This guide was last updated 10 October 2017
Getting on the property ladder can be a daunting experience.
Whether it’s for investment purposes or you’re buying your first home, there are dozens of essential considerations to take into account before you know if you’re ready. However, these are definitely worth going through, because the rewards for getting on the property ladder are far greater than the effort!
The most difficult and convoluted aspect of buying a property is successfully getting a mortgage. To make the process seem a little less daunting, here are some important pieces of information that you need to know to help secure your first mortgage.
If you’re feeling ready to buy a house, then the chances are that you understand that you need to provide a deposit for the mortgage. The amount you deposit will have an effect on the level of interest you need to pay back on the mortgage. A typical minimum deposit is 5% of the value of the property. If you are able to provide a larger percentage of the value of the property as your deposit, you will have better mortgage deals open to you, because the amount you borrow will be a smaller percentage of the total house value. This is called the ‘Loan to Value’ (LTV).
For example, if you are purchasing a property valued at £750,000, a 5% deposit will mean supplying a deposit of £37,500, leaving £712500 left for the mortgage, or 95% LTV. Meanwhile, a 20% deposit would be £150,000, leaving £600,000 for the mortgage, or 80% LTV. This not only leaves you with less debt on which to pay back interest but also represents less risk for the bank, meaning you would eligible for a better deal.
Don’t be put off if you don’t have 20% of the deposit, however. It’s quite common for first-time buyers to pay 5% for their first deposit.
It’s important to know what kind of deal you’re getting and how it works out for you in the long term. For instance, an offer that promises a lower interest rate over a longer period of time could end up costing you a lot more than a mortgage with a higher interest over a shorter period of time. You also need to have a plan on how you’re going to pay back the mortgage. One option – which, sadly, has become much harder to find since the credit crunch – is to get an interest-only mortgage, where you would pay back only the interest on the mortgage for a time to keep early costs down. These became even rarer after a law in 2014 declared that an interest-only mortgage could only be offered when there is a credible plan to repay it.
The more common and popular option these days is a repayment mortgage, where your repayments include the interest plus a piece of the debt you owe. To begin with, your payments will mostly be interest and a little bit of the debt, but as the debt lowers and the interest decreases, the debt will gradually and exponentially decrease.
Don’t forget to check what government schemes are available to first-time buyers as well. The government’s Shared Ownership Scheme and Equity Loan are just two ways to help you get on the property ladder.
Buying a house is, obviously, very expensive, but there are other costs that shouldn’t go ignored. The Stamp Duty Land Tax (SDLT) alone can be thousands of pounds. The amount you pay depends upon the value of the property you are buying. If the property costs between £125,001 and £250,000, the SDLT is 2%, £250,001 to £925,000 is 5%, £925,001 to £1.5 million is 10% and anything over that is 12%. To use the example above, on a property bought for £750,000, the stamp duty is 5%. However, this doesn’t necessarily mean you would pay 5% of £750,000 (£37,500). Instead, you would be taxed 0% for the first £125,000, 2% on the next £125,000, and 5% on the remaining £500,000, coming to a total of £27,500 for the SDLT. Pretty confusing, isn’t it?
That’s not all you need to consider, though. You also need to pay a fee for the property to be surveyed and valued before you can put an offer in, as well as the legal costs and arrangement fees. Again, these numbers can go into the thousands of pounds, so make sure you know what you’re getting into! You can read in more detail about hidden costs of buying a house in our blog.
Have you ever seen a house that seemed perfectly fine but was on sale at a suspiciously low price? The chances are that the lease is dangerously close to running out. Leasehold properties – which are more common with apartments – are properties where, even when you buy the property, you don’t own the land that it lies on. Instead, you lease it from the landowner. The good news is that leaseholds tend to last between 90 and 120 years, the bad news is that when you purchase the property, the number of years left on the lease will not change. This means that if you purchase a property without checking the leasehold and find out that it only has five years left on the lease, you will need to vacate the property in that time because it will then belong to the leaseholder. The lease will also affect the value of the property – leases with less than 80 years left can fall significantly in value and become much more expensive to renew. Leasehold properties also limit your freedom of what you can do with your property because the land is owned by another. Even if you decided to buy the lease, you will need to share it with other tenants.
Freehold leases, on the other hand, give the property owner the right to do whatever they like with their property, because they own the property and the lease. Of course, there are other external factors that might reel in your more crazy ideas, such as getting planning permission from the council. You can read more about leasehold and freeholds on our blog.
As mortgage brokers, one of the most common delays in a mortgage application we encounter is the paperwork. You must have this prepared and ready to go if you are applying for a mortgage. Essential items of paperwork will usually include:
If you’re a freelancer, the paperwork differs slightly, but you can read more about that here.
At Coreco, we understand that this whole process can get a little disorientating at times, especially for a first-time buyer. That’s why we offer services that can simplify the process for you, while also offering the best possible deal out there. We have access to far more lenders and can give you the best chance at a successful application. Getting the advice right often means that our clients save much more than the small fee we charge for professional advice. So get in touch using our Contact Us page if you’re looking for any advice on your mortgage or want a guarantee of finding a great deal.