Explore our range of topics below for further information on the mortgage and house buying process.
Purchasing your first property can be a very exciting, yet daunting, time. Familiarising yourself with the main steps invovled can help to relieve some of the stress and help you feel more comfortable throughout this time.
Once you have decided to buy a property, and have your deposit saved, the first step in organising the finance is to research the mortgage market to establish the best products available for your individual circumstances.
When making a recommendation on which products you should choose, mortgage advisors take many aspects into consideration, including things like whether the lender will pay you cashback, charge an arrangement fee, or cover some of your legal costs.
Obtaining a decision in principle
Once it has been established which Lender you want to take the mortgage with, you will then go on to obtain a Decision (or Agreement) in Principle (DIP), from that Lender. A DIP is basically a promise to lend you £x providing you can verify the information that is given to the lender (i.e supply proof of salary, proof of address).
The lender carries out a credit check and then tells you how much you could borrow. This then means that you know exactly how much you can borrow, so can make an offer on a property when you find one that you want to buy - you can offer on a property prior to obtaining this DIP, but many estate agents would not accept the offer until you can confirm that you have the finance organised.
Choosing a solicitor
When you get to the stage of offering on a property, you will need a Solicitor (or Conveyancer) to act for you in the legal process. When choosing a Solicitor, most people shop around to find one, or use one that someone has perhaps recommended to them.
It is often a good idea to choose a solicitor who has an office close to either your home or place of work – just in case you have to go in to their office to meet with them at any point. Once your offer on a property has been accepted, you then complete the mortgage application.
Obtaining a valuation
Part of the process involves the lender sending a valuer to the property to prepare a report on its suitability for mortgage purposes and the value. In most cases, the cost of the valuation is met by the person buying the house, but some lenders will cover this cost themselves sometimes.
Recieving the offer letter
Once the valuation has been carried out, and providing that the lender is happy to proceed with providing the mortgage, you will receive an Offer Letter from the lender, detailing the main features of the mortgage etc. At this point, the solicitor will complete the legal process and arrange with the seller’s solicitor for a date for Exchange of Contracts (this is when you are legally bound to buy the property and your deposit is required by the solicitor) and then Completion (when the mortgage monies are sent to the buyer and you get the keys and can move in).
Identification and fees
During the course of the process, you will be asked to supply identification (usually passport or driving licence) and verification of your address (utility bill, bank statement), recent payslips, latest P60, so it would be a good idea to look these things out!
You should consider any fees that would be applicable i.e. Solicitor fees, stamp duty (stamp duty is a tax payable when you buy a property costing more than £125,000. The rate of duty currently payable is dependent on the purchase price and is as follows: - nothing on first £125,000 then 2% of the next £125,000 then 5% on the next £675,000 then 10% on the next £575,000 then 12% on the rest.
So, for example, if you bought a house costing £275,000, your stamp duty would be £3,750, which is made up of nothing on the first £125,000, £2,500 on the next £125,000, and £1,250 on the remaining £25,000. Stamp Duty is usually arranged and paid via the solicitor, as part of the legal process.
For first time buyers in England, there is currently no Stamp Duty to pay on purchases of up to £300,000 or on the first £300,000 of the purchase price on a property costing up to £500,000. Between £30,001 and £500,000, the 5% charge will still apply.
How much deposit do I need?
A minimum of 5% of the cost/value of the property being purchased.
What’s the difference between the Mortgage Deposit and the Exchange Deposit?
Effectively, they are one and the same. When contracts are exchanged, the sale/purchase becomes legally binding on all parties, and the buyer provides a deposit/downpayment – usually 10% of the purchase price, but this can be negotiated to a lower amount if necessary, usually if the Mortgage Deposit is less than 10%. Mortgage Lenders require that anyone buying a property, has at least 5% of the purchase price to contribute themselves, and they will lend up to 90% on the mortgage. So, if you have provided a deposit at the point of Exchange of Contracts , then you have usually fulfilled both deposit requirements. For example – if you are buying for £500k with a 95% mortgage and 5% mortgage deposit, then your lender will give you £475k and you will provide £25k yourself. If the seller is happy to accept a 5% Exchange Deposit, then there is nothing further for you to pay in this regard. However, if the seller insists on a 10% Exchange Deposit, then you would be required to provide an additional £25k – this would effectively be returned to you when the mortgage monies are released, as you would be receiving £475k but would only have to send the seller £450k at that point.
