First Time Buyer

First time buyers are finding it increasingly difficult to get on the property ladder and secure their first home due to high house prices and the lenders' unwillingness to take risks due to the volatile market.

Buying your first property can be a hugely daunting experience as not only are you probably taking the biggest loan you ever will in your lifetime, but there are so many aspects you need to consider from the mortgage (such as fees, rates, amounts, products, repayment, mortgage contracts) to purchasing the property (stamp duty, solicitors fees, deeds) to the property itself (finding the right area, setting up household utilities, buying/moving furniture).

What is a First Time Buyer?

A first time buyer is simply, as the name implies, a person/people looking to purchase their first property. The name is well-known in the mortgage industry not only because first time buyers are a big source of business but also because of the different lending criteria required.

First time buyers often find it harder to get a mortgage application approved because:

• they often have little or no deposit and therefore rely on the bank to provide a higher level of funding
• they have no track record in terms of ability to repay a mortgage
• they can sometimes be at the start of their career where their salary isn't high enough and
• statistically, first time buyers have the greatest chance of suffering negative equity or defaulting on their mortgage.

These factors make it harder for a lender to approve an application from a first time buyer as pose a greater risk.

One of the first objectives for a first time buyer is to establish how much can be borrowed. Lenders often use an income multiple to estimate the amount such as 3.5x (3.5 times your salary).

Using a 3.5x income multiple, a first time buyer earning £30,000 per annum would be able to borrow £105,000 (3.5 x £30,000). Using a joint income multiple of 3.0x, a couple together earning £50,000 would be able to borrow £135,000 (3.0 x £45,000).

This amount only acts as an estimated figure as a lenders actual calculation is far more complex. In order to determine exactly how much can be borrowed, a decision in principle is required. The lender will take information regarding the applicants' employment, finances and credit history (among others) and will be able to provide a maximum amount they would be prepared to lend. Note that a decision in principle does require a credit check.

The most common form of mortgage first time buyers require is the 100% mortgage due to the lack of a deposit. There are other products available that sometimes offer higher amounts such as 110% mortgages and even 125% mortgages but these are very rare.

First time buyers also have the option to take a stepped or low start mortgage which offers lower monthly payments for an initial period whilst you settle into the property and will then increase after this. Another option that has proved successful is starting on an interest only mortgage initially to keep the payments at a minimum and then switching to repayment when you have additional funds. You should be aware that there is a greater risk of negative equity on interest only mortgages and low start mortgages will often increase to a much higher interest rate to recoup the discount the lender initially gave.

With current property prices quite high, there are many first time buyers that are unable to borrow enough to buy their first home. In these circumstances, there is the possibility of getting someone (usually a relative) to act as a guarantor to the mortgage. This means that the guarantor commits to paying the mortgage if the applicants are unable to themselves. By adding a guarantor, the lender is able to boost the amount they are prepared to lend as their risk is reduced.

Related topics

1. Tips for first time buyers
2. First time buyer mortgage calculator

For more information about 'First Time Buyers', you can call us on 020 8783 1337 or submit an online quote.