First Time Property Buyers Guide
How much can I (we) afford? Should I pay a deposit? What type of mortgage should I take out? What are the different types of Mortgages available? Common Types of Mortgages on Offer Higher lending charge (HLC) Where to find your dream home? Making an Offer Solicitors and Legalities of buying a property Offer Accepted Any Renegotiations Stamp Duty Things to Remember Completion Date What is a property chain? Make a PlanSooner or later the subject of buying a home raises it head, this can seem a very scary scenario, all those forms to fill in, legalities to comply with, hoards of professionals to take advice from, and so on and so on. Is it really worth all the hassle? Most definitely, however, before you happily embark on the long and winding path to home ownership, there are a few things you need to sort out first.
| How much can I (we) afford? |
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Having decided that home ownership is the way for you, the next thing is to figure out how much you can spend on the property. Unless you are one of the few people who can pay for a property from their savings (lucky you), for the rest of us, the way to get hold of the money to buy a property is by taking out a mortgage. There are literally hundreds of different types of mortgage providing all sorts of so-called benefits and offering you a variety of ingenious ways to raise finance to purchase your home.
The most important thing to remember is to only borrow what you can afford to pay back, however enticing the mortgage offer looks, if you can’t pay it back, you will lose your home and end of story. Historically, the way the mortgage provider works out how much they are going to lend you is based on your salary. They will lend around some 3.5 x your salary, or if you are looking for a joint mortgage, 2.75 x joint salaries.
This method of calculating how much the mortgage provider will let you have is not the only method used by mortgage providers when deciding how much they are prepared to lend you, in fact, more and more mortgage providers are using different criteria when calculating how much you can borrow, these alternative methods usually end up calculating a larger sum of money than that calculated by the salary method. At the risk of becoming boring, once again, a word of warning, do not commit to more than you can afford.
| Should I pay a deposit? | Top |
Traditionally, most mortgage providers asked for a deposit of around 5% - 10%, however, in today’s housing market where there are hundreds and hundreds of different types of mortgages on offer, not having the money for a deposit does not exclude you from getting a mortgage (100% mortgage).
So, is putting down a deposit a good idea? This depends on your personal set of circumstances, it certainly will make it easier in getting a mortgage, and in most cases the interest rate will be lower than that of a 100% mortgage, another benefit is that with a deposit you are less likely to fall into a negative equity situation, i.e. where the amount of the outstanding mortgage is more than the value of the mortgaged property. In the ‘good old days’ some mortgage providers offered mortgages of 100% - 125% against the property (not a good idea). Once again, I cannot emphasise too strongly, don’t borrow more than you can afford.
| What type of mortgage should I take out? | Top |
There are basically two ways of paying back your mortgage, depending on what type of mortgage you took out in the first place.
1. Repayment Mortgage
This is the traditional way of paying it back; there is a term over which payments will be made, usually 25 years. Repayments are monthly, and are made up of both capital and interest, at the end of the 25 years the mortgage is guaranteed to be repaid, and title of the property transfers to you (Yippee!).
It should be noted that during the early part of the mortgage term, the repayments are made up of mostly interest, as the length of the term increases, more of the capital is paid back, until towards the end of the term the repayments consist of the capital borrowed.
2. Interest Only Mortgage
As the name suggests, you only repay the interest over the period of the term of the mortgage, the capital is grown in an investment product, such as a pension, ISA, or an insurance policy. There is always the risk that the investment product chosen to take care of the capital does not perform as well as expected and this could end up with the borrower having to ‘top up’ the investment fund, so as to pay off the capital. Make sure you take professional advice before going down the interest only route.
| What are the different types of Mortgages? | Top |
Every day a new type of mortgage appears in the marketplace, proclaiming to be better than anything else on the market. This has resulted in thousands of mortgage products floating around and making a bewildering choice for those of us about to purchase our home. The main thing to be aware of is the interest rate associated with the mortgage, as this has direct relevance to how much your repayments will be.
