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Buying your home
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Buying your home is one of the biggest financial decisions you can make - especially in the wake of the credit crunch. This guide explains the house purchase process, from deciding where to live, how to get a mortgage, whether to take out mortgage insurance, and what questions you should ask the seller.
- I've decided to buy, how much can I spend?
- Where am I going to live?
- How do I go about getting a mortgage?
- Should I take out insurance to cover my mortgage?
- How do I choose the right property?
- What sort of things should I be asking the seller?
- What if I can't find a property I like?
- I've put in an offer, now what?
- What is conveyancing?
- What happens when we exchange contracts?
- When do I get to move in?
I've decided to buy, how much can I spend?
So you want to buy a property. The first thing to do is find out how much you can afford to spend. This amount is going to dictate (probably more than you would wish it to) where you may buy a property as well as what size of property you may purchase. For example, a three-bedroom house in a less salubrious area is going to be cheaper than the same size property in an area that is well-served by local amenities and has a sought-after school.
As a rough rule of thumb you may generally borrow three times the first income plus half of the second income, or two-and-a-half times' joint income. While income multiples stretched higher than this when interest rates were low and house prices were rocketing, large income multiples are now a relic of the past. According to figures from the Council of Mortgage Lenders, the average first-time buyer was lent 3.3 times their income in April, 2008, the lowest level since November 2006. But if you do manage to get a higher income multiple, perhaps through having a clean credit rating and large deposit,, do remember that the monthly debt burden will be greater. It is also important to bear in mind that, whatever the size of the loan, your home may be repossessed if you do not keep up repayments on your mortgage.
Where am I going to live?
Before you even consider the bricks and mortar, you need to think about several things, including some or all of the following:
- Transport - if you commute, consider the ease of getting to and from work
- Parking - investigate where and how easy it is to park if the property does not have a garage or off street parking
- Education - moving area may also mean moving your children to a different school
- Health and social services - you may consider it important to live near respected healthcare amenities like a hospital with low waiting lists. Also check the council tax charges
- Noise - noisy neighbours, a busy road, railway line or even an aircraft flight path need checking
- Amenities - are the local shops close enough and of a fair selection. The style and quality of shops can give an indication of the area's prosperity
All these issues will have bearing on where you want to live but they may also be reflected in the price of property in the area.
How do I go about getting a mortgage?
Establish how much you need to borrow and on what terms then look for a lender who will offer you what you want. Bear in mind that you may be disappointed if you are trying to borrow too much. You are likely to need a deposit equivalent to at least 10% of the asking price of the property you are interested in buying. If you are a first time buyer you may find it difficult to get a mortgage with a lower deposit; even if you are offered a mortgage you may find that you will be required to pay a higher interest rate as a result. However, most people should be able to find a prospective lender prepared to make a "conditional" offer. You will receive a document that will set out in detail the conditions on which the mortgage is being made available to you. Study it carefully! These papers are normally valid for a limited period of 3-6 months but are not irrevocable.
However, while the mortgage may be the largest expense in buying a property, it is by no means the only cost you will incur. Your home lender will require a valuation survey to be carried out to make sure the property is actually worth enough to cover the mortgage you are trying to borrow. It's in your interest to have a more detailed survey as well which may disclose structural defects which may not affect the mortgage offer but could put you off buying.
Some lenders no longer levy a higher lending charge (HLC). However, in most cases, if your mortgage is a high proportion of the value of the property, say 90% or more then you may be required to pay an HLC, which can run into thousands of pounds.
Stamp duty is also likely to be payable. Only if the property you are going to buy costs less than £125,000 will there be no duty to pay, although in some areas, classified as disadvantaged by the government the stamp duty threshold is £150,000.
Should I take out insurance to cover my mortgage?
You should consider taking out a mortgage protection policy. Under the regime introduced in 1995 State help for homeowners who run into difficulties with their mortgage repayments was substantially reduced. Mortgage protection policies pay a monthly sum in the event of unemployment or incapacity due to illness or disability. You may specify the amount to cover the interest or interest and capital on your mortgage, and perhaps even some monthly household bills such as buildings insurance and water rates under a broader income protection policy.