Do I have to save all of the deposit myself?
No. the deposit can be from own savings, bonus payment, inheritance, or gift from a family member. If the money is being sent in from outside of the UK, it must be in a UK Bank Account prior to the purchase of the property.
Saving for the deposit
Over the years, The UK Government has introduced savings schemes/accounts specifically aimed at people saving to buy their first home – providing the cost of the property is no more than £450,000. It can also be used for retirement savings (at age 60 or over), although you should seek financial advice on this if you are thinking about using the LISA specifically for retirement income. The two which are currently active are the Lifetime Isa (or LISA), and Help to Buy Isa (now closed for new savers).
The LISA is available to UK residents (incl members of the armed forces serving overseas etc), aged between 18 and 39. You can save up to £4000 per tax year in your LISA (as long as you are not saving over the annual overall Isa limit). The Government will give you a bonus of 25% of the amount that you pay in – so if you do pay in the maximum £4k, then you will receive £1k in a bonus. If you withdraw money for any reason other than for buying your first home, at age 60, or if you are terminally ill, then a charge of 25% will be made on the amount you wish to withdraw.
If you have a Help to Buy ISA, you can keep saving up to £200 per month until 30 November 2029, and you have until 1 December 2030 to claim the 25% Government Bonus. The Bonus will only be paid out if the home you buy costs less than £250,000 (£450,000 in London). If you withdraw your money for any reason other than buying a home, then you will not be entitled to the Bonus.
What is my credit history/ credit file?
This is a record of any credit (loans, credit cards, hire purchase, leasing, storecards etc) that you have applied for and/or use., together with repayments that you have made, and the dates that you have made the repayments. There are many Credit Reference Agencies that you can check your file with – the main ones are Equifax, Experian and CallCredit. If you have never borrowed money in any form (even mobile phone contract, gas/electricity contracts), then it is likely that you will have no credit history.
Any time you use a credit card/take out a loan etc, the provider will expect to receive regular minimum repayments by a specified date. If you make these payments on time, your file is awarded points for paying on time. However, if you miss or are late with any payments, then points will be deducted. A high credit score usually indicates a good track record of borrowing and repaying timeously, whereas a low credit score indicates a poorer or no track record of borrowing and repaying.
How can I build/ improve my credit score?
There are a few simple things that can help with this. Firstly, you should register on the Electoral/Voters Roll in the area that you live (and remember to do this each time you move house). If you are not eligible to be on the electoral roll, you can add a note to your credit file explaining why you are not eligible.
You could also apply for some form of credit and use and repay it timeously. For instance, apply for a credit card with a small limit, then use if for something that you would purchase every month (i.e travel card, petrol), and set up a direct debit to repay the full balance owed, every month. You are then demonstrating that you are using and repaying the credit card and building a track record.
Employment history/ income
Most UK/EU/EEA citizens do not require to have worked for a specified period of time, before being eligible for a mortgage. Many mortgage lenders will accept applicants who have just started their first job – providing that job is a permanent one. Self Employed applicants are usually asked to evidence income by way of tax returns/SA302s. Contractors are usually required to have several months remaining on the current contract, and have a proven track history of working in the same industry.
House buying schemes in England
There are a few Government backed schemes available to help people to get on the residential property ladder. The main ones are Help to Buy Equity Loan and Shared Ownership.
The Help to Buy Equity Loan scheme is currently available to anyone looking to buy a New Build residential property and is now available to First Time Buyers only. A buyer needs their own Deposit of at least 5% of the cost of the property, the UK Government will provide a Loan for up to 20% (40% in the London Boroughs) of the price, and a mortgage for the remaining percentage. The Loan is interest free for the first 5 years, with interest payments falling due from year 6 onwards. The Loan must be repaid in full when the property is sold – if your Loan is for 20% of the purchase price then you will be required to repay 20% of the price you receive when you sell. You must not own any other property, and are not permitted to Let the property out at any time. The maximum house purchase price for eligibility to the scheme, will depend on where you are buying.
Shared Ownership is another very popular scheme. This scheme is a combination of owning and renting. You buy a share (minimum 25%) of the property and pay rent to the Landlord (local authority, housing association or developer) on the remaining share. You are entitled to purchase further shares in the property (thereby reducing the amount you are paying rent on), at any time. This is called Staircasing. Eligibility is restricted by income – household income must be no more than £80,000 (£90,000 in London). Buyers will require a Deposit amounting to a minimum of 5% of the cost of the share they are purchasing. You must not own any other property and are not permitted to Let the property out at any time. If you sell the property, the Landlord must be given the option of finding a buyer first, before you sell it on the open market.
