How much can I borrow as a first-time buyer?
The quick answer is around 4 to 5.5 times your income.
However, as with all things in life, it’s not quite that simple.
Several factors help the lenders estimate what you can afford to pay into a mortgage and what interest rates they think is fair. Every loan comes with some risk, and lenders need to ensure you can meet their criteria, so they don’t stand to lose any money throughout its duration.
So, how much can a first-time buyer borrow in the UK? Well, it depends on the following factors.
What affects the amount you can borrow?
Your income is going to be the most significant attribute. If you have a high sole or combined income—let’s say over £75–£100k—then you’ll be offered more money and at preferable interest rates. The other major factor is your LTV.
Deposits and loan-to-value ratio (LTV)
Your loan-to-value ratio dictates how much deposit you put down against the property. The lower your LTV, the more comfortable with the risk your lender will be. Most providers expect at least a 15% deposit, translating into an 85% LTV.
Better offers with lower interest rates (that translate to lower mortgage payments) will demand at least that and, more likely, somewhere between 60% and 80% LTV.
Mortgage providers aren’t simply algorithms or automatons, ploughing numbers into a mortgage machine and delivering offers to everyone and anyone without care.
Every offer is scrutinised to ensure borrowers aren’t offered something they can’t afford.
Enter the Mortgage Market Review.
In 2014, right after the credit crunch, the Mortgage Market Review came into force because financial products were being placed with consumers who didn’t have the budget to cover them.
So, since the review, mortgage lenders have to investigate a borrower’s…
- Income – The total sole or joint income is the major factor, including income from pensions and investments, child maintenance, and other support.
- Monthly outgoings – Not just credit payments but utilities, food, clothing, entertainment, travel and more.
- Debt – Credit cards, store cards, bank loans, payday loans, HP, car finance, etc.
- Savings – A healthy-sized safety net and proof of sensible money management can also help.
- Employment – Is it a stable industry with ladder-climbing opportunities? Doctors, solicitors, engineers and other professionals are all considered for preferential rates—as long as they earn over £100k.
- Family – What would happen to your already tight budget if you were to have another child, for example?
From all this information, each lender decides whether their offer adds up to fair and affordable mortgage repayments or whether the borrower will be stretched too far to cope while living an acceptable quality of life.
They also make accommodations if the interest rates were to rise.
This is called stress testing and includes other events that could impact your ability to pay. What if your partner lost their job? You had another child? Or if you were ill for an extended period?
As with any loan, each mortgage lender wants to see that you’re a safe risk and have a good record when managing money. To do this, they run a credit check on each applicant, giving them details about the money they’ve already borrowed, ongoing credit accounts, if they pay their bills on time, or if they’ve failed to pay and it leads to court action with County Court Judgements or bankruptcy.
A low credit score can affect whether you receive an offer or not and the interest rate level you can achieve; it directly impacts the type of mortgage deal you'll be offered.
Should you borrow the maximum offer?
That top-end figure looks very attractive while scouring the market for your first home, but it’s vital not to overstretch yourself.
Perhaps today’s question shouldn’t solely have been “How much can a first-time buyer borrow?” but also “How much should a first-time buyer borrow?”
Having the best possible home is great, but not being able to enjoy anything else can really put a downer on life. Thankfully, your lender will help you determine what mortgage repayments are considered reasonable in your circumstances.
Searching out the highest offer amounts might also mean that you miss out on better interest rates and lower monthly repayments.
Who qualifies as a first-time buyer?
You’re a first-time buyer if you’ve never held a mortgage, owned a house or apartment, or a share in one, in the UK or abroad, and also if any partner on a joint mortgage fulfils the criteria too.
What types of mortgages are available to first-time buyers?
- Fixed-rate mortgages – A fixed rate over a set period allows you to budget without any nasty surprises.
- Standard variable rate mortgages – The lender's standard rate; usually far higher than other options.
- Tracker mortgages – A rate that goes up or down as the Bank of England base rate changes. Be sure you can afford any sudden fluctuations.
- Discounted variable-rate mortgages – This is a discounted version of the lender’s SVR, set at a slightly lower rate over a fixed term.
- Offset mortgages – Your mortgage is linked to your savings, so instead of achieving interest on them, it reduces the interest you pay on your mortgage.
- Joint mortgages – Two wages are better than one!
- Guarantor mortgages – A mortgage where a parent, family member, or other party promises to cover payments if you can’t manage them.
What schemes are available to first-time buyers?
- Help to Buy: Equity Loan – Interest-free loans of 20% (40% in London) for the first 5 years.
- First Homes – 30% discount on new build homes.
- Lifetime ISA – Savings topped up with a 25% government bonus for 18–39-year-olds.
What other costs do first-time buyers need to budget for?
- Property surveys – The lender needs to know the property is in an appropriate condition for the loan amount and is a justifiable risk.
- Mortgage arrangement fees – What your lender charges for organising the loan.
- Conveyancing fees – The legal work needed to add the new lender to the property title deeds.
- Stamp duty – A tax paid on all property purchases over a specific price (currently£125k in England and NI, £175k in Scotland, and £180k in Wales). First-time buyers can apply for stamp duty relief on the first £300k of the property value.
- Home insurance – You should take out appropriate building insurance to cover unseen problems and events.
- Life insurance – Although not a necessity, a life insurance policy pays off the mortgage amount in the event of death, clearing the debt for your surviving family.
Tracking down the best mortgage for you
As a whole of market mortgage broker, “How much can first-time buyers borrow?” is one of the more frequent questions we get asked. Hopefully, this article will help you understand what goes into an offer and how to achieve the most suitable option—not necessarily the highest amount.
We’re ready to help with expert mortgage advice, whatever your situation. Why not give us a call or drop us a line, and we’ll explain what your best options could look like? We'll look in depth at how much you can borrow, the mortgage rates you could expect, and everything else you're unsure of as you take your first steps onto the property ladder.