Over this series of articles we'll take you through the
various stages of the house buying process, offering you expert
legal advice and handy hints in a way that's easy to understand -
helping you to make the best decisions to get on the
ladder.
Richard Chan is a practicing solicitor from Arc Property Solicitors. Here he advises first
time buyers on what to be aware of when entering the market.
Buying your first home is a hugely exciting prospect, but with
15% plus deposits the norm, there's never been a more difficult
time to get on to the property ladder. If you are ready to make the
leap, make sure you do it with your eyes open and are aware of all
the costs and legal requirements. Here's a rundown of all the costs
a first time buyer should bear in mind and the options
available.
MORTGAGES
It's the first - and largest - cost people associate with buying a
house. There's a variety of offers on the market, and the most
suitable will depend on your personal circumstances.
Fixed-Rate Mortgages - The most common product
on the UK mortgage market, with the vast majority of buyers seeking
the reliability of a fixed-rate loan. The amount you repay every
month is fixed for a specified period of time.
Pros: Reliable and consistent repayment amounts will help you
budget.
Cons: If interest rates drop, you may be fixed higher than the
Bank of England base rate
(BOEBR) - the interest rate that the Bank ofEngland charges banks
for secured lending.
Tracker mortgages - A tracker mortgage has a
variable rate anchored to a prevailing interest rate, usually the
Bank of England's. With the recent cut in interest rates, tracker
mortgages have seen increased demand.
Pros: When interest rates fall, so do the monthly repayments on
your loan.
Cons: Interest rates can move both ways, so repayments can stay
the same or go up.
Variable-rate mortgages - Lenders set their
standard variable rate between 1.5% and 3.5% over and above the
Bank of England base rate.
Pros: Again, if the base rate falls, so might your monthly
repayments.
Cons: If the base rate increases, so will your lender's standard
variable rate. However, if the base rate falls, lenders are not
bound to pass this on to borrowers.
Shared Ownership Mortgages - This is shared
ownership between you and a housing association. You'll only need
to borrow against 25-75% of the property value and the housing
association will own the remainder. Over time, you have the option
to buy back the property from the housing association.
Pros: A great way to start - makes properties affordable, and
you may not need a deposit.
Cons: There are limitations on property types and areas, plus
administration costs.
Capped-rate mortgages - The interest will not
rise above or below a preset rate for a certain period.
Pros: Easy to budget.
Cons: If the base rate drops below the cap, you won't be able to
take advantage of this.
Off set mortgages - These offset the interest
you pay against money in your current and savings accounts. The
more money you have, the less interest on your mortgage you
pay.
Pros: You can avoid paying large amounts of interest and
possibly shrink the term of your mortgage and monthly
repayments.
Cons: You have to be extra disciplined with managing your
accounts.
Graduate mortgages - A graduate mortgage's main
benefit used to be its 100% loan to value (LTV) rate. However, due
to the economic downturn, any of these mortgages still on the
market will now offer 80-95% LTV.
Pros: Flexible features, and you can borrow more while paying
reduced fees.
Cons: Your repayments might become too much for you to afford if
your career doesn't
progress as planned.
LOAN MATURITY
Whichever mortgage you decide to take out, it's essential that
you can meet the monthly repayment requirements. A mortgage matures
at the date it is due to be paid off. Whether your mortgage is for
10 years or 30, you must pay it off by its maturity date or
before.
Failure to repay on the loan's expiry and the mortgage enters
default; but beware that paying it off too early may mean you face
early repayment penalty charges. Check your lender's terms. The
shorter the loan, the lower the interest value on your repayments.
A 30-year loan will be more expensive than one that matures in 10,
but the monthly repayments will be lower. Work out what repayments
you can afford and opt for the shortest loan possible. If you do
take out a 30-year mortgage and over time realise that you can pay
the loan off quicker, you can either pay lump sums off (sometimes
without incurring penalty charges) or simply refinance to a shorter
loan.
LEGAL AGREEMENTS
In recent years, high deposits and a lack of mortgages available
mean many first time buyers have chosen to purchase a house with a
number of friends or family. These "mates mortgages" can be a good
option, but make sure a legal agreement is drawn up before the
purchase is complete and the mortgage approved - this will
safeguard you if one person becomes unable to make repayments or
wants to move out.
GOVERNMENT
As a ftb and low income household, you may be eligible for a
government scheme such as HomeBuy. These schemes allow you to share
ownership of your property with a housing association and split the
equity in the house - making it easier to get on to the ladder.
Visit
homebuy.co.uk for eligibility requirements.
OTHER COSTS
Buying a house with a mortgage comes with a variety of other
costs, which can include:
Stamp Duty - a tax on purchasing property or land. As of March
2010, stamp duty was scrapped for first time buyers on homes
costing £250,000 or less and it will remain this way until at least
2012.
Solicitors fees - these costs normally
increase in line with a property's value and depending on the
location. It's important to shop around.
Land registry - registering the
property inyour name. All rates can be found at landreg.gov.uk or
simply ask your solicitor.
Lender's valuation fee - lenders need
to value your property to make sure they are happy with it and can
realise the money if you default on the mortgage. Prices range from
£100 to £250.
Survey fee - this will reveal any
faults with the property and any findings may allow you to
renegotiate the price. Request that your lender has this carried
out at the same time as the valuation as it may save you money.
Price ranges from £250 to £400.
Full structural survey - this is a
comprehensive check on the property from foundations to roof.
Usually around £450, but again, ask about the lender carrying this
out with the valuation to save money.
Buildings insurance - this covers your
home and any external buildings (e.g., garage or conservatory) and
protects you against damage caused by things out of your
control.
Council tax - the amount you pay
depends on the valuation band your home falls into.
These bands are based on their value on 1 April 1991, not their
current value.
Insurance - lenders may insist that
borrowers have certain types of insurance cover, including mortgage
life insurance, home insurance or mortgage payment protection
insurance.
With so many facts and figures flying around, entering the
market is a daunting prospect. Your first steps should be to ask
family and friends for advice, do your own online research, and
talk to your bank or an independent financial advisor. The
knowledge you gain should give you the confidence to stride forward
and make the best decisions for you.
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