuriated me for a long time is how difficult it is to get a first-time buyer mortgage if you are a renter. For a mysterious reason only understood by lenders, mortgage providers have never considered your rental payments record when considering your ability to pay a mortgage.

“So what if you’ve been paying £1,000 a month on rent and a mortgage would only cost you £750? We don’t think you can afford it!”

Thankfully, this is now changing. There are several lenders who are willing to consider your track record as a renter when assessing your mortgage application.

For example, Skipton Building Society are offering a Track Record Mortgage. You won’t need a deposit, and can borrow up to £600,000 providing you have paid at least 12 months’ rent in a row in the last 18 months.

7 Steps To A First-Time Buyer Mortgage

The sooner you start preparing to buy your first home, the better. Here are the steps you need to take:

1. Start Saving

The sooner you start saving, the better. Remember, too, that the bigger the deposit you can save, the less you’ll need to borrow and the better your mortgage rate is likely to be, saving you money when you do take on a mortgage.

2. Boost Your Credit Score

The higher your credit score, the more likely your mortgage application is to be accepted – and, again, the lower the interest rate is likely to be.

There are several ways to boost your credit score. One of the easiest is to use a credit building credit card (remembering to always pay your statement balance in full to avoid interest).

3. Research First-Time Buyer Help

While you’re in the process of saving a deposit and boosting your credit score, start looking at the help you can get as a first-time buyer. The schemes available are always evolving, with new ones being added and existing ones changed.

Individual lenders may also have their own schemes from time to time.

4. Be Realistic With Your Budget

Effective budget planning is crucial to your financial health. I always overestimate my expenses and underestimate my income. This helps to ensure that there are no nasty, unexpected surprises.

Don’t forget to factor in expenses that you may not have had before, such as home maintenance, buildings insurance, and life insurance.

5. Maintain An Emergency Fund

Few mortgage advisors place any emphasis on the need to build and maintain an emergency fund. I think it’s a crucial factor in good financial management.

With a healthy emergency fund behind you (at least three months of expenses), you will be financially prepared for almost any emergency. With the funds to pay for car repairs or a broken boiler, or to act as a cushion if you lose your job, you’ll be more relaxed and won’t have to borrow at expensive interest rates.

6. Get A Mortgage Offer In Principle

With all the building blocks in place, it’s now time to get a mortgage in principle. This is an indication of a firm mortgage offer, and will give you an idea of how much you can borrow, and how much the mortgage might cost each month.

This will save you a lot of wasted time looking at properties that are out or your reach financially.

7. Review The Small Print

When you have found your ideal home and wish to make a formal mortgage application, be sure to review the small print. It’s here that you’ll find any ‘nasties’ like early repayment penalties, or hidden fees.

Types Of Mortgage

As a first-time buyer, you have a range of mortgage types you can apply for, each of which offers distinct features:

Fixed-Rate Mortgages

The advantage of a fixed-rate mortgage is that you know how much you’ll be paying each month. If rates rise, your payments won’t. For this certainty, the fixed rate is usually a little higher than the lender’s SVR, and if rates should fall, you won’t benefit from lower interest rates.

This is unlike a flexible rate mortgage, which moves according to the lender’s Standard Variable Rate (SVR).

Tracker Mortgages

With a tracker mortgage, the interest rate charged rises and falls with an underlying benchmark. This is usually the Bank of England Base Rate. The rate you pay will move up and down by a fixed amount above or below this (for example, Base Rate + 0.5%).

Discount Mortgages 

A discount mortgage incorporates a special discounted interest rate at the beginning of the mortgage term. This is typically applied for between six months and three years, and you’ll pay less than you would otherwise because of the discounted rate.

When the discount period ends, you’ll revert to the lender’s SVR.

Offset Mortgages

If you have excess savings and want to retain access to them, you could opt for an offset mortgage. Instead of receiving interest on your savings, they are set against the amount you have borrowed to decrease the interest you pay, helping you repay your mortgage sooner.

Guarantor Mortgages

If you don’t have a deposit, or your mortgage application is denied because of a shortfall in affordability, you could ask a family member or close friend to be a guarantor on your mortgage. The lender will then consider their financial situation as well as yours.

However, the guarantor must accept the responsibility to make mortgage payments if you cannot (their home could be at risk, as well as yours).

First-Time Buyer Mortgages – The Bottom Line

When you are negotiating the mortgage market for the first time, the unfamiliar terminology and various mortgage options available can be confusing. Remember, there is plenty of help for first-time buyers like yourself. Specially designed mortgages offer unique features, including lower deposit requirements, reduced fees, and even cashback incentives.

While we have selected Accord, Perrena, First Direct, and Skipton Building Society as key mortgage providers for first-time buyers at the time of writing, there are other lenders available – it’s always advisable to research the market.

Don’t forget, too, that there are various schemes available to help you get on the property ladder, such as the First Homes Scheme, Lifetime ISAs, and Shared Ownership.

There’s only one thing left for me to say: when you do buy your first home, be diligent with your finances, and enjoy your status as a homeowner.