10 Things to Consider When Purchasing a Property
Many people regard purchasing a property as a stressful confusing time. I don’t think of it this way at all. I think it should be one of the most exciting times of your life and it can be if you know what you’re doing. Unfortunately, most people don’t. There’s so much to consider and most people don’t know where to start. That’s why I have prepared the “10 things to consider when purchasing a property”. I hope it helps you on your path to purchasing your first or next home.
Let’s dive straight in!
1. Deposit
Assuming you’re purchasing a property using a mortgage, as most people do, this is the first thing to consider before you can really start the process at all. A mortgage lender will lend you the money that you need to purchase a property and you will pay them back monthly over a certain number of years. But the lender will not lend you the full amount that you are paying for the property, they will require you to put down some yourself.
First let’s understand why they require that you put down a deposit at all. If you purchase a property for £100,000 and the lender gave you a £100,000 mortgage meaning you didn’t put down any cash yourself, the lender would be in a risky position. If you stopped paying your mortgage and your lender repossessed the property, they would need to sell the property to get their money back. It could take time for the property to sell for £100,000 and they don’t want this, they want their money. If the value of the property had dropped, it may not be possible for them to get all of their money back. This would leave them with no option but to sell the property for less and accept the loss. Well, this wouldn’t be good business and they certainly don’t want that to happen. For this reason, they ask you to put down a deposit and the lender will lend up to their maximum percentage of the purchase price.
The highest amount that is generally available to lend on the market today is 95%. This would mean that on the £100,000 property, you would need a £5,000 deposit and they would lend the other £95,000. This way, if you stop paying the mortgage and the property is repossessed, the lender only needs to sell the property for £95,000 to get their money back. If the property is worth £100,000, they should have no trouble getting £95,000 but it’s possible that the value of the property could have dropped and they could still struggle to get all of their money back. For this reason, the lenders consider a 95% mortgage as high risk. Because it’s high risk, lenders are much stricter with their credit scoring when assessing your application, and if you are offered a 95% mortgage, you will pay a higher interest rate than you would if you could put down a larger amount, for example 10% or 15%. Some lenders simply do not offer these mortgages and require a larger deposit. For example, some lenders will lend a maximum of 75% of the purchase price. However, your standard high street lenders will generally offer at least 90% subject to credit scoring.
So, what is the right deposit? 5%, 10%, 15%...? Well, the larger deposit you put down, the lower the risk for the lender. For this reason, you will generally get a better deal if you can put down a larger deposit. However, it is important to understand that the deals available only change for every 5% deposit you put down.
For example, if you put down 5% deposit you will get offered a higher interest rate than you would if you put down 10%, but if you put down 8% you would still be offered the same deal as you would if you put down only 5%. The available deals only change in steps of 5%.
Based on this information, you need to consider first whether it’s possible to put down a larger deposit in order to secure a better deal and also whether it’s worth it. If you’re purchasing a property for £100,000 and you have £10,000 savings, would you want to spend all of your money on the deposit and have nothing left for the other costs of moving, or would you rather accept a higher interest rate and keep some of your cash aside? You might decide it’s worth putting down more of your savings to secure a better deal but before you can decide your deposit budget, you need to consider the other costs of purchasing a property…
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This means that if you were to purchase a property for £300,000, your stamp duty would be £5,000 (unless you’re a first time buyer).
If you purchase a property as a couple, and one of you is a first time buyer, you will still be required to pay stamp duty.
Additional stamp duty
If you are purchasing an additional property in England, that is, you currently own one or more properties and you are going to purchase an additional one, on top of the standard stamp duty, you may also be required to pay additional stamp duty. Additional stamp duty is an extra 3% on top of the standard stamp duty if the property is purchased for more than £40,000. For example, if you currently own your own home and want to purchase an investment property for £100,000, you would pay £3,000 stamp duty (£100,000 x 3% = £3,000).
Stamp duty works differently in different parts of the UK. For help working out how much stamp duty you would be required to pay, visit
Stamp Duty Land Tax Calculator
Please be aware that by clicking on to the above links you are leaving the Free Life Financial website. Please note that Free Life Financial nor HL Partnership Ltd are responsible for the accuracy of the information contained within the linked site(s) accessible from this page.
Conveyancing
When you purchase a property, whether with or without a mortgage, you will need a conveyancer. A conveyancer is a solicitor who takes responsibility for the legal transfer of property into the name of the purchaser.
It’s difficult to give an estimate of conveyancing costs because there are multiple variables which can impact the overall cost. For example, many solicitors base their conveyancing fee on the purchase price. There may also be additional costs if you are using a mortgage, a help-to-buy ISA, a lifetime ISA, the help-to-buy shared equity scheme, shared ownership scheme or if the property is a lease hold (generally a flat in a block of flats will be a lease hold).
