Ultimate mortgage guide for first time buyers

Few people in the UK can afford to buy a property outright. That is, paying for the whole thing with cash.

And that’s why mortgages are one of the most popular secured loan products out there.

The process and the products can be incredibly confusing and complicated – even for those who have done it before.

So this comprehensive guide is your starting point for navigating mortgages.

Oh, and if you’re not sure about the meaning of anything, here’s a glossary of mortgage terms that demystifies the jargon.

Mortgage categories

There are lots of different mortgage products out there, ranging from ones geared towards first time homeowners who need a guarantor to those looking to invest in buy to let homes.

But broadly speaking there are two categories: fixed rate mortgages and variable rate mortgages.

Fixed rate mortgages are ones where the interest you pay is fixed for a period of time, and then it will revert to a lender’s standard variable rate (the default rate offered).

Variable rate mortgages are ones where the interest rate will change over time, according to rates set by the lender.

Within the variable rate mortgage category there are also subcategories.

The main ones are:

Tracker mortgages where the interest rate moves up and down, and is usually pegged to the Bank of England’s Bank Rate.
Discount rate mortgages where the interest rate is lower than the lender’s standard variable rate for a period of time, but will still move up and down like a tracker mortgage.

Types of mortgages

Most people buying a home will have a standard mortgage with either a fixed rate or variable rate terms.

However, there are also specialist mortgages that might suit people in particular circumstances better, and some will have lower interest rates than normal.

In terms of residential mortgages – which is what we’re covering here – these are some of the lesser-known but still popular options:

Offset mortgage where the attached savings account can help “offset” the mortgage and lower interest rates.
Guarantor mortgages where a family member or close family acts as guarantor to help someone with low income or limited credit history to secure a mortgage; the guarantor becomes liable for the debt if the borrower cannot pay.
Joint borrower sole proprietor (JBSP) mortgages where there are multiple people jointly liable for the mortgage debt, but only one person is on the deed to the home.
New build mortgages where the home being purchased is a new build property; some mortgage providers have different lending criteria for these homes.
Shared ownership mortgages where the property is bought through a shared ownership scheme; ownership of the home is shared with a housing association or other party, and the buyer pays rent on the portion that’s not owned as well as the mortgage.
Professional mortgages where preferential rates and/or terms are offered to those in professions like medicine, law, and finance because they typically have stable incomes and high earning potential.
Islamic mortgages where the bank buys the property and charges the buyer rent until the cost of the home is paid off; it doesn’t use interest rates, which makes it Sharia-compliant.
Self-build mortgages where the loan is used to build a home.
Green mortgages where preferential rates are offered to buyers of energy-efficient homes.

Can you switch mortgage types?

You can absolutely switch the type of mortgage you’re on.

The easiest time to do this is when the initial period on your mortgage comes to an end as you won’t be subject to any penalty fees.

Obviously you’d still be limited by the type of mortgage available to you.

If you’re in the middle of the initial period, for example if you’re two years into a five year fixed rate mortgage, then you need to speak to your lender.

They can then advise whether they have a suitable product of the type you’re after and if there are any additional fees to pay.

How much can you borrow?

It’s generally accepted that you can borrow 4.5 times your salary.

So if you’re on a £50,000 salary then you might be able to borrow £225,000.

In reality, most lenders will offer slightly less than this, and some lenders will offer more.

It all depends on your circumstances – and the size of your deposit.

For professionals for example – those doctors, lawyers and accountants – lenders may be happy to offer a slightly higher multiplier, especially if they’re already on a high income.

But if someone has a poor credit history, or has large, regular expenses – child care, for example – they may not be able to borrow as much.

One way to get an idea of what you might be able to borrow is to get an agreement in principle.

You have to tell a prospective lender details of your income, expenditure and the property you’re hoping to buy, and then they will come up with a figure that they’re willing to lend.

It doesn’t affect your credit score so it’s definitely worth doing, and it’ll give you a clearer idea of your budget.

It’s not a sure thing though; you’ll only find out how much you can borrow once you go through the process of applying for your mortgage.

Your circumstances as well as the characteristics of the property could all affect how much you get.

How much do you need for a deposit?

Actually, you don’t need a deposit at all to buy a home – there are lenders offering 100% mortgages.

Skipton Building Society for example has the Track Record mortgage, which is geared towards renters and doesn’t require a mortgage.

Meanwhile, the Family Springboard Mortgage from Barclays and the Family Boost Mortgage from Halifax are both guarantor mortgages that require zero deposit from the buyer.

For these, a family member puts down 10% of the amount borrowed as a guarantee for a certain amount of time.

When that period ends and the buyer hasn’t defaulted on any payments, they will then get their money back.

Low deposit mortgages are not the norm though.

Most lenders will require at least a 10% deposit, and will offer lower interest rates to those with bigger deposits.

How do you improve your chances of getting a mortgage?

Having poor credit history, being self employed, and even having children could all lead to mortgage rejections.

Essentially, anything on your application and in your financial history that makes you look unreliable or makes the mortgage look unaffordable could hamper your chances of getting approved.

And so, to improve your chances of securing a mortgage, you need to be able to show that the opposite is true.

Having a good credit score is a good way to show it – and you can do this even without using a credit card.

You’ll also want to show that you have steady, regular income, and that these are unlikely to fall in the near future.

Since affordability is a big part of securing your mortgage, you might be able to improve your chances of securing a mortgage by cutting out non-essential expenses in the lead up to your application.

Why not try a no spend challenge for a few months or get rid of some of those streaming subscriptions?

Read this: Self employed mortgage: Tips from the experts

Should you get a mortgage broker?

There are many more niche mortgage options beyond those mentioned above – and that’s why it can be helpful to speak to a mortgage broker.

They can help you find the right mortgage for you, and suggest lenders more willing to work with your circumstances.

They also have access to mortgage products that aren’t available to the public, potentially leading to a better mortgage deal.

It’s especially true if you’re buying a commercial or semi-commercial property, or intend to use the home for buy to let or as a holiday let.

Word of mouth is often best but sites like Unbiased* can also come in handy.

Some mortgage brokers charge a fee while others will get a commission from the lender.

The most important thing to check is whether they will do a “whole of market” search for you, which gives you access to the widest range of products.

What length of mortgage should you go for?

I personally think it’s a good idea to know the basics of what you want before you go to a mortgage broker.

It saves everyone time, but also it means they can tailor their advice a bit more.

One of the key things you’ll be asked is how long you want your mortgage to be.

A standard mortgage in the UK is 25 years but these have been getting steadily longer as homes become more expensive.

Some can even be as long as 40 years.

Having a longer mortgage will mean lower monthly payments, but you’ll pay more in the long run due to the build up of interest.

It’s worth bearing in mind though that there’s nothing stopping you from getting a much longer mortgage to start with and then switching to a shorter one when you can afford to.

And of course, you could shorten your mortgage by making overpayments.