Exact policy terms will vary but in general the policies will require you to have been in continuous employment between three and six months before purchasing the insurance and you will be unable to make a claim on the policy until it has run for a set period, usually three months. It is unlikely that you will find a policy which will pay out for more than two years at most. Policy costs vary from around £7 per £100 down to £3.50 per £100 for cut-price policies which provide limited cover.
In addition, there is a life assurance policy, also known as mortgage protection, which can be taken out to repay a mortgage on death. But with money at its tightest mid credit-crunch, make sure the insurances you choose are relevant for you. You may decide that life assurance is not important to you if you have no dependants.
How do I choose the right property?
New properties and recently built properties should have an NHBC Buildmark Warranty. The National House Building Council (NHBC) is a non-profit making body with a register of around 25,000 builders and developers. NHBC inspectors examine new properties and, providing the builder is registered and the property meets standards drawn up by the NHBC, they will issue a certificate of sound construction. This offers substantial insurance protection against any building faults or structural defects for a period of 10 years up to a maximum liability of the original purchase price adjusted to take account of inflation.
Since the credit crunch began to bite in 2007, mortgage lenders have been wary about lending on new-build property. There have been cases of developers working in cahoots with their own solicitors and valuers to inflate prices thus enabling them to offer a gifted deposit of 10% for example, to draw in purchasers. To resolve this problem the Council of Mortgage Lenders has introduced new procedures, with effect from 1 September 2008 that will ensure that the conveyancing and valuation processes capture the true value of the property. Lenders will require builders or developers of any new build, converted or renovated property to complete a new disclosure of incentives form.
However, most of us are likely to be buying property from the owner - somebody who has been living in it. When you are viewing properties write down a checklist of things to look out for (as well as things to ask). Write down how you feel about each point as you go around. Take your time; don't be hurried or afraid to look around again. Although they are often overlooked, dont forget to ask your seller for the Home Information Pack that they would have had to compile by law before marketing their home for sale. This will set out local searches, title information and an energy performance certificate which gives a score from A to G on how energy-efficient the property is. This can be used to get an estimate of household bills such as gas and electricity - particularly useful in the face of rising fuel costs.
Among the things you should look out for:
- Check the outside first. Look at the walls, windows, paint, roof, gutters, drains and garden
- Check inside for damp patches and cracks, particularly if you found problems outside
- Sufficient rooms and enough space for your needs?
- Décor - would you want to redecorate?
- Heating system, water and lighting. Try them all out
- Check the bath, basin and flush the toilet
- Inspect the roof and its insulation
- Examine widows, doors and locks for security
- Check the floors and ceiling for durability and cracks
- Listen for outside noise
- View the property at different times of the day and week
- Are neighbouring properties in good condition - you're going to have to live next to them
What sort of things should I be asking the seller?
If you're buying a second-hand property (and most of us do) you may be concerned about the risk of subsidence. But before you panic about that crack that's appeared in the wall, remember many small cracks happen naturally as houses age. They most likely do not require expensive repairs and should not spell disaster. Subsidence depends on the soil on which a house is built and on the age of the property. Those built before 1960 are likely to be more vulnerable because foundations tend to be more shallow.
Here are some of the questions you should be putting to the person selling the property you are interested in:
- Why do you want to sell?
- Do you have any other potential buyers?
- How long has the property been for sale?
- How long have you owned the house?
- How old is the house?
- What is included and not included in the sale?
- Are there any structural problems?
- Have you made any alterations?
- How noisy is it living here, what are the neighbours like?
- What is the car-parking situation?
- Have they found a property, how quick do they want to sell?
What if I can't find a property I like?
If you can't find a property you want to buy, you could always build it! Around 20,000 people around the country every year cut out the middle-man and build their own homes but you don't have to be an expert bricklayer or plasterer - most so-called self-builders employ someone else to do the actual construction. Completed self-build homes are valued at between 20-30% more than the total outlay for land, labour and materials. (Source - Daily Mail: 13/6/2008)
In addition to this, you may reclaim the value-added tax (VAT) on materials and labour in the construction of the house, provided you do so within three months of completion - this can amount to several thousand pounds you will get back! However, remember, if you build without permission or not in the place agreed, you could be legally forced to demolish the property!
I've put in an offer, now what?