When using a mortgage to purchase a property, the mortgage lender will usually require ‘searches’ to be carried out by your solicitor. Property searches are enquiries carried out by the conveyancer to find out more information about the property before you are committed to the purchase. These searches are carried out with third parties such as the local authority. The main searches carried out when purchasing a property are the local authority search, the water and property search and the environmental search. These searches are intended to identify anything that you may not be aware of which could negatively impact your property. For example, the searches could find that planning permission had been granted for a development nearby which you were unaware of.
If you are purchasing a property with cash, these searches are optional. If you are purchasing with a mortgage, it is normally a requirement of the lender that you have these searches carried out and of course they do incur an additional cost which is usually included in your solicitor quote.
Your conveyancing costs for purchasing will usually be in region of £900 - £1,500 including searches but they could be much more so it is advisable to compare different quotes and of course, read reviews.
If you are selling a property and purchasing a new home, you will pay conveyancing costs for the sale of your property as well as the purchase of the new property. Of course, this is more expensive than if you were paying only for the purchase. Usually, you will use the same conveyancing firm to take care of the legal work for both selling and buying, as most people find this easier for communication.
When it comes to choosing a conveyancer, my advice is to choose one who has been recommended by a friend or family. The estate agent who is helping you sell/buy will often be able to recommend a solicitor for you and your mortgage broker will usually be able to as well. However, it is worth noting that often they will be paid a fee from the conveyancer to do so which can sometimes mean that you pay more than you would if you went to the same conveyancer directly, although this is not always the case.
Broker fee
Generally, when you use a mortgage broker to arrange your mortgage for you, you will be charged a fee. Like most services that you pay a fee for, it’s important to find out how much you’re going to be charged. Usually, your mortgage broker will tell you this at the beginning of the process and you should always know this before you are committed to using the service.
Some mortgage brokers charge a flat fee and with some, it depends on other variables, for example, the size of the loan you are requesting, your credit history, the type of mortgage etc. An example of this would be a broker charging more because it is going to be more time consuming than usual to find a suitable solution for you, perhaps because you have a poor credit history. A mortgage broker will also retain a fee from the selected mortgage lender for arranging the mortgage, this is called a ‘procuration fee’ or a ‘proc fee’ for short. Usually it is around 0.3% - 0.4% of the loan amount. So, in some cases, a mortgage broker may be inclined to charge you less if you are applying for a large mortgage because they will receive a larger proc fee. Contrarily, some mortgage brokers charge their broker fee as a percentage of the loan amount, meaning the more you borrow the more you pay your broker.
Some mortgage brokers will not actually charge an upfront fee but will take the ‘cashback’ from your mortgage. Let me explain… It’s quite common for a mortgage product to offer a ‘cashback’ incentive. This is when the lender will give you a sum of money after completing the purchase of the property. These cashback amounts can vary and are generally somewhere between £250-£1,000. Many mortgage products offer no cashback element at all. It’s your broker’s job to work out which deal is right for you including all fees and incentives. Usually they will have software to help them with this, as it can be quite complex. If your broker tells you upfront the amount they are going to charge you and takes part or all of this from your cashback amount after your purchase completes, then this is generally acceptable with agreement between client and broker. However, if a broker was to tell you upfront that they will take the full amount of your cashback as their fee, regardless of the amount, you may wonder if that broker would recommend a mortgage product which has a large cashback amount rather than whichever deal works out the best for you. So, whether it’s a fixed amount or it is dependent upon certain variables, you should always find out from your broker how much they are going to charge you during your first meeting/call.
It is possible to find brokers who do not charge a fee at all and rely solely on the fee paid to them from the lender. This especially works for businesses which process a high volume of mortgage applications and can therefore afford to not charge the customer a fee because their income from the high number of lender procuration fees is enough.
As with all services, something to consider when comparing broker prices is the service they provide and whether extra services cost extra money. A mortgage broker’s number one job is generally to find the most suitable deal available based on your circumstances. But a mortgage broker can often offer much more than this. Your mortgage broker will often be the first professional you speak to when you start considering purchasing a property. If your broker can then be the person who is there for you to call throughout the whole house buying process, even after your mortgage application has already been accepted, this can make the whole process much less stressful. Some brokers will help you when it comes to negotiating the price of the property you want to purchase. This could be anything from a quick phone call with some general advice to taking over the negotiating process for you.
Your broker may be qualified to give you professional advice on the insurances that generally go with purchasing a property and help you compare options. So it’s always important to find out exactly what your broker can do for you, whether there will be extra costs involved and of course, you should always do your research.