Buying to let
If you are buying a property specifically to let out, and require a mortgage to do so, then you will need a Buy to Let Mortgage. The rules and regulations surrounding buy to let are a bit different than for residential properties, and the eligibility and affordability are assessed differently – mainly using property value, loan amount and rental income. Mortgage lenders set their own parameters, but in general, you will be required to provide your own deposit amounting to between 20% & 25% of the property value. Rental income must be at least between 125% & 145% of the mortgage interest (at a default rate set by the lender – not the actual pay rate).
Rental income from buy to let properties is taxable, and you should declare this on an annual tax return to HMRC. You may also be liable for Capital Gains Tax when you sell a property that’s not your main home.
At present, anyone from the EU or EEA, applying for a mortgage in the UK, is treated as a UK Citizen, and there are no special requirements regarding length of residency etc. However, Citizens of countries outside of the EU and EEA, do have certain criteria to meet when applying for a mortgage in the UK. Mortgage Lenders have their own rules/criteria to apply, but, generally speaking, the main requirement is Permanent Right to Reside in the UK. There are exceptions, and there are currently a few lenders that will lend without Permanent Right to Reside, providing certain other conditions are met (such as having 18+ months left on Visa, or evidence of living and working in UK for 12 months or more). It is therefore prudent to seek advice from a Mortgage Advisor to clarify an individual situation.
EU/EEA citizens after Brexit
At the present time, there have been no changes to mortgage criteria etc, in regard to EU/EEA citizens after the UK leaves the EU and EEA. However, we cannot say that this will always be the case.
The UK Government is currently recommending that all EU/EEA citizens who wish to remain living in the UK after 30 June 2021, apply to the EU Settlement Scheme. This should provide you with Settled or Pre-Settled Status. If you have Settled Status then you have the right to continue living in the UK for as long as you wish. If you have Pre-Settled Status (usually if you have not been living in the UK continuously for 5 years or more), you can apply for Settled Status after 5 years UK residency. You can apply here.
What costs are involved in buying a property
There are a few things that need to be paid for when buying a property. You will have fees to pay to the Solicitor – these fees are set by individual solicitor firms themselves, so it is wise to obtain a few quotes before deciding which firm to use. The solicitor has certain checks or searches to carry out and has to register your property with the Land Registry, and will charge for these, either as part of their overall fee, or separately – you should check beforehand if fees include searches, registrations etc.
Another potentially large cost, is Stamp Duty (explanation below). It is your solicitor’s job to collect the stamp duty from you and pass it to HMRC. Sometimes solicitors will include the Stamp Duty in their fee – again, you should check this.
Incidental fees – if you are buying the property with the help of a mortgage, then you may have a mortgage arrangement fee to pay to the lender (average £999). In most cases, you can add this to the mortgage loan.
Your mortgage lender requires an up to date report on the value and condition of the property that you are buying, to ensure that it is suitable for them to lend against. You may have a fee to pay to the lender for this, and the cost is usually dependent on the price of the property. It is sometimes worth instructing your own survey/valuation – particularly if you are buying an older property or one that is of non-standard construction. If you do choose to do this, then you will be responsible for paying the fee yourself – again, the cost depends on the value of the property.
What is stamp duty?
Stamp Duty Land Tax (to give it its full name) is a tax levied on the purchase of property in England. The amount you pay is linked to the price you pay for the property. Current residential rates are: nothing on first £125,000, then 2% of the next £125,000, then 5% on the next £675,000, then 10% on the next £575,000, the 12% on the rest. If you are a First Time Buyer, you currently pay no Stamp Duty on a property costing up to £300,000 or on the first £300,000 of a property costing up to £500,000.
If you are buying additional property that will not be your main residence (for instance, buy to let, home for relatives, holiday home etc) then there is an additional 3% Stamp Duty payment to make in respect of this purchase.
Stamp Duty holiday continues until end of June 2021 (no duty to pay on purchases of up to £500k, or the first £500k of a purchase over that sum). From 1st July 2021 until 30th September 2021, this amount reduces to £250k, then from 1st October 2021, Stamp Duty rates revert to normal (nothing to pay on purchases of up to £125k, or the first £125k of a purchase over that sum).
