Taking the first step onto the property ladder is challenging for most first-time buyers so keep costs down by choosing the best mortgage for you
It’s fair to say that buying your first home isn’t getting any easier. House prices have risen sharply over the last 25 years, especially in London and the South East, while salaries haven’t increased at the same rate. Although house prices have dipped a little recently, they still make owning property out of reach for many.
At the end of 1997, the average UK house price was £61,830 according to the Nationwide house price index. Fast forward to the end of 2022, and it’s £265,195 – more than a fourfold increase – with the ratio between house prices and earnings at 5.6 for first-time buyers, compared to 4.3 a decade before.
On top of astronomical house prices, there’s now sky-high inflation to contend with, which has led to rising living costs and finances stretched even further. Inflation was 10.5% in December 2022 – the highest it’s been in more than 40 years.
Because of this, mortgage rates have also risen as the Bank of England has increased the base rate in an attempt to control inflation. It was set at 4% on 2 February – the highest for 14 years – and is expected to rise further in 2023 before falling again in 2024.
‘The biggest change in terms of housing affordability for potential buyers over the past year has been the rise in the cost of servicing the typical mortgage as a result of the increase in mortgage rates,’ said Andrew Harvey, senior economist at Nationwide. ‘While wider financial market conditions had stabilised by the end of 2022, mortgage rates are taking longer to normalise.’
By taking out a fixed-rate mortgage, however, which the vast majority of borrowers do, you can be sure your mortgage payments won’t rise over the period of the deal.
First-time buyer help
The good news is that there’s help available for first-time buyers. The government’s mortgage guarantee scheme has enabled more lenders to offer mortgages for 95% of the property’s value (known as loan-to-value or LTV). There are also Help to Buy and, in Wales, Homebuy schemes that let you take out an equity loan to make buying a property more affordable, although the scheme in England closed to new applicants on 31 October 2022.
Shared ownership schemes let you buy a portion of a property and pay rent to a housing association on the rest, and with the First Homes scheme in England you can buy a property at a discount if you’re eligible. Deposit Unlock is a scheme where you can buy a newbuild property from certain home builders with a 95% mortgage from participating lenders.
Another boost is that you don’t have to pay stamp duty (a tax you pay when you buy a home) as a first-time buyer if you’re buying a home for £425,000 or less in England or Northern Ireland. In Scotland, first-time buyers don’t pay stamp duty (known as Land and Buildings Transaction Tax) up to £175,000.
It can take years to save up a big enough deposit to buy a home, but a Lifetime ISA can help you buy your first home if you’re under 40. You can pay in up to £4,000 each year until you’re 50, and the government gives you a bonus of 25% each year, earning you up to £1,000 annually.
There are also mortgages specifically designed for first-time buyers that let a family member, such as a parent, use their savings or equity in their home to help you buy a home without a deposit.
The best first-time buyer mortgage deals
Here are the best two-year fixed-rate mortgage deals currently available throughout the UK. Mortgage selection based on data from Moneyfacts.co.uk on 10 February 2023. Total cost figures are for borrowing £200,000 over a 25-year term and are rounded to the nearest pound.
Mortgages are subject to status so factors such as your borrowing history, income and credit score will affect what you’re offered.
Best for borrowing up to 90% LTV
NatWest – 4.93%
● Max LTV: 90%
● Product fee: £995
● Total cost over two years: £28,910
There are no valuation fees to pay with this deal plus you get £250 cashback. Early repayment charges apply during the first two years of 1.5% in the first year and 0.75% in the second year but you can overpay by up to 20% extra each year without charge. This deal is only available through brokers, not directly from NatWest.
First Direct – 5.14%
● Max LTV: 90%
● Product fee: £490
● Total cost over two years: £28,993
There are no valuation or legal fees to pay with this deal. It has early repayment charges over the first two years of 3% in the first year and 2% in the second year but you can overpay by unlimited amounts without charge. First Direct also offers a deal with no product fee but as it has a higher interest rate of 5.34% it costs £76 more over the two-year period.
Best for borrowing up to 95% LTV
NatWest – 5.68%
● Max LTV: 95%
● Product fee: £0
● Total cost over two years: £30,044
There are no valuation fees to pay with this deal and it gives you £350 cashback. Early repayment charges of 1.5% apply in the first year and go down to 0.75% in the second year but you can overpay by up to 20% a year without charge. This deal is only available through brokers, not from NatWest directly.
Atom Bank – 5.69%
● Max LTV: 95%
● Product fee: £0
● Total cost over two years: £30,073
This deal is just £29 more expensive over the deal period than the NatWest one above. There are also no valuation fees to pay and you can overpay by up to 20% a year without charge. If you overpay by more than 20%, early repayment charges of 2.5% apply in the first year and 2% in the second year. Atom Bank mortgages are only available through brokers.
Should I choose a low interest mortgage or low fees?
You should look at the set-up fees as well as the interest rate when you’re comparing mortgage deals as the ones with the lowest rates won’t necessarily be the cheapest overall.
For example, you could get a two-year fixed-rate mortgage from HSBC with a rate of 5.09% if you were borrowing 90% of the property’s value – much lower than the 5.37% offered by Yorkshire Building Society on the deal above. However, it has a £999 product fee so would end up costing you £207 more over the deal period on a £200,000 mortgage. The difference would be more if you were borrowing more than that.
The best way to compare the cost of deals is to look at the total cost over the deal period as this factors in the cost of the interest as well as the fees. After this, you would usually remortgage to a new deal to avoid paying your lender’s higher standard variable rate.
How can I get the best first-time buyer mortgage deal?
It’s a good idea to speak to an independent mortgage broker (find one at unbiased or vouchedfor) to get the best deal for you as they can look at all the available products. They also have access to deals not available directly from lenders. Alternatively, you can use comparison sites, such as Moneysupermarket, Uswitch, or our sister site GoCompare to compare deals.
Bear in mind that the lower your LTV, the cheaper the mortgage you’ll get, so it’s worth saving up as big a deposit as possible.
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Cathy has been a journalist since 2001 and specialises in money, property and technology. Before going freelance in 2018 she worked at Which? for 12 years, first as a money writer then as an editor in the money, home, tech and cars teams. Publications she has written for as a freelancer include Loveproperty.com, Lovemoney.com, The i Paper, the London Evening Standard, Which? and Which? Computing.
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