What you need to know before you buy a house
The process of moving is expensive, and there are lots of things you should consider well in advance to know whether you’re ready financially.
If you are considering buying a property in 2021 this is what you need to get sorted before you approach a bank, or get too excited about that country idyll you saw while late night scrolling.
Know how much deposit you can afford to put down
Unless you are buying a property without a loan, how much you can afford as a deposit is the place to start. The deposit is the amount of money you put towards the property you want, the rest you will need to borrow from a bank or building society in a mortgage.
The sum borrowed is measured as the Loan To Value, or LTV. If a house is valued at £300,000 and you have a £60,000 deposit (20 per cent of the value of the house), you would need to borrow the remaining £240,000, therefore you need an 80 per cent LTV mortgage.
You are limited in how much you can borrow, however. It is based partly on how much you earn (though there are other considerations, more on those shortly), and is usually up to a maximum of about four and a half times your salary. When you buy with someone else both of your salaries are taken into account, which means you can borrow more overall.
Make sure you look at what schemes are available that could help, for example the government has just launched a scheme for 5% deposits that could get you on the property ladder sooner.
If you can save more, a bigger deposit will pay off
The cruelty for those already struggling to find enough for a deposit is that the less you need to borrow, the cheaper your mortgage.
Those who only need LTV mortgages of 65 per cent or less will get better interest rates.
There are particularly big jumps in affordability for mortgages where you have a small deposit. The advice has always been to push yourself to put down at least a 10 per cent deposit, because it will be significantly cheaper than a mortgage with a 5 per cent deposit.
This has become even more challenging for first time buyers during the pandemic, however,
as many lenders have withdrawn 5 per cent and 10 per cent mortgages all together. If you can, 15 per cent is the rough deposit that most lenders will want to see this year.
There are many useful online mortgage affordability calculators to see how much you might be able to borrow based on your income, for example, at Moneyadviceservice.org.
Make sure you factor in moving costs
When budgeting how much you need to save to buy a property it’s easy to focus just on the deposit. Unfortunately, there are lots of other expenses to consider, too. Moving costs add up so it’s important to factor them in when deciding how much you can afford, and before you put any offers in on a property.
The biggest moving cost is stamp duty. This is the tax you pay on the property you buy.
Usually stamp duty is owed on any property worth more than £125k, at a cost of 2 per cent between £125k and £250k, and 5 per cent over £250k and under £925k.
The exception to this is if you are a first time buyer. All first time buyers will still be exempt from stamp duty after the March 31 deadline on the first £300,000 of a home.
Solicitors and surveys
Make sure you budget for legal fees, too. You will need to employ a solicitor known as a “conveyancer”, to manage the process of buying. Expect to pay at least £1,000 or so plus a few hundred on top for local authority searches. It’s best to find a conveyancer you think you might use before you get to this stage, so you can ask them for their rate card.
You may decide to have a full structural survey of the property you want to buy, too, to check for damp, or whether the roof might cave in. This is usually related to the age of the property – most new builds won’t require a full structural survey – but it’s advicable to consider one for older properties, even if it looked sound when you’ve viewed it. Your mortgage lender will carry out their own basic survey, which you might have to pay for, usually a couple of hundred pounds. This is not something to rely on, however, as these surveys are mainly to check that the property exists or is worth the sum you’re paying for it and won’t uncover any issues with the property – past or present – or anything serious like subsidence.
You’ll need a full building survey to check for any structural defects and these usually cost from £300 to upwards of £1,000. You can find a surveyor on the Royal Institution of Chartered Surveyors site, ricsfirms.com.
You might also consider employing a mortgage broker to help you find the best deal. If you’re a first time buyer a broker can recommend lenders who are more likely to accept smaller deposits. Some charge a fee, but others are free, instead earning commission for recommending specific mortgages.
Remember, however, that interest rates and fees on mortgages will really add up over the years. Getting the best deal will save you thousands of pounds over two decades. Never feel forced into going with the broker recommended by your estate agent.
Don’t forget that you might need to pay for a removals van, too, or even storage if you need to wait a little while between accommodation. And, if you can, try and reserve a little contingency in case you move into your new abode and discover something needs an urgent repair. Also if this is your first place or you’re getting a bigger place, you might want to set aside enough for that new sofa and some other furniture essentials.
Watch your spending in the run up to apply for a mortgage
When deciding whether to lend to you banks will assess not only your salary, but also your outgoings and your credit worthiness.
