In the past ten years Britain has experienced a property boom, a property crash and a dramatic change in the housing market, making it harder for many people to get on the first rung of the property ladder.
The days of the widely available low cost mortgage might not be with us any more, but that doesn’t mean owning property is impossible.
This blog is a short guide for prospective first time buyers who are looking to invest in bricks and mortar.
Saving a deposit
Early this year there was some sobering news for house buyers, when it was stated that an average deposit was now over £70,000.
This staggering sum is due to the introduction of the stringent new lending rules imposed by the Treasury, to ensure that borrowers can repay their loans.
If you live in Wales the situation is not quite as dire, with the average house price (calculated in April 2015) at £117,000, and a deposit of 30 percent coming to a total of £35,100.
If you are single, this will mean saving from one income. Couples, with two incomes, obviously have something of an advantage. You may be looking for answers to the question ‘How do I reduce my mortgage payments or at least spread the cost?’
This has led some groups of friends saving for properties together, and has also resulted in more people living with relatives for longer in order to afford a deposit.
You will need to take into account all the additional costs and charges that are incurred during the purchase of a house, from stamp duty to solicitors fees.
Stamp duty is a tax payable on all residential properties with a value of £125,001 or more.
The amount of stamp duty due is calculated as a percentage of the property’s value, and there are several thresholds, depending on the value of the property.
Between £125,001 and £250,000 stamp duty is two percent of the property’s value. Property value from £250,001 to £925,000 has 5% stamp duty, £925,001 to £1.5 million has 10%, over £1.5 million its 12% stamp duty.
Often mortgage lenders will include the cost of solicitors fees for conveyancing (the legal process of purchasing a property) into the mortgage itself. You should calculate the cost of this over the life of the mortgage and decide whether it is cheaper to pay the solicitors fees yourself. Another cost that often gets rolled into the mortgage is the surveyor’s fee.
Without a survey of the property, most lenders will not consider offering a mortgage, they need to know that the house is not going to start falling apart days after you move in.
Again, make sure you calculate over the long term how much this will really cost you and then make your decision accordingly.
Help to Buy
The best news for first time buyers facing exorbitant costs is the government’s Help To Buy scheme. Help to buy is not just limited to first time buyers, but they can access it to purchase any property up to the value of £600,000.
The scheme works as follows. Buyers are expected to put down five percent of the property price, so on a £200,000 house that would mean a deposit of £10,000.
This would be matched by a loan from the government of 20 percent or in this example £40,000, for which borrowers will not be charged for the first five years.
Thereafter they will pay a fee of 1.75 percent of the loan’s value. There will be a variable fee based on the rate of interest in subsequent years.
The more you pay off the actual capital of the loan, the lower the annual charges will be.
Banks may look more favourably on borrowers if they are backed up by a relative offering to stand as a guarantor.
This means that if the borrower defaults, the guarantor agrees to take on the loan repayments. Parents with equity in their own homes may well be the best people to offer this kind of guarantee.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE
When you buy a house, you hear lots of unusual terms.
Here are our ‘dictionary’ definitions of terms used when buying a house to help you understand the convoluted world of property jargon.
As the name suggests, it is the fee that the mortgage lender charges for arranging the loan.
To be behind with ones mortgage payments.
The essential survey you must take out on the property, to assess its construction and condition, to make sure it doesn’t collapse the moment you open the front door.
A ‘chain’ of buyers and sellers i.e. the people you are buying the property from are in a ‘chain’ with sellers they are buying from, and you might also be in a chain with buyers of your property. At any given time this chain might, and frequently does, break down.
A payment made to an estate agent on completion of the house sale.
When contracts, keys and monies have changed hands between buyer and seller.
A legally binding agreement.
The complicated legal work your solicitor does to help you buy a property and make sure your rights are protected.
A legal agreement specifying the uses of the land or property.
An examination of your previous credit worthiness, debt repayments and defaults. A poor credit score can limit your chances of further borrowing
A document granting legal ownership to a person of a property.
A mortgage paid off by an endowment, which is an investment policy that pays out after a specific and fixed period of time or on the holder’s death.
Exchange of contracts
Where two people exchange contracts over a property.
Fixed rate mortgage
Where the interest rate on a mortgage is fixed for a period of time, normally in anticipation of a future rate rise.
The land beneath the property. Ownership of this is particularly important if you are buying a flat.
The rather dubious practice of offering a higher bid on a property to secure it, after it has been offered to somebody else.
