For someone who has been working for a few years or has graduated and has a steady career, the next big financial goal is usually a home of his or her own. Much press coverage has talked about the “Boomerang Generation”, (offspring returning to the family home every few years, driven by unemployment, poor health or a bad partner choice), but getting a house and a mortgage is still a priority for many.
The biggest barrier for most is the deposit; think in terms of 10% of the property’s cost, as 100% mortgages are not available in the current marketplace. The government’s Help to Buy scheme allows additional borrowings to bring the actual deposit down to 5%, but I would be wary of basing my whole life strategy on a limited scheme with considerable political risk of being withdrawn. The bigger the deposit you have, the more choices you have and generally the lower your cost of borrowing, so make a 10% or more deposit an ambition.
Parents and relatives can help with a deposit, but they will have to stump up hard cash in advance of a mortgage these days. Most lenders are determined to see evidence of saved money in a bank account and any gifted deposits in an account in the house buyer’s name in advance of a binding offer – vague promises of money “when the time comes” are not enough these days.
How much your first home will cost you depends a great deal on where you want to live. A two bedroomed flat in Leicester can be under £70,000; a similar sized two bed flat in Lewisham could be £220,000 or more, so get familiar with local house prices. In an ideal world, you are looking for the worst house in the best area, so your DIY skills can make you some untaxed capital gains, but be reasonable, living on a building site is no fun and buying skills in can cost you a great deal. If a property is too rough to live in, getting a mortgage will be almost impossible.
How much you can borrow with a mortgage depends on your provable income; mortgage providers no longer believe clients who cannot produce payslips, accounts and HMRC statements that support their declared income. For the employed, a permanent job, no probationary period to go and six months payslips should be enough, but the self-employed will need 3 years accounts accepted by HMRC. Although no lender will say so, as everything is based on “affordability”, work on about 4-5 times joint regular annual income, (ignore bonuses and overtime unless it is contractual).
Using some numbers as an example, imaging a couple having a saved deposit of £21,000 and income of £22,000 for one and £25,000 for the other, they can expect to purchase a home for about £210,000.
Now you have your purchase money sorted out, there are some lesser-known traps for the unwary; the difference between leasehold and freehold, stamp duty, legal costs, surveys and searches.
As a generalisation, most flats are sold leasehold; you will own the right to live in your flat, but not the land it rests on and the life of the leasehold will be limited. Short leases are very hard to get mortgages on, most mortgage lenders will want a lease for the length of the mortgage and 40 years more, say 70 years plus. Most leases will ask for regular annual ground rent, often a small amount and a service charge, often much larger and based on the cost of shared facilities and buildings insurance. Non-payment of these is not an option, so budget for them from the start. Leasehold for houses is less common and additional costs are often limited to a ground rent, but issues around short leaseholds abound. Beware of ground rent and service charge increases; find out who decides these costs and ask yourself, do you trust them?
Freehold suggests that your ownership is absolute, so you do own the land and the bricks and mortar, but you also take responsibility for the repairs to your home and any damages you cause to other people, if bits fall off your house or your tree falls on a neighbour’s car.
Buying a property will often lead to a charge for Stamp Duty Land Tax, (SDLT), which will not normally impact on first time buyers as the threshold is £125,000, but this is on a sliding scale. The rates are available here, https://www.gov.uk/stamp-duty-land-tax/residential-property-rates. Usually the solicitor will handle payment, but you will need to provide the necessary disbursements, (payments of tax and fees).
Legal costs can be a big, unbudgeted expense; all property transactions have to be evidenced in writing, so a solicitor is usually asked to do a conveyance. This process will include handing over the Stamp Duty, checking the title of the property, reading the lease or sales documents and getting and examining the searches for the property. Any issues with title, (the vendor does not own what they say they own), the searches, (planning permission for a road or sewage works next door), or lease or covenant restrictions, (no pigs or chickens to be kept for fun or profit), should be explained to you. Legal costs are usually quoted excluding disbursements, so get these listed and priced, so you can see what you are getting into. As a rule of thumb, £500-1000 for the legal work, about £500 for searches and then the Stamp Duty on top.
Next, think about a survey. Most people rely on the survey prepared for the lender and do not get their own done. All the lender’s survey does is make sure that the mortgaged property is worth the mortgage advance. It is not for your benefit although you are probably paying for it. There is a cautionary tale here; http://www.telegraph.co.uk/finance/personalfinance/borrowing/mortgages/11891118/Survey-failed-to-spot-165000-subsidence-hell.html. For an older house do not skimp on a survey as buying a house that is falling down is just buying a money-pit! For a new house or one still covered by a warranty, not having a personal survey may not matter so much, but you are taking a risk.
Remember the other bills that come with being a homeowner; council tax, television licence, gas, electric, water, repairs, decoration, building and contents insurance.
Finally, think about some life insurance – any mortgage is repayable on death, so unless either one of you in a joint purchase can buy outright or raise a mortgage on your own, the death of your partner will mean you are out of your home at the worst time imaginable. Simple life cover is not expensive, but you cannot get it after the fact. Once you have accepted the necessity of life cover, now think long and hard about income protection; not being able to earn will get you repossessed, remembering that planning for the worst means it is not as bad as it could be.
Buying your own home is a big step in your financial life; for most people rent is “lost” money, so buying your home is a step towards financial freedom and can be the best investment of your life.
If you would like to know more about how we can help you plan and realise your financial goals then contact us at info@martin-redmanpartners.co.uk or call us on 01223 792 196.
The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of UK legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or inaction.