They will usually ask to see your last three months of bank statements, and will want to know about some of your financial commitments, such as childcare or gym membership, or how much you spend on eating out. The silver lining of the pandemic is that this might be much less than normal, but both yourself and your mortgage lender need to be confident you’ll still be able to afford the gym when we can resume some more ‘normal’ life activities along with your new mortgage.
Some banks may be strict about things like gambling, taking out payday loans, or even being reliant on buy-now-pay-later services, such as Klarna. They want to know that you are going to be able to repay regularly, and anything that suggests you struggle to budget at the end of the month will be a warning sign.
If you’ve taken a payment holiday on any debt during the coronavirus pandemic, it won’t show on your credit score, but banks will still be able to see that you paused payments, and may take it into account as an indication that you could be a riskier borrower, and heavily reliant on your full salary each month.
Make sure that at least three months, ideally six months, before you apply for a mortgage you cut back as much as you can.
Check and improve your credit file well in advance
Banks will also take into account what is on your credit file. You should check your credit file at least six months, ideally a year before you want to buy with all three credit reference agencies in the UK, Equifax, Experian and TransUnion. They will have a record of information on your interactions with different financial companies, for example, whether you have a credit card, a mobile phone deal, and whether you’ve paid bills on time.
There are simple things you can do to make sure your credit file is as good as it possibly can be. You need to be on the electoral register at the same address that you’re using to apply for your mortgage. If you have any mistakes on your credit file, you can ask for a note to be added to correct them.
You should make sure all bills are paid promptly. Being already good with credit and spending sensibly on a credit card at no more than a third of your credit limit, will show that you are a reliable borrower. If you don’t already have any debt products, you could consider taking out a low limit credit card in the months before you apply for your mortgage. If you do this, be sure to always pay your balance in full every month and never go over the limit. However, be wary of applying for too much credit just before you take out a mortgage as too many applications at once will count against you.
There are some new services that promise to help boost your credit profile by letting you add your rent repayments, or your Netflix bills, showing you can repay regularly and on time.
It’s early days and not all lenders will take these into account, but you’ve not got much to lose by adding them into the mix, so long as you actually are someone who repays these on time.
Understand your rights and responsibilities when buying with someone else
The cost of housing relative to salaries means that for many young people it is near impossible to buy on one income alone.
If you are buying with someone that you’re not married to, whether that’s a boyfriend or girlfriend, a sibling or a flatmate, you should be aware of your legal rights and any potential problems down the line.
You can buy as joint tenants, which means you own the property 50/50 and if you were to go your separate ways, you’d get half each. If one of you was to die, the other person would inherit the property in full.
Or you could buy as tenants in common, perhaps owning different proportions of the property 70/30 or 40/60, if one person has brought more money to the table.
You will be entitled only to your proportion when the property is sold.
It’s important in this case to note, particularly if you are in a romantic relationship with the person you’re buying with, and even more important if you have children, that if your partner was to die, you would not automatically inherit the property, unless they have laid out their wishes in a will.
When buying with someone else you will be jointly liable for the mortgage debt. That means if the person you are buying with refuses to pay up each month, you will have to find the money.
You should also know that taking out a joint financial product links your credit files. If the person you’re buying with has a poor credit score you might find it more difficult to borrow, too, or you might end up paying higher interest rates.
If you’re getting help from parents, decide how will the money be given
The Bank of Mum and Dad is now one of the country’s biggest mortgage lenders. Many are unable to buy without money from family, but you need to think about how this help will be managed before approaching banks.
Some will want to see evidence that any cash given towards your deposit is a gift, not a loan.
During the pandemic some banks have said they will not lend to first-time buyers reliant on parents’ money to boost a deposit, though it looks like this is being reversed.
You might need to state that it is a “soft” loan where your parents expect to be repaid but not until you’ve sold the property.
Another option is to take out a family mortgage. These allow parents, grandparents or other family members to guarantee your loan, in some cases by using their savings, locking the deposit they might have given you into a cash-linked savings account.
Parents keep the cash, and can access it further down the line, as long as you pay your mortgage on time. Some family mortgages let parents use any spare equity in their home as security, rather than cash.
Beware that some of these mortgages may have higher interest rates, so you should always weigh up your options.
Most important, keep talking. Buying a home is an exciting but stressful process, be open with those you’re going through it with to avoid expensive mistakes.
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