The practice of demanding a lower price on a property at a crucial moment in the sale in the hope that the vendor will agree to prevent the sale from falling through.
Policies that pay out compensation to the holder in the event of accident, damage or ill health.
Interest only mortgage
A mortgage where the actual balance of the loan is not repaid, only the interest payments on the loan.
A document that verifies the ownership of a piece of land.
The recording of ones ownership of a particular piece of land.
Land registry fee
The cost of the previous entry.
The ownership of a property for a fixed period of time, normally relating to flats. The leasehold ultimately belongs to the freeholder (see Freehold above).
Loan to value (LTV)
The ratio between the amount borrowed in a mortgage and the value of the property.
Local authority search
A search on a property carried out by your solicitor to find out who legally owns it and who has owned it in the past.
A property loan, typically 25 years in length.
The document that aforementioned loan agreement is contained within.
Mortgage indemnity guarantee
An insurance policy taken out by the lender to guarantee against the borrower from defaulting on their mortgage payments.
How much the bank will lend you.
A nominal amount, normally £1, needed to satisfy the criteria for the creation of a legal contract.
A mortgage where the borrower repays both the interest and the capital of the loan.
A compulsory tax due on all properties over the value of £125,000, calculated as a percentage of the property’s overall value.
A general term to cover three different types of survey, the condition report, the homebuyer’s report and the building survey (see above Building Survey).
Subject to contract
The seller of a property has accepted an offer on the home but the deal is not complete until contracts are exchanged.
The professional who carries out the survey.
A document detailing the ownership of a property.
A property where an offer has been accepted and paperwork is pending (see Subject To Contract).
The person(s) selling the property.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE
With interest rates offering little to get savers excited, now may be a good time to look at other options.
If you are a first time investor, you may be feeling nervous about taking the plunge. That’s fine; there are a range of low risk investments to help you take your first steps into investing.
Here are some tips to get you started.
You’ll Still Need Some Cash (So Make It Work As Hard As It Can)
Having cash to hand acts as a buffer against life’s ups and downs. How much cash you need to keep depends on your situation. Some people like to keep a couple of months’ salary.
That being so, it’s a good idea to make your cash savings work as hard as they can.
From Autumn this year, ISAs (Individual Savings Accounts) will become more flexible. You will be allowed to withdraw and replace money as you wish.
The only condition is that the net contributions stay within the ISA limit for any given year. This means that all or part of your ISA allowance can essentially be used as a standard savings account. It will have the benefit of allowing you to receive interest on your savings without paying tax.
Look At Government-Backed Schemes
Every now and again, governments introduce schemes to encourage saving and/or investing.
At the moment, first-time buyers building a deposit for a house might like to look at the “Help To Buy ISA”. This scheme is due to start in autumn this year. In short, for every £200 saved, the government will add £50, up to a maximum of £3000.
The government also recently ran a “Pensioner Bonds” scheme for over 65s. This is currently closed, but given its huge popularity, it is entirely possible that it will open again.
It’s always worth keeping an eye open for government-backed schemes as they may offer special benefits.
Make Your Investments Match Your Needs
There is a huge range of investment products available.
Instead of thinking in terms of “good” and “bad”, think in terms of “appropriate” or “inappropriate”. In order to decide whether or not an investment is appropriate, you will need to start by taking stock of your current situation.
In particular, you will need to be realistic as to whether you should start investing right now at all. If you have high-interest debts, you may be better to spend any spare cash you have, on paying them down first.
Once you are ready to start investing, you will need to think about your short-, medium- and long-term goals. You will also need to be realistic about your attitude to risk.
You may have heard the expression “the value of an investment can go down as well as up”. This is true. It is also true that some investments carry more risk than others. Some people are happy to accept higher risk for the possibility of higher reward. Other people prefer to take a safer line in their investment strategy.
Of course it is perfectly possible to divide your investment funds between investments with different levels of risk.
Diversification And Dividends – The Two Pillars Of Investment
You’ve probably heard the saying “don’t put all your eggs in one basket”. That often holds true for investments. Putting all your money into high-risk investments creates the risk of losing it all.
By contrast, putting it all into lower-risk investments means you can miss out on some great returns.
By having a mixture of investments of different degrees of risk, you can have the best of both worlds.
Also remember that investments can be for growth or income or a mixture of both. Many listed companies pay dividends to shareholders. These can be reinvested for more growth or used as income.
THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.