Once you have done your research, checked reviews and found out what services are included, you should also consider your future relationship with your broker and costs of getting further help down the line. For example, it is common to re-mortgage every few years and many people move home several times within their lifetime. In some cases, a broker will charge you a fee which may be higher than other brokers but offer a discounted or even free service when you require their assistance again in the future.
Let’s look at an example of this…
If one broker charges you £500 every time you use the service and another broker charges you £800 the first time and £200 every time after that, you could start saving money if you use them three times or more.
If you do come across this kind of deal, it is worth considering whether it is a company which you would expect to still be around for a long time to come, that is, will they still be there to give you the discounted service when you need help in the future? When agreeing to a deal like this you should also check that you have it in writing.
So, it is clear that there is a lot to think about when comparing mortgage broker fees and of course prices may be higher in more expensive areas (e.g., London). But if you find a broker who will be there for you throughout the whole process, is known for going the extra mile and charges a price which you find acceptable, you’re doing well.
Estate agency fees
You will not need to pay any estate agency fees for purchasing a property. However, when selling a property through an estate agent, the estate agency will take commission when the property sells. So, if you are selling your property to purchase another one, it is important to factor in this cost to your overall costs of moving.
It is worth speaking to several estate agents to compare. It is important to use an estate agency which can give your property maximum exposure to potential buyers. If the estate agency will list your property on sites such as Rightmove and Zoopla, this is a good start. Most estate agents will be able to list your property on both sites and if they cannot, you could be missing out on a large area of the market. For example, if your property is listed only on Rightmove and somebody who saw your property there is willing to offer asking price, it’s possible that somebody who only uses Zoopla would have been prepared to offer more but didn’t see it.
Usually, an estate agent will charge a fee of somewhere between 1-2% of the sale price and it is sometimes negotiable, especially on higher value properties. So, it’s always worth asking for a better deal once you have chosen your preferred agency.
3. Mortgage Affordability
Now that you’ve worked out that you have the necessary funds to consider purchasing a property, it’s time to start thinking about whether your income is enough (or deemed enough) to afford a mortgage.
Different lenders have different ways of calculating how much they would be prepared to lend you. Usually, you can expect to be able to borrow up to 4.5 x your annual salary, but this will depend not only upon your income but other factors such as credit commitments, other outgoings and the term of the requested mortgage. In general, the longer the mortgage term, the more you will be able to borrow. This is because spreading the repayments out over a longer term makes the monthly payments smaller and therefore more affordable. This will be discussed further in the ‘mortgage term’ section.
It’s not only up to the lender to decide what is affordable. You must also make sure that you are able to comfortably afford your monthly payments and also have money left to enjoy life. For example, if you are hoping to start taking more holidays or planning to take up another expensive hobby, this is something that you should consider seriously. Once you’re committed to a mortgage, it can be a complicated and expensive process to turn back. You should also consider what impact a sharp increase in interest rates and therefore increase in monthly payments could have on your lifestyle. Usually, for the first two to five years of your mortgage you’ll be fixed into a guaranteed interest rate and monthly payment, but who knows what interest rates will look like after that initial period?
Purchasing a property doesn’t only mean paying a mortgage. There are usually a number of other monthly costs involved. Generally, when you take out a mortgage you will also take out certain insurance policies. If you are purchasing a property with a mortgage, it is usually a lender requirement to have buildings insurance and it is a sensible option to take out contents insurance alongside this. This will usually cost somewhere between £15 and £50 per month but it could be more. People purchasing a property may also choose some kind of personal/family protection, for example, life insurance, critical illness insurance or income protection. The prices of these depend largely upon the type and amount of cover you require as well as you and your lifestyle (age, smoker status, health history, hobbies, occupation etc).
You will also be required to pay bills such as council tax, gas, electric and water. If you have previously lived in rented accommodation you will most likely be used to making these kinds of monthly payments and possibly also the aforementioned insurances. Depending on the property it’s also possible that the mortgage payments could be similar or even less than the amount you were paying in rent. However, if you are not used to making monthly payments like these, for example if you have been living with parents, it is a good idea to get an understanding of all of these costs and sit down and work out the numbers yourself being extra careful not to make underestimations when it comes to the amount of money you require each month to continue living a happy life. Usually, your mortgage broker will also go through your monthly spending with you to ensure you’re not taking on more than you can afford.
Once you’re satisfied that you could afford to pay a mortgage, it’s time to work out how much a lender would be willing to lend and also how much you’re willing to pay per month. It’s relatively easy to get a rough idea of affordability and monthly payments using online calculators. But be careful, if your salary is not a guaranteed base salary which is the same every month and stated in your contract, you may find that lenders assess your income differently from how you might think. For example, you may enter your salary including overtime as the amount you earned last year, when that particular lender might actually take 50% of the average of the last 3 months overtime and annualize it. This is where different lenders may be more or less suitable based on your particular circumstances and their criteria/policy.
find out how much you may be able to borrow
4. Mortgage Lender (Criteria)
There are so many different mortgage lenders out there who all have different rules and criteria. One lender might require a minimum of 3 month’s payslips to apply for a mortgage, and another might require as little as a contract to show that you will start your employment within the next 3 months. There are countless variables that can impact your chances of being accepted for a mortgage and it is important to make sure this research has been done before you apply.
