Home loans for first time buyers in the UK

Trying to break into the housing market in the UK can be a daunting task, to put it mildly. And for first-time buyers, there is the added pressure of both learning about the home-buying process and securing the best home loan for their situation at the same time.   

The good news is that you can use the status of being a first-time buyer in your favour. Not only are there government schemes available to help you step onto the property latter, but there are home-buying scenarios where you will be looked up favourably. 

So do not worry. Here is everything you need to know about home loans for first-time home buyers in the UK. For any mortgage professionals reading this article, we invite you to share this with clients of yours who have questions about home loans for their first home in the UK. 

How much can a first-time buyer borrow? 

There is no one-amount-fits-all approach to how much you, as a first-time home buyer, can borrow. The answer depends on your income, as well as other factors, like if you are purchasing a property with another person. In that case, both incomes are considered. Other factors include loans, debts, credit cards, and other financial commitments.  

One of the best ways to determine how much money you can borrow is to use an online mortgage calculator.  

Typically, the maximum amount you can borrow from a lender will be based on your annual salary. Usually, lenders will let you lend between four and four-and-a-half times your annual salary—while some lenders will offer as much as five times, six times, and, in rare cases, seven times your annual salary. 

For instance, if you earn £20,000 per year, you will likely be able to borrow between £80,000 and £90,000 toward your first mortgage. Lenders also expect you to be able to repay the amount over a set period, typically 25 years. 

How much deposit do you need for first-time home buyers? 

In the UK, you typically need a deposit of at least 5% of the purchase price of the property. For instance, if you want to purchase a property that costs £150,000, you will have to save at least £7,500, or 5%, for the deposit. If, however, you can save more than 5% for the deposit, you will gain access to a much wider—and cheaper—range of mortgage options in the market. Not to mention a lower interest rate.  

What schemes are available for first-time home buyers? 

While buying your first home can feel daunting, the good news is that there are government schemes to help first-time home buyers in the UK. Here are some of the more popular ones: 

1. Help to buy 
2. Shared ownership 
3. Right to buy 

Let’s take a closer look at each scheme: 

1. Help to buy 

The help to buy scheme has passed its last date for applications and is now looking for those who qualified to close out their purchases by March 31st, 2023. No new applications are being taken for this particular first-time buyer scheme.  

This scheme helped people build new homes. If you qualified for this scheme, you would have had to make a deposit of 5% and borrow 20% of the purchase price of the property. If you lived in London, you could have borrowed 40%. The key to the whole thing was that you didn't have to pay any interest on the loan for five years. 

2. Shared ownership 

With the shared ownership scheme, you only own a portion of the home (whereas help-to-buy gives you legal ownership of 100% of the property).  

For shared ownership, you buy a share of the home from the landlord—typically the council or a housing association—and pay rent on the rest. You will, however, need a mortgage to pay for your share of the property, which is usually between one quarter and three quarters of the value of the property. If you choose, you can purchase a larger share of the home and increase that amount until you own 100% of its value. 

3. Right to buy 

The right-to-buy scheme is only available to those who live in England and Northern Ireland. The scheme lets you to buy a home at a discount if you are a housing association tenant or a council house. If you live in England and fail to qualify for the right-to-buy scheme, you may be able to secure a discount under the right-to-acquire scheme.  

The maximum right-to-buy discount differs depending on your area: 

• London: £116,200 
• Rest of England: £87,200 
• Northern Ireland: £24,000 

If you sell the home in five years, you will have to repay your total discount, or a portion of the discount, as well as any share of the profit. 

What qualifies as a first-time buyer? 

A first-time buyer is a person buying a home who has previously not owned a home and has no property to sell. Essentially, if you are a first-time buyer, you do not own a home, you are not an investor, and you are not currently mortgaging or re-mortgaging a house. 

The following is a breakdown of who typically qualifies as a first-time buyer in the UK: 

• You have not owned a principal residence for three years. If your spouse has owned a home and you have not, you can buy a property together and still be considered first-time buyers. 
• You are a single parent who has only owned a property with your ex-spouse when you were married. 
• You are a displaced homemaker who has only owned a property with your former spouse. 
• You are someone who has only owned a principal residence that is not permanently attached to a foundation as defined under applicable regulations. 
• You have owned a home that was not in compliance with local, state, or model building codes.  

Whether living with parents or renting, first-time buyers are usually attractive for sellers because they are chain-free, meaning it should therefore be faster to sell your property. Real estate agents will review your financial situation before proceeding with a home purchase. 

What benefits do first-time buyers have? 

The major obvious benefit that first-time buyers have in the UK is financial. Schemes such as help to buy, shared ownership, and right to buy can save you significant amounts of money, both in the beginning of the home loan with savings on the deposit and in the long term with better rates. For instance, an equity loan will enable you to purchase a property with a deposit of just 5%. With a shared ownership, deposits can be even lower.  

Another benefit first-time home buyers enjoy is the preferred buyer status that comes with it. The reason you may be looked upon favourably by lenders is that you do not have a chain, meaning you may be deemed as being more reliable than a current homeowner.  

The reason is that a current homeowner must rely on another home buyer purchasing their property before they are able to move. If you are a first-time home buyer, it is in both your best interest and the best interest of the seller. This is especially true if everyone involved wants a fast sale. 

There are many schemes available to first-time home buyers in the UK. Not only can you get help making that daunting deposit, but you may even be in a better position to close on a deal than a current homeowner. However, since stepping onto the property ladder can be very tricky, we invite you to speak with some of the most qualified mortgage professionals in the UK for assistance and to continue learning which first-time buyer loans are right for you. 

Do you have experience with home loans for first-time buyers in the UK? Let us know in the comment section below.