In Scotland, the tax free holiday on Land and Buildings Transaction Tax (Scotland’s name for Stamp Duty) will end on 31st March 2021, when rates will revert to Scotland’s normal rates.
Later life mortgages/ borrowing
Traditional mortgages may not be suitable for people nearing or in retirement – mainly due to the fact, that a traditional mortgage has to end by a specific age. Fortunately, there are some good alternatives on the market now, in the form of Retirement Interest Only mortgages, and Equity Release.
Equity Release has had some bad press in the past, but lenders have revived and revised their products to bring them into a competitive market and make then a viable option for the over 55s. The most common type of Equity Release loan (also called a Lifetime Mortgage) allows a homeowner to borrow a percentage of the value of their property (either in one or more lump sums, or in regular/periodic smaller sums), without the need to make any regular repayments. The loan is repaid in full at the point that the property is sold (usually on death or if the homeowner moves into permanent care). Interest at an agreed rate, accrues over time and is added to the amount of the initial loan to reach the total figure that must be repaid on sale of the property. Some Lifetime Mortgages allow for the interest to be paid regularly, rather than be added to the amount borrowed. This has the effect of minimising the amount owed when the property is finally sold.
Another type of Equity Release, is a Home Reversion Plan. Home Reversion is only available to those aged over 65, and involves selling all or part of your home to the lender, in return for a cash lump sum (usually higher than the amount you would receive from a Lifetime Mortgage). You remain living in the house, but it will be owned, or part-owned by the lender. There is no interest to pay, and when the property is sold, the lender gets whatever percentage you’ve sold to them, in payment – so if you have sold 100% to the lender then they will get 100% of the sale proceeds. Home Reversion Plans are very high risk products.
Retirement Interest Only Mortgages are very similar to traditional standard mortgages and eligibility is assessed in a similar way (except they use retirement income rather than earned income). They are aimed at the over 55s and allow you to borrow against your property and pay only the interest every month. When the house is eventually sold (usually on death or if the borrower moves into permanent care), the amount owed is basically the original loan amount.
Most people with a mortgage nowadays are paying a fixed or discounted/tracked rate of interest. This rate is usually set for a period of time (i.e 2 years) or until a specific end date. When the end date is reached, the mortgage will revert to whatever the lender's standard variable mortgage rate is at that time (currently most common rate is 4.74%). In most cases, this means that the mortgage interest rate and therefore monthly repayment amount, will increase. It is therefore wise to prepare for this and start to look for a new fixed/discounted/tracked rate in advance. This can normally be done with the existing lender, or by moving to a different lender. Moving to a different lender is called Remortgaging.
With a Lifetime ISA, individuals are able to contribute £4,000 per year and will receive a 25% Government bonus (max £1,000 per tax year). This can be paid in via lump sums or regular contributions.
Time frame: LISA rules state you must keep the account open for a minimum of 1 year, otherwise you will incur a withdrawal charge. Incurring this withdrawal charge may mean that you get back less than you paid in to your lifetime ISA.
Purpose: You can withdraw money from your LISA if you’re: buying your first home (with a mortgage), aged 60 or over, or terminally ill, with less than 12 months to live. You’ll be charged if you withdraw cash or assets for any other reason. Incurring this lifetime ISA government withdrawal charge may mean that you get back less than you paid in to your lifetime ISA.
Property value: The LISA can be used on purchases up to £450,000 anywhere in UK.
Age: if you are aged between 18-39 then a LISA is a viable option (as long as you keep account open for a year). As long as you open it by age 39, you can still contribute to your LISA until age 50.
Existing Investments: You can open a Lifetime ISA alongside any other ISAs you may hold (cash, stocks and shares, help to buy or innovative finance). But be careful not to exceed the overall annual ISA subscription limit of £20,000, which a LISA counts towards.
Couple: If the person you’re buying with has a Lifetime ISA too, they can also use their savings and government bonus (as long as it is also their first property they are purchasing).
With a help to buy ISA, individuals are able to contribute up to £200 a month and will recieve a one time 25% Government bonus when purchasing a property.
Time frame: Help to Buys ISA rule state that you can pay into the account until November 2029 and have until November 2030 to claim the 25% Government Bonus. Sine November 2019, Help to Buys ISA's are no longer available to open
Property Value: The Help to Buy ISA can be used to purchase a property up to £250,000 anywhere in the UK (£450,000 in London).