The best advice I can offer you is to think of the old adage ‘horses for courses’ and venture out into the mortgage marketplace to look for the right mortgage for your personal set of circumstances. Another adage (I like adages) ‘One man’s meat is another man’s poison’ springs to mind, in other words check everything out, do your due diligence and keep an open mind.
Below I have listed some of the more common types of mortgage and their attitude to interest rates.
| Common Types of Mortgages on Offer | Top |
Variable-rate mortgage
The interest rate that is charged by the mortgage provider against their mortgage products, is known as the Standard Variable Rate (SVR), this will in general follow the Bank of England base rate changes, although sometimes, it may not exactly mirror them, and even on occasion not change at all.
Discount mortgage
Some mortgage providers offer a discount on their Standard Variable Interest Rate (SVR). Generally 1% discount, so if the mortgage providers SVR was 6%, your discounted interest rate would be 5% (bear in mind that this rate will also vary as the mortgage providers SVR varies). The amount of time the discount applies for depends on what the mortgage provider offers, however, be aware that in the majority of discounted interest rates the mortgage provider locks you in to the mortgage during the discounted period, and you would have to pay a penalty if you wanted to redeem your loan.
Fixed-rate mortgage
This type of mortgage offers a fixed interest rate regardless whether or not the lenders rate goes up or down, like the discount mortgage, the mortgage provider locks you in for the duration of the fixed rate, and in some cases beyond the duration of the fixed rate.
Capped-rate mortgage
This type of mortgage offers a capped interest rate, in other words, the interest has a fixed upper limit. If your mortgage provider SVR rises above your capped rate, you don’t pay the additional interest, but if your mortgage provider’s SVR falls below your capped interest rate then your interest rate will fall as well.
Once again you will be tied in during the duration of the capped interest period.
Tracker-rate mortgage
This type of mortgage ‘tracks’ the Bank of England base rate, it usually offers a discount or premium for a specific period of time, and reduction in the Bank of England base rate will be reflected in full in your tracker interest rate mortgage.
Again you will be locked in for specific period of time
Flexible mortgage
As the name suggests, this type of mortgage is flexible, allowing you to pay more, pay less, and at certain times pay nothing at all. You are not locked in for a specific period and you can pay off the mortgage at any time without penalty. Flexible mortgages usually attract variable rates of interest, but some fixed and discounted rates of interest are beginning to emerge within the financial marketplace.
| Higher lending charge (HLC) | Top |
Sometimes known as a Mortgage Indemnity Guarantee (MIG). These are insurance policies for mortgage providers and the borrower pays for the premiums. The HLC covers the lender in case the borrower defaults on the loan and the lender has to repossess the property and then sell it on. They are usually raised on mortgages of over 95% - 125%.
There are many more different types of mortgage available on the market today, the ones shown above are just a sample of the type of mortgages that you can apply for. In reality, for every unique set of circumstances regarding a mortgage, there is a mortgage plan waiting to fore fill the circumstances.
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Where to find your dream home? |
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IfYou have been granted a mortgage, so you know how much you can spend on your home, the next step is where to find the home of you dreams (for the right price) .
First thing to do is to register with a local estate agent in the area where you wish to buy your home, estate agents fees are paid for by the seller not the buyer. Make an appointment with the estate agent so that you can discuss with them exactly the kind of property you are in the market for, make them aware of how much you are prepared to pay and any other relevant facts that will influence your choice of property. The estate agent will arrange to send you details of property they have on their books and any new properties that appear which fit your criteria. Estate agents will set up viewing appointments so that you can go and visit any potential properties that you may like. The vendors should issue you with a Home Information Pack (HIP). The HIP associated with the property contains such things as surveys and local searches relating to the property, compiled in advance.
| Making an Offer | Top |
Right, all those days of viewing, more viewing and even more viewing have finally paid off, you have found the home you always wanted. Big deep breath is required here. Time to ‘make an offer’, don’t let your heart rule your head, you know what you can afford, plus there are going to be a number of other expenses associated with the purchase. So, be sensible when making an offer and remember, that what it is at this stage is only an offer; no survey has been carried out yet.