Here are just a few examples of criteria where mortgage lenders differ…
· Employment status (permanent, fixed term, agency worker, zero-hour contract, self-employed)
· Adverse credit (missed loan or credit card payments, defaults, CCJs etc)
· Property (some lenders require larger deposits for new builds or flats)
· Income types (overtime, commission, allowances etc)
If you are using a mortgage broker, this will be taken care of. Your broker will have a way to check lender criteria to ensure you maximise your chances of being accepted for the amount of borrowing required. However, if you are going it alone, this is perhaps the most difficult part to get right. More than anything, it will be time consuming, as it could require calling various lenders, waiting on hold, and often booking an appointment just to have these kinds of conversations.
Some people will not need to worry about lender criteria as much as others. For example, if you’re in permanent full-time employment with a basic annual salary which is paid monthly in the same amount every month, have a good credit score and little or no debt and you are looking to purchase a house with a 10% deposit, you’re probably going to be fine and it will be more about finding the lender who will lend you the right amount at a competitive rate. But let’s look at a more complex example… Let’s say you are in permanent full-time employment, but your salary is impacted by overtime and your basic salary alone won’t be enough to borrow the amount you require. Also, your credit history isn’t great, and you want to purchase a house with a 5% deposit. It’s clear that this is going to be a harder task. You will need to find a lender who offers 95% mortgages (5% deposit) and often these lenders have a much stricter credit check to borrowers with only 5% deposit. You’d also need the lender to accept your overtime when assessing affordability. All lenders are different when it comes to assessing extra incomes like overtime. Some lenders may not accept overtime at all. However, many lenders will take an average of the overtime shown on the three most recent payslips and annualise it. But be careful, you may work out how much you could borrow based on your three most recent payslips and then find a property two months later, you would then need to recalculate because you now have two more payslips with different amounts of overtime. It’s also possible for a lender to ask for extra evidence to confirm sustainability, for example, last years P60 to show that this level of overtime is consistent.
Let’s look at some more examples of how lenders criteria can differ in certain areas…
New job
Lender 1 – Must have at least three months’ payslips in current position and have been employed for at least one year with no gaps of more than two weeks
Lender 2 – Must have been employed in the same industry for a minimum of 6 months and have one payslip in current position
Lender 3 – Must be able to provide contract of employment for the new position and start date must be no longer than three months after mortgage application
Missed loan payment on credit file
Lender 1 - No missed payments within the last three years
Lender 2 – Maximum of two missed payments within the last two years and none within the last six months
Lender 3 – No limit as long as application passes overall credit check
These are just a few examples of the many criteria which you may need to consider when choosing a suitable mortgage lender. In some cases, you may find a lender who fulfils all of your criteria needs and has a slightly higher interest rate than other lenders on the market or you may get lucky and find that the cheapest lender out there is flexible in the areas that matter to you.
5. Mortgage Repayment Method
At this point you’ve confirmed that you can afford a mortgage and you’ve identified at least one lender who’s rules are in line with your particular situation. So now we begin to look at our different mortgage options.
There are two main types of mortgage. The first is a capital repayment mortgage. When you make your monthly mortgage payments on a capital repayment mortgage, you are paying two elements, one is the interest and the other is the capital. Interest is what the lender charges you for lending you the money, this is how they make profit. Capital is the amount you borrowed. So, every time you pay off some capital, you then owe a little less to the lender. This is a repayment mortgage. It means that come the end of the mortgage term, you no longer owe money to the lender and you own the property outright.
The second type of mortgage is an interest only mortgage. This is when you pay only the interest to the lender and don’t pay off any capital. Because you’re only paying the interest, your monthly payments will be much less, but it also means that the amount you owe doesn’t reduce and come the end of your mortgage term, you would still owe the amount that you initially borrowed and if you didn’t have the money to repay it, you might have to sell the property. This option would only be useful if the property was worth as much as the amount you owed.. For example, if you borrowed £100,000 on an interest only mortgage over 25 years to purchase a property for £110,000 and after the 25 years you hadn’t paid back any capital and still owed £100,000 but the property had lost value and was now worth £90,000, even selling the property for £90,000 would leave you short and you’d need to come up with an extra £10,000 to repay the lender. As you can see, this kind of mortgage comes with some risks and these interest-only mortgages are not as readily available as they used to be. So, if you’re purchasing a property to live in, you will usually choose a capital repayment mortgage.
