First Time Buyers
When the credit crunch took hold in 2008 the hardest hit were first time buyers. Typically, first time buyers would have in the region of 5% – 10% deposit, some were able to buy without any deposit at all. After the fall, out had settled it because clear that even 10% lending was going to be very difficult and buyers would need between 15% and 20% to stand a chance of getting on the housing market.
Fortunately, things have settled down somewhat and with the help of a variety of government schemes, first time buyers are able to buy homes in ever increasing numbers now due to some innovative first time buyer mortgage schemes.
Some first-time buyer mortgage schemes involve the government and a house builder owning lending the buyer an amount towards the deposit with a fixed repayment plan starting after 5 years. Others allow buyers and local authorities to share ownership of the property, with the buyer having an option to increase the share in the property until they own it outright. The newest scheme and perhaps the most helpful and wide reaching of the first-time buyer mortgage schemes is the Help to Buy 2 scheme which sees the government providing an insurance policy that buyers used to have to take on high loan to value (LTV) mortgages, those typically over 90%. This has increased the ability of lenders to provide more reasonable 95% mortgages to first time buyers.
Some lenders offer options that reduce the risk of high LTV mortgages by using their parent’s savings.
Help to Buy Equity Scheme
With a Help to Buy: equity loan the Government lends you up to 20% of the cost of your new-build home, so you’ll only need a 5% cash deposit and a 75% mortgage to make up the rest. You won’t be charged loan fees on the 20% loan for the first five years of owning your home.
You must start repaying the equity loan after 5 years and must pay it off in full within 25 years, however it’s expected that most will repay the loan through the sale of the property before this time. He loan can be reduced by a process called ‘staircasing’ whereby you reduce the equity loan in amounts no less than 10% at a time. If the loan remains at 20% and you sell the property, the loan repaid will be 20% of the sale price, even if that has reduced.
There are a few considerations with this scheme. Firstly, the home builder has to have particular properties on a plot pre-authorised, and so you may not be able to use this scheme on every new build home in a development. Secondly, you may find that the higher initial cost of a new build home means that you won’t see any house price inflation for a longer period than if you bought a second-hand home. This means that your deposit won’t grow as quickly as second hand house prices in the area and so its crucial that you plan to save or staircase in order to offset this and give yourself the best chance of being able to move in the future. There is a maximum property valuation of £600,000 and the mortgage must be a repayment mortgage.
To apply for these types of property you first need to organise a suitable mortgage, considering the overall affordability. Once the mortgage is agreed in principle you can apply to the equity loan agency who will also verify the scheme is affordable and then you can approach the builder to negotiate on the property.
Shared Ownership Scheme
Shared Ownership schemes are much simpler in that they allow you to buy a percentage of the property, typically between 25% and 75%, and you rent the other part. The properties are generally administered by local authority housing providers and you must apply to them as well as to the mortgage lender. The arrangement is similar to the Help to Buy equity scheme in that you can ‘staircase’ and increase the percentage of the property you own, but it differs in that you will be paying rent on the portion you don’t own from the outset.
Shared ownership properties can be second hand, and can be found on popular property portals by selecting the ‘shared ownership’ option. There are many lenders that can lend against these types of property.
Remortgages, Further Advances and 2nd Charges
It is common that when you get to the end of the tie in period on a mortgage that you look at refinancing to another lender, or to set up a new initial rate period with the existing lender. There will be many however that benefitted from extremely low Standard Variable rates (SVR) in the wake of the 2008 credit crunch. Before this time many SVR rates were linked to the Bank of England base rate and as that dropped dramatically, so did their mortgage payments. Customers are well advised to keep an eye on these rates because once they start to increase, many customers will suddenly be looking to fix and lock in as lower rate as possible. This sudden demand will cause banks to increase the rates available, both to capitalise and to manage their workload. For those that didn’t get such lucky deals, SVR’s are typically much higher than the fixed rates available even over 5 year terms, and will see a jump in their monthly mortgage payment unless they either negotiate a new deal with their current lender, or switch to a new deal. At AALTO, we would always encourage customers to find out what the existing banks offer, and we will compare this to the rest of the market. If we can do better elsewhere the monthly savings must be weighed up against the extra work involved in making a switch, although we do the heavy lifting of course!