Hence, when you or your estate agent proposes your offer (in writing) to the vendor, the words ‘subject to survey’ should appear somewhere within the written text.
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Solicitors and Legalities of buying a property |
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While you are waiting for a reply regarding the offer you have made, now would possibly be a good time to sort out a good solicitor who will act for you regarding the legal aspects of buying a property. Ask around your friends and colleagues if they can recommend a good conveyancing solicitor and make sure you get a quote from the solicitor first, before signing any agreement.
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Offer Accepted |
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Once your offer is accepted, you may well be asked to pay a deposit as a sign of your serious intent to buy. If the purchase doesn't go ahead due to circumstances outside your control, you should get it back as the deal is not legally binding until contracts are exchanged, but once they are, your deposit will normally be non-refundable. Your solicitor should be able to deal with this side of it.
Remember the mortgage, now is the time to bring it into force, so, time to finish off the application. Your mortgage lender will arrange a valuation of the property to ensure that it is worth the sale price, and more to the point, it has a valuation that is more than the mortgage lent against it. As usual, this service costs, and please remember that this is a basic survey, it won’t show all the structural details associated with the property, for this you will need a surveyor to carry out a detailed give the property survey listing any defects that come to light. Once again, ‘surprise surprise’ this also costs.
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Any Renegotiations |
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Depending on what the structural survey reveals regarding any defects that are found in the property that you intend to purchase, will answer the question whether or not any renegotiations with the vendor need to take place. If the survey comes back with the information that property you intend to purchase is structurally sound, then no problem, let nature and property purchasing take its course. However, if on the other hand the survey comes back with some major (or minor) defects associated with your intended purchase, then it is time to renegotiate the purchase price. Don’t let your heart rule your head, if the survey shows really serious faults in the property, at the very least get professional advice and if need be, walk away from the deal, remember, your offer is not legally binding at this stage.
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Stamp Duty |
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As if buying a property was not expensive enough already, you will have to take into consideration Stamp Duty and a Land Registry Fee.
Stamp Duty is raised on all property priced at over 125.000 GBP.
Rates of Stamp Duty are as follows:
Less than £125,000 - nil
£125,001 to £250,000 - 1%
£250,001 to £500,000 - 3%
£500,001 and over - 4%.
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Things to Remember |
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If everything is still on track, now is the time for your solicitor to arrange for the exchange of contracts and negotiate a completion (moving in date). Up until now, you could withdraw from the sale, but once contracts are exchanged, you are legally obliged to complete the sale, and if you don’t, you will lose your deposit.
Once a completion date has been agreed between yourself and the vendors, time to arrange and inform various parties about your forthcoming move of home. Utility companies need to be informed, your mail needs to be redirected, and your bank and other service providers need to be informed of your new address.
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Completion Date |
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Completion date is the day when the balance of the money is paid over to the seller and when you have the keys to the property and move in.
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What is a property chain? |
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The majority of transactions associated with buying and selling property in the UK usually involve people that are both buying and selling, and can involve quite a large number. This is known as a property chain. Now, the more people involved in a property chain, the more likely something can go wrong.
The words you do not want to hear when buying or selling property in the UK is ‘There is a break in the chain’.
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Make a Plan |
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As with all things, but especially when buying a house, always expect the unexpected.
There is no definitive list or plan that can cater for every eventuality when it comes to the stressful situation of buying your first property. However, with a little bit of fore thought, pencil and paper, good planning, and a bit of luck, you can come through the process of buying a property relatively unscathed, and once you have got through the process, think about just how much easier it will be when you do it again. (I hope!)