If you’re not purchasing a property to live in yourself and you’re purchasing a property to let out to somebody else, then an interest only mortgage could be a suitable option. That is however, beyond the scope of this article.
6. Type Of Mortgage Product
Generally, most people purchasing a property which they are planning on living in for at least the next couple of years will choose a fixed term mortgage. Although there are other options, the fixed term is certainly the most popular, so we’ll start there.
Fixed
A fixed term mortgage guarantees that your interest rate will stay the same for a certain number of years. This means that you have the peace of mind of knowing that your monthly payments will be the same every month for this period. So, if interest rates go up during your fixed term, you will not be affected. It also means that if interest rates reduce during your fixed term, you will not see the benefit of this either. Your interest rate and monthly payment will remain the same until you come to the end of your fixed term. Once you come to the end of your fixed term, you will usually switch over to a new one. If you don’t, your lender will start charging you a different interest rate and it’s usually higher. You may choose a new fixed rate with your current lender, or you may compare deals across the market and switch to a different lender who has a cheaper deal. This is called re-mortgaging.
You can choose how many years you wish to fix for and different lenders offer different options. The most common options which are available with most lenders are two years fixed and five years fixed. Some lenders offer different options such as three years fixed and there are also options out there to fix for longer.
In my opinion, this is the most difficult question I ask my clients. There is no right answer and there are a few different things to consider when choosing the fixed term.
Interest rates
Interest rates are currently lower than they’ve ever been. For this reason, it could be a good idea to fix for longer so that you’re guaranteed a low interest rate for longer. However, this also has its drawbacks. You will generally pay a higher interest rate to fix for five years or longer than you would if you fixed for two years.
Early repayment charge
When you are in a fixed term, you are usually tied into it. This means that if you wanted to repay the mortgage, for example if you were selling the property, you would need to pay something called an ‘early repayment charge’ (ERC). So, if you fixed for five years and then decided to pay off the mortgage to move house, you could be hit with a fee. The amounts of early repayments charges differ but the percentage often depends on how far into your fixed term you are. For example, if you are in the first year of a five-year fixed, your ERC could be 5%. If you are in your final year, it might only be 1%. You should check the terms of the ERC before committing to a fixed term. If you have a £100,000 which you want to repay early and your ERC is 5%, your ERC would be £5,000. As you can imagine, some ERCs are much higher than this and it’s important to consider this.
Porting
Some mortgages are portable, meaning that if you decide to move home you can take your current mortgage with you to a new property. This could save you from needing to pay the early repayment charge, as you would not be redeeming your mortgage. However, porting your mortgage also has its drawbacks. If you are purchasing a more expensive property and need to borrow more than your current mortgage, you will need a top up mortgage. This means you will have two mortgages with the same lender both secured against one property. You will also need to decide what kind of mortgage you want on your top up mortgage, for example, a fixed rate and how long for. You could then end up with one fixed rate which finishes in three years and another which finishes in five years. Usually, when your fixed rate finishes, you simply switch it onto another fixed rate. If you have two separate fixed rates, you’ll find yourself needing to do this twice as often as normal and it can be a bit of a headache. Some people in this situation choose to let one fixed rate finish and accept whatever rate they are given by their lender (often much higher) and wait for the next fixed rate to finish so that both can then be re-mortgaged together.
Future options
It’s also important when choosing a fixed term to consider what options you might have come the end of your fixed rate. A simple example would be that because you have a default on your credit file you have been unable to access mortgages with some lenders in the market and have accepted a mortgage with a higher interest rate. In this case, it may be worth taking a shorter fixed term as you may qualify for a better deal a year or two down the line when your credit rating has improved and the default is either further in the past or no longer on your credit file.
Your future options will also be impacted by your loan to value (LTV) when your fixed rate ends. For example, you may put down a 5% deposit meaning your LTV is 95%. But after two years, you have been paying the mortgage off every month and the property may have also increased in value, it’s possible that your LTV could have dropped below 90% which could mean you qualify for a cheaper deal. This is especially worth thinking about if you are buying a property which needs some work and you are planning on making home improvements. Let’s look at an example…
You purchase a property at 95% LTV (5% deposit) for £100,000. This means that you borrow £95,000. You then make some home improvements and the value of the property potentially increases to £105,000 after two years (depending on the market, this could happen without making home improvements). You have also been paying your mortgage every month for the last two years and only owe £93,000. Your loan to value would now be 88.57% and as you are below the 90% threshold, cheaper options may now be available. However, as discussed, it is possible that by this time, interest rates have increased and even at 88.57% LTV you may not be able to find a deal as cheap as the last one. It is also possible for the value of your property to drop which could have the opposite effect.