Once you make an offer to purchase a property you enter a process called conveyancing. This term describes the legal transfer of ownership of freehold or leasehold properties. It is a complicated process which can be (and has been) completed in an afternoon but it can also take several months and a period of up to 12 weeks between making an offer for a property and moving in is not uncommon.
Your offer to buy will be conditional. The standard phrase is "subject to survey and contract". This means you may withdraw your offer if the survey of the property shows problems or if there is any legal impediment which complicates the terms of the legal contract.
Leases are more complicated than the sale and purchase of a freehold property. As a buyer, you should be sure whether the property you are purchasing is leasehold or freehold. If a lease is involved, you should pay attention to the conditions, restrictions and financial responsibilities imposed by it.
Most people use a solicitor or a licensed conveyancer because there's quite a lot of detailed work to do when transferring ownership of a property. If you're buying, it's a bit more involved than handing over your credit card - you need to be 101% sure you will be getting the benefit of exclusive rights of ownership over the land. But you don't have to have to been an expert to handle the transaction. You could do it yourself (you can buy a DIY kit from a legal stationer or a good bookseller).
What is conveyancing?
In England and Wales many of the documents involved in the traditional conveyancing process are compiled upfront in a Home Information Pack (HIP). But the actual conveyancing that needs to be carried out in a property sale is the same and falls into various stages. The first is the investigation stage which means collating draft documentation. Draft documentation in the HIP includes a summary of sale, copy of the lease if the property is leasehold, land registry searches, evidence of title, an energy performance certificate and a local authority search. Some solicitors still do not accept the local search in the HIP which is carried out more quickly by a private search company, so will commission another one.
The second stage, once this information has been absorbed by the buyer's solicitor, is the pre-contract enquiries, These include specific questions that may cover issues such as disputes with neighbours, alterations to the property, etc. The seller is legally required to answer these enquiries honestly!
At the same time the buyer's solicitor will be reviewing the contents of the documentation the buyer has received from the seller. As these are legal documents, the wording has to be correct and unambiguous. If the property is leasehold, this is the point at which you will need to check thoroughly the apportionment of expenses (if you are in a block of flats), the terms of maintenance, the terms of the management of the property and what charges are made.
This is also the point at which the conveyancers (your conveyance and the seller's conveyancer) negotiate the deposit payable on exchange of contracts, the time between exchange and completion and any allowance by the seller to let the buyer have access to the property ahead of time. A deposit of between 5% and 10% is common, as is completion 28 days after exchange although both may vary. Indeed there is no reason why completion may not take place at the same time as exchange providing all the necessary conditions have been fulfilled.
What happens when we exchange contracts?
Under current legislation, the purchase of property in England and Wales only becomes a binding contract at this point in the proceedings. As purchaser, once you or your conveyancer is satisfied with the inquiries, negotiations and documentation, you sign the approved contract and hand over the deposit. The seller also signs a contract of sale. This is the exchange of contracts, the third part of the conveyancing process, and a date for the fourth and final part, completion of the transaction, will be set.
The contract is now binding and either party is liable for legal action in breach of contract if they try to pull out. Be aware that as purchaser, you are responsible for the insurance of the property after the exchange so you need to arrange insurance cover from the day of exchange.
Once contracts have been exchanged, the next step in conveyancing is to carry out bankruptcy searches. Mortgage lenders want to be sure that neither the buyer nor the seller has a bankruptcy notice registered against them. Title searches at the Land Registry and the Land Charges Department (depending on whether the property is registered or not) will also be carried out.
When do I get to move in?
The completion date is the date on which you as buyer obtain all rights to the property in return for the actual transfer of the funds covering the purchase price (less the deposit already paid). Until the seller has these funds, the buyer may not normally have access to the property. The date, even the actual time of day, of completion is quite specific and relies absolutely on the transfer of money.
After Completion you still have bills to pay, including your solicitor's bill and any stamp duty on the purchase, if applicable, now has to be paid. The purchaser must be registered as new owner with the Land Registry together with the details of any mortgage lender. The title deeds will be sent to the mortgage lender. If the property was purchased outright, you keep the deeds BUT be sure to put them in a very, very safe place. Most people lodge them with their bank for safekeeping.
30 June 2008 © Moneyextra.com
Our senior editor Robin Amlôt recommends you should consider taking independent financial advice before acting on any article. Please contact us for help with your individual circumstances if any assistance is required.