Home Buyer’s Guide

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Getting on the property ladder might seem like a daunting prospect, but here’s an easy guide on how to negotiate the various stages.

From Civvy Street Magazine #43 (January 2014)

Raising capital

The first step to getting on the property ladder is to calculate what you can afford, what size of deposit you can raise and what you can afford to spend on monthly mortgage repayments after essential and lifestyle spending.

The days of the 100% mortgage are over and the majority of lenders require at least a 10% deposit – the larger the deposit the cheaper the mortgage will be, as the rate of interest you are paying on the loan will be smaller. You will also need to put aside enough money to cover the cost of moving – a rough estimate is 6% of the purchase price – which will cover stamp duty, survey, solicitors fee and removal costs.

If you are struggling to raise enough funds for a deposit there is help available, through the Government’s new Help to Buy mortgage guarantee scheme, which allows you to secure a mortgage with only a 5% deposit. You don’t have to be a first time buyer to be eligible and there is no limit on your household income. To see if you are eligible for this scheme talk to a mortgage advisor or go to www.gov.uk and search Help to Buy.

Types of mortgage

Before you talk to your bank or mortgage broker, shop around on mortgage comparison websites such as www.moneysupermarket.com/mortgages or  www.comparethemarket.com/mortgages. This will give you an idea of what loans are available. Mortgages are made up of two parts: the capital, ie the money you borrow, and the interest, which is the charge made by the lender until the loan is paid back. There are two principle types of mortgage – repayment and interest only.

A repayment mortgage is the most popular option with borrowers; buyers will pay monthly repayments for an agreed period until they have paid back the capital and the interest. The benefit is your debt is gradually being reduced, so if you keep up with the repayment schedule you will have paid off your mortgage at the end of the agreed term.

With an interest only mortgage, on the other hand, you only pay the interest on the amount you borrowed. On the up side your monthly repayments will be smaller, but on the down side at the end of the agreed term you will still owe the original capital you borrowed. If you take out an interest only mortgage most lenders will require you to have a strategy in place to pay back the capital. Some lenders will also require a larger deposit.

Fixed or variable?

Interest rates differ on mortgages and you have two options: fixed or variable. A fixed rate mortgage charges a fixed interest rate for a set period of time – usually 2-5 years – at the end of this period your lender will usually switch you onto a standard variable rate. The benefit of this is that your monthly mortgage repayments will stay the same for this fixed period – if interest rates rise your mortgage repayments won’t increase. This makes it easier to budget, although fixed rate mortgages tend to be more expensive than other mortgages, and you will not benefit if interest rates fall.

With a variable mortgage the interest you are paying could change at any time, depending on which way interest rates are predicated to move. With a standard variable rate mortgage the interest you are paying can move up or down at the lender’s discretion. Their decision may be influenced by the Bank of England’s interest rate. This type of deal will last until your mortgage ends. The obvious downside of this is that interest rates might go up so much that you struggle to keep up with monthly repayments. The benefit is that it is usually free to leave your lender or make early repayments.

Before you talk to your bank or a mortgage broker, it is advisable to go through your household expenditure as this will help you to budget and will allow you to work out how much you can afford to spend on monthly repayments. A lender will carry out an affordability check before agreeing a mortgage, they will scrutinise your income and outgoings, but it is helpful to have an idea beforehand.

Once you have spoken to your mortgage provider, and it seems likely that you will be able to raise sufficient funds, it is generally best to agree a mortgage in principal. This will eliminate one of the biggest risks when buying – spending months finding your dream home only to be refused a mortgage.

Searching for your home

When you have your mortgage agreed in principal and know what you can afford, your search can begin in earnest. Location is usually one of the biggest factors when deciding on a home – if you have children you will want to check the catchment areas for good local schools. Proximity to other factors – such as family, shops, transport links and parks – are also worth considering. Ninety per cent of purchasers start their search on property websites such as Rightmove and Zoopla, but don’t ignore estate agents, as they will have good local knowledge and often know of properties coming up for sale which are not yet on the market. Explain that you have your mortgage agreed in principal and that you are ready to move quickly. Having a solicitor or property conveyancer instructed also shows you are a serious buyer. Many mortgage providers insist on you using a solicitor or conveyancer from an approved list, so it is best to check with your lender beforehand.

When you arrange to view properties keep an open mind – it is unlikely that any home will tick all the boxes, so be prepared to compromise. When you are looking around it helps to have your surveyor’s hat on – look out for hairline cracks in the walls, check for damp patches, musty smells, warped windows or doorframes, or unfinished DIY jobs.

Once you have decided on the right home, make an offer to the seller’s estate agent – in England and Wales an offer is not legally binding until you have exchanged contracts, while in Scotland once an offer is accepted you are obliged to buy the property and might have to pay compensation if you fail to buy. Having had your offer accepted you need to notify your solicitor so they can start work on the contract and property searches and notify your lender so they can carry out their own valuation.

You should then commission a Homebuyer Report – a basic survey, costing around £450, which will check the structural integrity of the property including the roof, walls, drainage and general build quality. If you a buying an older property it is recommend to have a full survey, costing around £1200. This looks into more detail including timber quality, electrics and plumbing. In Scotland sellers are required to provide a Home Report, so buyers are not required to carry out a survey.

Once you and your solicitor are happy that no legal or survey issues remain you will sign a copy of the contract and exchange it with the seller. A completion date will be set and on this day your solicitor will transfer the funds from the lender to the seller, and you will pay the remaining solicitor’s fees and stamp duty. You will then, finally, receive the keys of your new home.