So, it’s clear that there is no one size fits all when it comes to how long you should fix for. Also, in some cases, a fixed term may not be the best option. Let’s explore some other options…
Tracker
A tracker mortgage does not offer a guaranteed interest rate for any period of time. Instead, the interest rate tracks a base rate, usually the Bank of England’s base rate (plus a set percentage). This means that it’s possible for your interest rate to change at any point. The lender may offer a tracker at the Bank of England’s base rate plus 1%. So, if the Bank of England’s base rate was 0.1%, you would pay 1.1% interest. Often, a tracker will not have an early repayment charge which means you are not tied in. These can be useful for people who are considering moving within the next couple of years and would rather not be tied into a fixed term.
Standard variable rate
Standard variable rates can also go up or down and usually they are higher than the interest rates you can find with a fixed rate. They generally fluctuate in line with market conditions, but they do not track a base rate. The standard variable rate is chosen by the lender. When you have been in a fixed rate but it comes to an end and you don’t renew to a new fixed rate, you will often begin to be charged your lenders standard variable rate. This can be much higher so if you’re planning on staying where you are for the next few years, it’s probably a good idea to renew your fixed, rather than fall onto the standard variable rate (SVR).
Discount
A discount mortgage is set at a specific amount below your lenders standard variable rate. This means that if you have a discount rate which is 1% below the lenders standard variable rate, and your lenders standard variable rate is 4.5%, your interest rate would be 3.5%. However, a lender can change their standard variable rate when they want. This means that it’s possible for your interest rate to increase at any time. Whilst a tracker mortgage will only increase if the Bank of England base rate increases, this is not the case with a discount rate. A discount rate tracks the lender’s standard variable rate so if the variable rate increases, your monthly payments will increase. Like a tracker mortgage, these also often have no early repayment charge which means you are not tied in.
Offset
An offset mortgage involves opening a savings account with the mortgage lender and offers a benefit if you can deposit funds into that account. The amount which you have in the savings account is used to ‘offset’ part of your mortgage interest. You will only be charged interest on your mortgage balance, minus the amount you have in the savings account. So, if you have a £100,000 mortgage and £20,000 in the savings account, you will only be charged interest on £80,000. These can be beneficial to people who have a large amount of cash in the bank and would like to benefit from it.
Watch Elliot's step by step guide to purchasing your first property in the UK on YouTube.
Please be aware that by clicking on to the below links you are leaving the Free Life Financial website. Please note that Free Life Financial Limited nor HL Partnership Ltd are responsible for the accuracy of the information contained within the linked site(s) accessible from this page.
7. Term Of Your Mortgage
At this point you have decided on what type of mortgage to go for and for the majority, it will be a fixed rate. You have also decided how long to fix for. You have confirmed that there is at least one lender out there who will consider your application and it’s now time to decide how long to take your mortgage over. This is different from choosing how long a fixed term you want. The mortgage term is the overall length of time it takes for your mortgage to be repaid in full, so you own your property outright. Most people will renew their fixed rates and re-mortgage a number of times throughout their overall mortgage term. For example, if you choose a 25 year term and you keep choosing five-year fixed rates, you will have 5 x five-year fixed terms within your overall mortgage term of 25 years.
Most people prefer to have their mortgage paid off before retirement. If this is the case for you, you can try to ensure your mortgage term finishes before you plan to retire. If you want your mortgage term to exceed your retirement age, some lenders will accept this providing you have pension arrangements in place.
The longer your mortgage term, the cheaper your monthly payments will be, as the repayment is spread over a longer time. However, this also means you are paying interest for longer and therefore, you will pay more interest in the long run.
Most lenders allow overpayments of 10% of the outstanding balance every year. Any more than this will often incur a fee if you are in a fixed term. This means that if you choose a longer term with lower monthly payments, it is usually possible to pay extra every month. This will save you money on interest and allow you to repay the mortgage sooner. For this reason, if you are considering taking a 25 year mortgage and you are unsure if you can comfortably afford the repayments, it could be a good idea to take a longer term to reduce the monthly payments and make overpayments where possible. Of course, this takes discipline, if you’re just going to spend the extra money on takeaways, you’re not going to see a benefit!
It is possible to change the term of your mortgage if you wish, however, you will need to wait until the end of your current fixed term to do so. So, if you are in a 25 year mortgage with a five year fixed term, at the end of the five years, it will be time to review your options and at this point you will have 20 years left on your overall term. You could reduce or increase this if you wanted to, subject to your circumstances at the time. For example, at the end of your five year fixed, you are earning more money than you used to, you may decide to reduce the mortgage term to 15 years which will increase the monthly payments but put you on track to repay the mortgage earlier.
