Buying a property: mortgages and deposits

clip_image002In our article, “What to expect when moving home” we explained that moving home will probably be one of the most stressful things you do in your life, and that a major cause of the stress is the property chain. However, another major cause of stress when buying a house is arranging the finances for it.

If you are buying a house for the first time you will probably need to get a mortgage and will need to apply to a mortgage lender. They will look at a wide range of considerations to see what you can afford, such as your income, credit history, living costs and expected bills in your new home. This is because it is essential that you are able to continue to afford your monthly mortgage repayments, even if your circumstances change (such as you lose your job).

There are a wide range of mortgages available, so you will need to choose one which is right for you. With interest only mortgages you only repay the interest each month, and you must ensure that you save separately to repay the capital. With repayment mortgages you repay some of the amount you borrowed plus the interest each month, meaning you are paying off the total amount you owe more quickly. With a fixed rate mortgage, the interest rate stays the same for a fixed period of time, whereas with a variable rate mortgage the interest rate goes up and down in line with the Bank of England’s base rate or the lender’s standard rate variable. You will therefore need to do your homework to see which mortgage is right for you.

When taking out a mortgage, you will need to have saved up some money for a deposit. A deposit is a percentage of the cost of the house, so for a house that costs £180,000, a 10% deposit would be £18,000, and you would then have to take out a 90% mortgage. The bigger the deposit you can put down, the better the mortgage deal you’ll be able to get because you will be less of a risk to the mortgage lender.

It has been normal in previous years to expect first time buyers to put down a deposit of at least 20%, but this would be £36,000 on a £180,000 house. The rise in house prices in recent years has meant that saving up this amount of money is almost impossible. You will therefore need to find out which mortgage lender will allow you to put down a lower deposit, say of 10% or 5%. If that is not available you might therefore want to consider what government schemes are available to help you.

Help to Buy is one. This scheme allows you to buy a house up to the value of £600,000 with a deposit of just 5%. So, if you were buying a £180,000, you would need to save up a deposit of £9,000 – still a large amount, but far more affordable than the £36,000 mentioned above. There are two different Help to Buy schemes, and you can only use one of them. With Help to Buy Equity Loans  you put down at least 5% of a property’s price, and the government then tops your deposit up to 25%, loaning you up to 20% of the property’s price, meaning you then only have to take out a 75% deposit, giving you a better deal than you could otherwise afford. With Help to Buy Mortgage Guarantees, the government provides a guarantee to your mortgage lender, allowing you to take out a mortgage with just a 5% deposit.

Alternatively, if you want to buy a newly built home, you might want to consider the government’s NewBuy scheme, which allows you to buy a new build home with just a 5% deposit. You have to be buying a new build home built by a builder taking part in the scheme which costs £500,000 or less.

Finally, it is worth noting that when you take out a mortgage, you will have to pay an arrangement fee for setting up the mortgage, which is usually around £1,500, and you will have to pay for the mortgage lender to carry out their own valuation of the property so that they are confident that it is worth what you are paying for it. The costs will depend on the property value. If you approach a mortgage broker or financial advisor you may also have to pay a fee to them. Before proceeding with your mortgage application always make sure you understand all fees that you may have to pay to obtain the mortgage offer.

For more information about moving house, please visit the conveyancing page on our website.

Agree? Disagree? Do let Cooks Solicitors know what you think by commenting below.

1 comment :

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