Best mortgage charges for first-time consumers: How lengthy ought to they repair for?

The prospect of buying a home for the first time can be as daunting as it is exciting.

For the majority of people it will be the biggest financial decision of their life, and this brings up plenty of challenges.

Securing the best possible mortgage deal is one of the most important things to get right, especially as rates remain relatively high at the moment. 

While mortgage rates are lower and more stable than they were in 2022 and 2023, they are still a long way off the lows enjoyed by home buyers prior to interest rates rising in 2022.

The average five-year fixed rate mortgage is 5.09 per cent, according to Moneyfacts, while the average rate for a two-year fix is 5.39 per cent.

Someone securing the average five-year fixed rate on a £200,000 mortgage to buy their first home could expect to pay £1,180 a month if signing up to a 25-year repayment term.

But someone able to secure the best first-time buyer five-year fix would see that monthly repayment fall to £1,051 a month. That’s an annual saving of £1,548. 

> When will interest rates fall again? Forecasts on how low the base rate may go 

How good a mortgage can I get? 

The type of mortgage deal a first-time buyer is able to get will depend on the size of their deposit as well as their personal circumstances, their income, debt and credit score.

Having a bigger deposit relative to the purchase price opens up cheaper mortgage rates, as lenders will deem the buyer a less risky borrower.

Mortgage rates are often available in tranches based on the size of the mortgage versus the property’s value. This is known as the loan-to-value. 

For example, if you had a 10 per cent deposit your mortgage would be 90 per cent loan-to-value, if you had a 25 per cent deposit it would be 75 per cent loan-to-value and if you had a 40 per cent deposit it would be 60 per cent loan-to-value. 

Speaking to a whole-of-market mortgage broker, rather than going direct to a bank or building society, is the easiest way of getting matched to the cheapest possible mortgage deal.

Mortgage brokers will also run an affordability check to see what the maximum someone can borrow is. They will use information from bank statements, payslips or tax returns to do so. 

As a rough rule of thumb, most lenders typically limit most people to borrowing no more than 4.5 times their annual income. 

However, it can be lower dependent on any other loans and debts they may have to factor in, or potentially higher if their incomings and outgoings are robust.

It is also possible to borrow more than 4.5 times your income with certain lenders, depending on how much someone earns and how large their deposit is.

In September, Nationwide announced it was giving first-time buyers the ability to borrow six times income, even to those with a deposit of 5 per cent.

This means couples earning £50,000 to borrow £300,000 towards first home, which is roughly £75,000 more than standard lending.

It followed on from Halifax, which announced at the start of September that it had made £2billion available for first-time buyers who need to borrow up to 5.5 times their annual income.

To be eligible for what Halifax is calling its ‘First-time buyer boost,’ buyers need a total household income of £50,000 or more, which will need to come from employment. 

They also need to be purchasing a property with a deposit of at least 10 per cent.

There are also certain lenders that provide higher multiples for certain professions, usually secure public sector jobs such as nurses or civil servants. 

The best mortgage rates for first-time buyers

40% deposit or more

Five-year fixed rate mortgages 

Halifax has a five-year fixed rate at 3.96 per cent with a £0 product fee at 60 per cent loan to value. The deal does come with a £100 valuation fee.

Two-year fixed rate mortgages 

Barclays has a 4.21 per cent fixed rate deal with a £0 product fee at 60 per cent loan-to-value.

25% deposit

Five-year fixed rate mortgages 

Halifax has a five-year fixed rate at 4.05 per cent with a £0 product fee at 75 per cent loan to value. It also comes with a £100 valuation fee.

Two-year fixed rate mortgages       

Barclays has a 4.33 per cent fixed rate deal with a £0 product fee at 75 per cent loan-to-value.

15% deposit

Five-year fixed rate mortgages 

HSBC has a five-year fixed rate at 4.16 per cent with a £999 product fee at 85 per cent loan to value. The deal also offers £350 in cashback.

Two-year fixed rate mortgages 

HSBC has a two-year fixed rate at 4.74 per cent with a £0 product fee at 85 per cent loan to value. It also comes with £250 cachback.

10% deposit buyer

Five-year fixed rate mortgages 

Bank of Ireland has a five-year fixed rate at 4.54 per cent with a £0 product fee at 90 per cent loan to value.

Two-year fixed rate mortgages 

Bank of Ireland has a two-year fixed rate at 5.07 per cent with a £0 product fee at 90 per cent loan to value.

5% deposit buyer

Five-year fixed rate mortgages 

Virgin Money has a five-year fixed rate at 4.99 per cent with a £0 product fee at 95 per cent loan to value. The deal also comes with £300 cashback.

Two-year fixed rate mortgages 

Bank of Ireland has a two-year fixed rate at 5.33 per cent with a £0 product fee at 95 per cent loan to value.

How long should first-time buyers fix a mortgage for?

First-time buyers have a tough call to make when deciding how long to fix their mortgage rate for.

