Best mortgages for first-time buyers: from fixed-rate deals to Help to Buy London and family-backed borrowing
Mortgages used to come in only two types — with fixed or variable interest rates. Not any more.
We run through some of the more popular options for first-time buyers:
1. Fixed-rate deals are best
If you are stretching to the max to buy your first home, having the security of a fixed rate can be very reassuring. Often you need to pay extra for this security — but not at the moment.
HSBC offers the cheapest variable mortgage over the same timeline, again with fees of £999, but this time the rate varies with the Bank of England base rate plus 1.34 per cent, which currently equates to 2.09 per cent.
The Bank would need to cut rates twice — or by 0.5 per cent in one move — for you to be better off in terms of monthly repayments.
If you’ve squirrelled away a 20 per cent deposit there is very little difference between the best rates.
NatWest offers a standard mortgage with two years fixed at 1.41 per cent with £1,272 fees, while Halifax’s two-year variable rate is currently 1.46 per cent — the base rate plus 0.715 per cent — with fees at £1,199.
While the rate difference may be minor, the products can vary a lot. Fixed-rate deals are all about stability, both for you and for your mortgage provider. There are generally limits on how much you can overpay and penalties if you end the mortgage early.
Variable-rate mortgages have no such conditions, but your payments may go up or down.
2. Buying with a five per cent deposit
Well done. Saving five per cent of the value of a London home is no mean feat. It also gives you options.
If you have the income to support the remaining 95 per cent in a mortgage, HSBC offers a 25-year mortgage with a two-year fixed rate of 2.69 per cent and no fee. That’s £1,374 a month for a £300k mortgage.
For those who like certainty, the good news is that five-year fixed rates are not much more expensive.
Leek United Building Society’s 25-year, 95 per cent loan-to-value mortgage has an initial five-year fixed rate of three per cent and zero fees. On a £300,000 mortgage this is just £136 a month more than HSBC’s two-year offering.
3. You've got a deposit but limited income
If you struggled to amass a five per cent deposit, mortgage repayments on the remaining 95 per cent may be beyond you. But the Help to Buy London equity scheme offers an alternative.
The Government lends you up to 40 per cent of the purchase price for five years, interest free, and you take out a mortgage for the remaining 55 per cent.
Lenders participating include Halifax, now offering a two-year fixed-rate deal at 1.48 per cent, and a five-year fixed rate of 1.84 per cent, both with £995 fees.
Do be aware of Help to Buy’s three important catches. First, you must buy a new-build home, which can be more expensive than equivalent older homes. Secondly, interest payments on your equity loan kick in from year six.
The rate starts at 1.75 per cent and rises by 1 per cent plus inflation annually, so can quickly mount up.
Thirdly, the Government owns a percentage of your home, not a fixed amount. As your house price increases, so does the amount you need to pay back.
4. No deposit? There’s hope if your family has cash
High London house prices mean it can take years for even the most diligent saver on an average income to tuck away five per cent.
Family members often want to help, but few can afford to give away their life savings. A number of creative mortgage products offer a way forward.
If your family has a nest egg they’re willing to lend, consider a Barclay’s Springboard mortgage.
This lets you borrow the full purchase price for up to 35 years and a maximum £500,000 at a five-year fix of 2.75 per cent to 2.95 per cent, depending on circumstances.
Your family puts an additional 10 per cent of the purchase price into a Helpstart account as security, currently earning 2.25 per cent interest.
This money is returned after five years, assuming you keep up repayments. So you get a home and your family gets a modest income.
5. Family has assets to lend
The dramatic rise in UK house prices over the past few decades means that many parents and grandparents are asset rich, even if their income is little changed. Equity release is one option, but it is not for everyone.
The Post Office’s family link mortgage provides an alternative that doesn’t necessarily alter your family’s inheritance pot.
Here, you borrow 90 per cent of the purchase price at a five-year fixed rate of 3.89 to 3.99 per cent, depending on the cashback amount. The remaining 10 per cent is lent as a mortgage against your family’s home.
This is repaid monthly alongside your other mortgage, but does not generate interest and you can overpay without any charges.
Having so many options can be mind-boggling. Speak to an independent mortgage broker or use an online portal such as Habito or Trussle if you need help finding your perfect fit.