8. Which Mortgage Deal
In some cases, your circumstances may mean that there are only a small number of lenders available to you, but if you’re lucky, you’ll find yourself in the position where you can choose the right deal from a large number of lenders. However, this isn’t quite as simple as you might think. There’s a little more to it that simply choosing the lowest interest rate. Some mortgage products have fees such as an ‘arrangement fee’ or ‘product fee’. It is very common for this fee to be £995 or £999. Some are less and some are more. In some cases, you will be able to add this fee to the loan rather than paying it upfront. So, for example, you will borrow £100,000 on a product which has a £999 fee and you add it to the loan, meaning that after your purchase completes, you owe £100,999.
When you purchase a property with a mortgage, the lender will do a valuation of the property to make sure it is worth what you are paying for it. This is to make sure that the property is suitable to act as their security against the loan (if you stop paying the mortgage, they can repossess the property and get back their money by selling it). Some lenders charge a fee for this valuation and many lenders do it for free.
There are often other small fees associated with a taking out a mortgage which will all be made clear to you when taking out a mortgage.
In some cases it may work out cheaper to take a deal with a higher interest rate and no/low fees, rather than a product with the lower interest rate and a £999 fee. If you choose to add the fee to the loan, it is spread over the full term of the mortgage. So, taking a product with a lower interest rate and a £999 fee over a 5 year fixed term may mean the it works out the cheapest option over the 5 years but more expensive in the long run, as you have added the £999 to the mortgage amount and will be spreading the payment, plus interest over the whole term.
If this isn’t already complex enough, some mortgage products also offer cashback. This means that after your purchase completes, they will give you a sum of money. This is often between £250 and £500, although sometimes it can be higher. For example £1,000. It is also worth taking this into consideration when you are choosing between products.
Because there are so many things to think about and calculating which deals work out cheaper overall can be difficult, it is a good idea to get help with this, whether it’s a website or a mortgage broker.
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9. Surveys
Basic valuation
As mentioned earlier, when you apply for a mortgage, the lender will do a valuation of the property. These valuations are very basic and they are designed to ensure that the property is worth what you are paying for it. This way, the lender can be confident that if you were to stop paying your mortgage, they would be able to get their money back by repossessing the property and selling it. So, these valuations are not designed to protect you, they are designed to protect the lender. Usually, the lender will send somebody (often a third party) to visit the property to conduct the valuation. However, sometimes, the valuation will be done without anybody visiting the property. It is common for a lender to conduct or have a third party conduct a ‘desktop’ valuation. This means that they value the property using various techniques using a computer and the internet, for example, checking how much similar properties have sold for in the area. Even when somebody is visiting the property in person, these inspections can sometimes last as little as a few minutes, so they can be very basic.
You may decide you would like to have some more in depth checks done on the property before you are committed to purchasing it. This is called a ‘survey’. There are different types of survey and which one will be most suitable for you will depend largely upon the property which you are purchasing.
Homebuyers report
A homebuyers report is the most common type of survey people choose. They use a traffic light system and rate aspects of the property as green, amber or red, green being the lowest risk and red being the highest. It is important to understand that just because something is marked down as amber or red, doesn’t always mean it is a serious problem, it often just means that you will need to get somebody of the relevant profession to check it. A common example of this would be if the surveyor found signs of damp (this is especially common in older properties). The surveyor may not be able to specify the severity of the damp issue and may recommend getting a damp report. Whilst damp can be a serious issue, it is possible for a damp report to show that the damp problem is less serious and inexpensive to fix. So, it is important not be immediately put off the property if there is some amber or red on the report. You should read the report thoroughly and consider the recommendations of the surveyor.
A home buyers report is ‘non-intrusive’, meaning that the survey will only pick up on ‘surface-level issues’. Checking under floorboards for example, would not be included in the inspection.
Building survey
A building survey is the most in-depth survey out there. It is commonly referred to as a ‘full structural survey’ because it provides an analysis on the structural integrity of the property as well as its general condition. This is often recommended for older properties but you can have this survey carried out on properties of any age. If the property is of an unusual build design or simply in poor condition, it could be worth paying extra for this type of survey. A building survey is not a ‘non-intrusive’ survey and you can expect the survey to be carried out in a ‘hand-on’ fashion. For example, checking under floorboard.
Which survey should I choose?
This will depend entirely on how high a risk you consider the property to be. As a property purchase will often by the biggest financial transaction of your life, if you’re unsure, it is advisable to pay for the more in depth option.
When should I have a survey?
Usually you will not have a survey carried out on the property until you have had an offer accepted but once you have, feel free to book in a survey. When purchasing a property, you become legally committed to purchase the property once you exchange contracts, so, you must have the survey carried out before then. It is possible for either party to pull out of the transaction at any point before exchange of contracts, meaning it is possible for you to pay for a survey on a property and then the vendor (seller) to decide not to sell the property. In this case, unfortunately, you would have wasted your money.
