First-time needn't be third-rate

The number of prospective first-time home-buyers is at an all-time high, despite high property prices and the threat of recession, according to one of Britain's biggest lenders.

Miles Bingham, head of mortgage marketing at Abbey National, says the amount borrowed by first-time buyers has risen from about 20 per cent of the bank's new lending last autumn to 30 per cent now. 'First-time buyers were getting squeezed out of the market,' he says. 'But now house prices have come off the boil a bit and interest rates have come down, there is more confidence that mortgage rates will be affordable.'

First-time buyers generally drive the property market. Without them, homeowners at the bottom of the market cannot sell up and move on to better homes. However, Bingham says first timers are now saving bigger deposits and buying better types of property: 'They're trying to miss out on the one-bedroom flats and the properties that combine kitchen and living areas. The average first-time property price is £60,000, but in London and the South East this is more likely to be £125,000.'

But even if you save up a sizeable deposit, the costs of buying your first home are likely to be high, says Johannes Kennard of Bath mortgage broker London & Country. If your first home costs £60,000, and you are borrowing 95 per cent, you can expect to face upfront costs of about £5,000 (including the deposit). You will need to save for:

• A minimum 5 per cent deposit;

• Stamp duty - 1 per cent on properties worth £60,001 to £250,000, 3 per cent on properties worth £250,001 to £500,000, and 4 per cent on properties over £500,001;

• Land registry fees, ranging from £40 to £800 depeding on the property. You'd pay £70 for a £60,000 flat;

• Local searches - about £165;

• Solicitors' fees of between £300 and £400;

• A survey. If you opt for the simple valuation required by your lender, this will cost about £200 on a £100,000 property. If you want information about the condition of the property, you may prefer to pay about £300 for a homebuyer's report, and if you are worried about the structure in any way, you should probably go for a building survey, costing about £600.

You may also need to prepare for:

• An application or administration fee on your mortgage, typically about £300;

• Life insurance premiums. If you have dependants, you will need to buy cover to ensure the mortgage is paid off if you die.

• Mortgage payment protection insurance. This optional insurance covers the cost of your mortgage (usually for a year) if you are unable to work through illness or redundancy, and costs about £5 a month for every £100 of your monthly mortgage payment. So if you pay £500 on your mortgage, MPPI would cost you about £25 a month;

• Mortgage indemnity guarantee. This is very expensive insurance that protects the lender if it is forced to repossess your home and sell it for less than the value of the mortgage. Costs vary, but typically you will pay about 8 per cent of the amount you borrow above 75 per cent of the property's value. So if you are buying a home worth £100,000, and you need to borrow £95,000, you will have to pay £1,600 for the MIG (8 per cent of £20,000).

Most lenders usually apply MIGs on mortgages where you need to borrow at least 90 per cent of the property's value, so the best way to avoid the extra cost is to save a 10 per cent deposit.

Some lenders, such as Britannia and the Woolwich, offer special first-time buyers' loans that do not require MIGs. The Woolwich, for example, is offering a first-time version of its flexible Open Plan mortgage, discounted by 1.76 per cent for three years (producing a current variable interest rate of 5.74 per cent). You can borrow up to 95 per cent of your property's value without paying any MIG.

The Britannia's first-timers' loan is fixed at 6.09 per cent for three years, offers a free valuation and £250 in Kingfisher vouchers that can be used at Woolworths, B&Q and Comet.

If money is particularly tight, look out for mortgages that include free valuations or help towards legal fees.

Abbey National offers a 'Buying your first home' service, which includes help in finding a solicitor, and weekly updates on progress, budget planners, checklists and money-saving incentives such as discounts on van rental and electrical goods.

Kennard recommends that you choose a fixed-rate mortgage (his recommendations can be found in the table). You may not find rates as low as those available on discounted mortgages, but he points out that neither will you face any unaffordable hikes in your mortgage payments during the period of the fix.

Kennard adds: 'Make sure you avoid loans that have redemption penalties which extend beyond the end of the fixed period. That way you can remortgage to another fixed or discounted rate as soon as your first fix comes to an end.'