Where customers are looking to raise some additional funds against the property there are a few different options to consider. Firstly, the purpose of the loan is important. Borrowing to pay for tax bills, or to invest in business is generally not encouraged and lenders may be reluctant. Borrowing to buy more property, or the develop or extend existing property is much more welcome because this often results in an overall better long term position for the client by increasing the value of their property more than the amount borrowed. Borrowing to consolidate debts is an option, but some extra consideration needs to be taken for the long-term cost of this. Borrowing a small amount over a long term can cost much more than expected because of the compound effect of the interest and the fact that it adds up over time.
If the funds are required at a time where the mortgage as a whole is due for review, many customers prefer to simple increase the amount borrowed and retain the difference on completion, however in some cases taking a separate 2nd charge of the property might be preferable because this can be arranged over a shorter term and the total amount of interest payable could be reduced. If the customer is still tied into an existing deal with their lender, then the second charge avoids them having to pay the Early Redemption Charges common with most tie in periods. In some cases speaking to the existing lender about them advancing further funds is an option. The downside is you get split products with different tie in periods, leaving you exposed to ERC’s or SVR’s. You are also dependant on that lenders rates and criteria.
As with any customer we will understand your circumstances, and recommend the best course of action, or present the options to you with the overall costs, and the monthly cost to make a decision.
They say moving house is one of the most stressful times in our lives, and the reasons are quite evident. Your home, a place you will likely have lovingly styled and improved over the years, is opened to a very critical public, followed by a negotiation process where we are sometimes faced with low offers or negative comments about our property. Then, once a satisfactory result has been achieved, you still have to go on to find your dream home. Perhaps you have already found it but haven’t sold yours; perhaps when you do find it you are up against first-time or cash buyers who can complete much faster than you can, all adding to your worries. Throughout all these processes you remain in limbo, committed to fees with agents, solicitors and other parties, all with no guarantee of success.
If you require a home mover mortgage to facilitate the transfer, having an expert on your side can go a long way. At AALTO Mortgage and Property Solutions, we understand the relationship between your sale price and the subsequent equity, both the costs of moving and the resultant mortgage on the new purchase. We want to ensure you don’t pay a penny more than you have to or get any nasty surprises. Below are our tips to consider before, during and after your move to make the process run as smoothly as possible.
Once you’ve decided to move house, often the first step is to invite estate agents to view and appraise your property. However, it may be a good idea to exercise caution at this point. If you consider the most important thing to you when selling your home, it’s probably to sell quickly and for the best price. Estate agents are primarily sales people who are rewarded for closing the sale of your property. They are acutely aware that everyone wants the best price for their home and will use that when promoting their services. You should also be aware that most estate agents (there are a few exceptions and these will usually have the letters MRICS after their name) are not qualified surveyors and their valuations are more the price they think they can get away with than the real value. For instance, when you first enquire, one of the tricks they may employ is to ask what value you hope to achieve for the property – and then give you a slightly higher figure in the appraisal.
Agents usually work by testing the market with a high price, looking at the viewings, and then adjusting the price downwards until they generate some interest. This is a perfectly valid approach, but that initial starting then price becomes the value of your home and every reduction, or low offer, starts to feel like money out of your pockets or, worse still, an insult. It’s worth remembering that the value of something is whatever people are willing to pay for it and this is often a function of demand. Set too high a price to begin with and your property will not look attractive enough in the listings to generate the viewings you need for an offer. By contrast, sensible pricing can encourage interest straight away, often resulting in a bidding war that leaves you better off in the end.
These considerations are crucial if you require a homemover mortgage to purchase your next home. In these process es, your mortgage balance will remain the same but your equity will be reduced as you bring your selling price down. If you are in a market where house prices are rising quickly, the opposite is true. As your equity increases, the amount of money required to buy the house you want is going to be increasing faster than your equity, and therefore your mortgage will also need to increase as time goes on. Following the recent tightening up of mortgage affordability, it’s likely that clients will have a finite amount of borrowing at their disposal, and will need to be mindful of where these limitations lie before committing to estate agency fees.