10. Insurance
There are a number of different types of insurance to consider when purchasing a property and you may already have some of them in place.
If you are purchasing a property with a mortgage, the only insurance that the lender requires you to have is buildings insurance, also known as home insurance. The rest are optional. Some of them are usually strongly recommended, but this will depend upon your circumstances. Whilst you may already have insurances such as life, critical illness or income protection in place, it’s important to review these when taking on a mortgage, as you must consider the impact of such unfortunate events on your ability to make mortgage payments.
Let’s take a look at the different types of insurance…
Buildings and contents insurance
Buildings insurance covers the property itself. This means that if the property was damaged, you could make a claim on your insurance policy to have the insurance company pay towards the repairs. Contents insurance covers the contents within the property. Meaning that in the event of loss or damage to your contents, you could make a claim on your insurance policy to replace the goods. Usually, you will take out a buildings and contents policy which covers both. For example, if your property flooded and the building itself was damaged as well as your furniture, you could make a claim for the building to be repaired and for the furniture to be repaired or replaced.
Life insurance
Life insurance pays out a lump sum to your beneficiaries in the event of your death during the term of your insurance policy. This is often considered vital if you are purchasing a property as a couple. If one person was to pass away, the lump sum could be used to pay off the mortgage in full, meaning that the person left behind wouldn’t have to worry about keeping up with mortgage payments, as well as bills and other living costs on one salary alone. The sum does not have to be used to repay the mortgage, you can use the money to do whatever you wish. Although, it is common to take out a policy which will cover your mortgage amount for the duration of your mortgage, with the intention of using it to repay the mortgage in full in the event of death. Depending on the policy, you may also be eligible for a claim if you are diagnosed with a terminal illness (subject to the terms and conditions of the policy).
Critical illness insurance
Similar to life insurance, critical illness will pay out a lump sum in the event of a successful claim. The difference is that you could be eligible for a claim upon diagnoses of a specified critical illness, regardless of whether it results in death. The most common reasons for a pay out are cancers, strokes and heart attacks but many policies will also cover you for a range of other illnesses too, for example, loss of limb, blindness, multiple sclerosis, major organ transplant and so on. The amount of different conditions covered depends on the provider and it is important to check which illnesses are covered in your policy.
If you were diagnosed with a critical illness, it is likely that you would be off work for some time, if not permanently. If you have a critical illness policy with the sum assured equal to your mortgage amount, that would enable you to repay the mortgage in full in the event of a successful claim. Meaning that you would no longer have mortgage payments to worry about with the substantial reduction in the household income caused by your illness.
It is common to take a ‘life or earlier critical illness’ policy. This would pay out a lump sum if you were to either pass away or be diagnosed with a critical illness.
Statistically, the chances of you passing away within your mortgage term are much less likely than the chances of you being diagnosed with a critical illness. For this reason, critical illness cover is more expensive than life insurance. Often, a critical illness policy automatically includes death cover. Meaning that it is actually a ‘life or earlier critical illness’ policy.
Because the monthly cost of critical illness cover can be much more than that of life cover, some people take out a life insurance policy which will cover the full amount of the mortgage and a smaller critical illness policy. For example, a policy which covers part of the mortgage would generally cost less per month than a policy which covers the full mortgage. Whilst this may not be enough to repay the mortgage in full if you were diagnosed with a critical illness, it could provide you with financial security if you were to be off work for a long period of time while you recover. The limitation of this is that if you do not recover and return to work, you may find it difficult to keep up with mortgage payments as well as living costs.
Income protection
Income protection is an insurance policy that could pay out a monthly amount to you in the event of you being unable to work due to sickness or injury. It covers medical conditions including physical and mental, illness or injury. This would need to be signed off by a health professional. When you take out an income protection policy, you will choose a deferred period. This is the amount of time you would need to be incapacitated before the policy would start to pay out. When choosing a deferred period, you will consider things such as your employer sick pay, savings, monthly outgoings and so on. Generally, if you would like a short deferred period, meaning that you could access your monthly pay out sooner, you will pay more per month for this. Your premiums will generally be lower if you choose a longer deferred period, but you'll need to make sure you could get by during this period. Different providers offer different options for deferred periods but it could be anything between one week and two years.
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You’re all set!
Now that you understand the different things to consider when purchasing a property, it’s time to make those decisions. And don’t rush them! You’ll also need to decide whether you are going to go through a mortgage broker/advisor or try to do it yourself. Whatever you decide to do, I wish you the best of luck! I hope the process runs smoothly for you and I wish you many happy years in your new home!
Elliot Leonard
Mortgage Broker
Free Life Financial