Choosing what length to fix for depends on what you think will happen to interest rates during that time, and what your personal circumstances are – including if they will need to move after just a few years. 

Typically most people fix for either two years or five years, although there are some who will fix for three years or even 10 years. 

Those who fix for two years do so because they believe that interest rates will continue falling over the next 24 months, and a shorter fix will allow them to switch to a cheaper rate when that time comes. 

Or, because they think they may want to move again in two years – and fixing for longer might open them up to an early repayment charge on the mortgage were they to exit early.  

There will be many who prefer the cheaper five-year fixed rates, taking the view that mortgage rates are unlikely to fall much further from here. 

George Smith, a mortgage broker at LDN Finance says: ‘Borrowers with a 15 per cent deposit of less are starting to look increasingly towards five-year fixes with the current state of geopolitics.

‘But there are still a lot of first-time buyers who are fixing in for two or three years. 

‘The sentiment at the moment is that we hope rates continue to drop over the next 12 to 18 months so there may be interest rate savings to be made at that point.

‘Another factor in this decision is that a high number of first-time buyers have limited deposits so they may lower their loan-to-value in two years and therefore be in a lower interest rate bracket and secure a lower rate off the back of it.’

What about a tracker mortgage? 

If rates continue to fall, a tracker mortgage without an early repayment charge could put borrowers in a position to take advantage.

A tracker mortgage essentially tracks the Bank of England’s base rate plus or minus a percentage. 

For example, it could be base rate (which is currently 5 per cent) plus 0.5 percentage points, equalling 5.5 per cent.

Hypothetically, if the Bank of England were to cut base rate from 5 per cent to 4 per cent, this tracker rate will immediately fall to 4.5 per cent. 

However, for all the potential benefit, a tracker product will also leave people vulnerable to further base rate hikes in the meantime, while also being more expensive than fixed rates at present.

‘Lots of first-time buyers are asking about trackers,’ adds broker George Smith.

‘However, the fix allows first time buyers to be able to budget month-to-month, which many find more attractive. 

‘Due to most trackers being Bank of England base rate plus a margin, they are currently starting from a much higher point than fixed rates. 

‘This means the base rate would need to come down significantly to match a fixed rate, and then fall further to make up for the lost time. 

‘I advise clients that although there is no right or wrong answer, it’s a fairly large risk to take when buying their first home and when they may not have a huge deposit or any assets in the background.’

What next for mortgage rates?

On 1 August, the Bank of England cut interest rates for the first time in over four years. It then held base at 5 per cent in September.

At present, markets are pricing in one or two further rate cuts in 2024. If forecasts are correct, this could mean base rate will fall to 4.75 or 4.5 per cent by the end of 2024.

Looking further ahead, financial markets are forecasting base rate to fill further over the course of next year.

The most bullish forecasters on rate cuts have base rate coming down to as low as 2.75 per cent by the end of 2025, with Goldman Sachs analysts announcing this rate forecast recently. 

Goldman’s prognosis would mean a quarter point interest rate cut at all nine meetings of the Bank’s Monetary Policy Committee (MPC) from November 2024 to November 2025. 

This is similar to economists at Capital Economics think the base rate will fall to 3 per cent by the end of next year. 

At the more reserved end of the spectrum, Santander recently revealed it expects interest rates to fall to 3.75 per cent by the end of next year and then remain between 3 per cent and 4 per cent for the foreseeable future.

Many people assume that mortgage rates are directly linked to the Bank of England base rate.

In reality, future market expectations for interest rates and banks’ funding and lending targets and appetite for business are what really matters.

Fixed rate mortgage pricing often closely follows Sonia swap rates. A swap is essentially an agreement in which two banks agree to exchange a stream of future fixed interest payments for another stream of variable ones, based on a set price.

These swap rates are influenced by long-term market projections for the Bank of England base rate, as well as the wider economy, internal bank targets and competitor pricing.

In aggregate, swap rates create something of a benchmark that can be looked to as a measure of where the market thinks interest rates are going.

As of 25 October, five-year swaps were at 3.79 per cent and two-year swaps at 3.97 per cent – both trending well below the current base rate.

Roughly this time last year, five-year swaps were around 4.5 per cent. Similarly, the two-year swaps were coming in around 5 per cent.

George Smith adds: ‘We’ve seen some good movement on swap rates and mortgage rates since the Bank of England rate cut. 

‘We’ve seen plenty of sub 4 per cent rates being released which is, of course, fantastic to see. 

‘I personally feel like things will plateau toward the 3.5 per cent mark which feels like a good deal in terms of borrowing money. 

‘With lower interest rates comes increased house prices so I’m advising clients that now is a good time to buy and also potentially take advantage of lowering borrowing costs.’

Smith adds: ‘We are seeing a lot more stock of properties on the market and a lot of them seem to be chain free with second homeowners and investors looking to offload before potential changes to capital gains and the like in the upcoming budget. 

‘First time buyers are therefore even more attractive buyers with quick transactions the flavour of the month.’