Entering the Market - Buyers Guide

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.

Richard Chan is the Managing Director of Arc Property Solicitors and a practising Solicitor. Here he advises first time buyers on what to be aware of when purchasing a home. www.arcpropertysolicitors.com/ftb.php