When you receive an offer on your property, the buyer is going to be unknown to you. Whilst the number on paper might look good, they may not be able to secure the funds from a lender. Your agent should be responsible for verifying the source of funding, even if it’s a cash offer. For instance, it’s not uncommon for cash to become a homemover mortgage later on down the line once they feel it’s too late for you to turn back , but don’t assume the estate agents will check this. The agents have little to lose at this point whereas this is the most critical stage for you. It’s important to ask key questions during this time, such as have your buyers seen a mortgage broker, or are they going direct to their own bank? Have they got a decision in principle that can be verified? Have they shown they have the funds required for both the deposit and any expected fees?
The buyers may also be insistent on taking the property off the market at this stage. It is generally recommended to wait until a survey has been carried out before you go ahead with this. Lenders will typically charge the client and this, in turn, gains commitment from the buyer. Alternatively, if they offer a free survey, they might wait until the homemover mortgage is approved. Either way you secure a commitment and there is less likelihood of the buyer pulling out if another property comes along. To ensure even more security for sellers at this stage, it is often beneficial to advise the agent that, whilst the property continues to be advertised, no more viewings are conducted. Instead, anyone calling to view the property is told it’s unavailable, but names and numbers will be taken so, if an initial sale does fall through, the agent has a list of people ready to view and maybe offer straight away. The buyer is reassured as the property is taken from the market and the seller gets that extra peace of mind that interested parties can still be contacted if a sale falls through, possibly in enough time to maintain the on-going purchase.
Getting a successful offer on your own property is a huge relief and you are able to progress to the fun part – viewing your new home! But, the tables are now turned and the focus will be on presenting the best possible buyer to property vendors. To avoid planting any seeds of doubt in the vendor’s minds regarding your ability to buy, ensure you have all the necessary paperwork when you go to make an offer. Bank statements showing cash deposits, passport and address identification will allow the initial sale paperwork to be completed. At this point, having a solicitor organised will be helpful; the agents will need to exchange this information with the vendor’s solicitor in order to start the sale process.
Many buyers can be concerned that their decision in principle shows a greater amount than they are willing to pay, and fear that vendors will spot the extra funds available to them and, as a result, hold out for more. As it turns out, showing you are able to borrow more than you may need can put you at a real advantage. For example, you will have some leeway available should underwriters reduce the amount you can borrow after scrutinising your circumstances. In the end, the price you will pay and the price you can pay are two very separate things and shouldn’t influence the negotiations. Having this slack in mortgage affordability is crucial as, under the new rules, lenders are now fully responsible for assessing and agreeing that the homemover mortgage is affordable for you. Everyone’s situation is different and one underwriter may look at things differently to another. There is always a judgement to be made and this may result in a slightly lower loan amount than expected. If this reduced loan is no longer large enough to secure your chosen property you will either need to top up the amount with cash funds of your own or, much less practically, renegotiate with the vendor.
If you are coming up against problems securing the funds required, vendors may begin to offer incentives such as stamp duty relief. As a buyer, you may also need to be cautious here. Whilst perfectly legal and very helpful, lenders will deduct the stamp duty from the purchase price and then apply Loan to Value (LTV) thresholds to this lower amount. To give you an example, a £400k property being bought with an 85% LTV mortgage of £340k, with stamp duty relief of £12k, becomes a purchase of £388k. The mortgage will become £329,800 and the deposit required will be £70,200. This will be £10,200 more than originally required, virtually voiding the advantage of the stamp duty having been paid for you. There are circumstances where this can work without affecting the loan amount, but only with certain combinations of purchase price and deposit.
The negotiation your new purchase can be very difficult, especially if it’s a property you really desire. Depending on whether you are in a part of the UK where prices are increasing at a fast pace, tactics will vary. In this circumstance, you may have to engage in a bidding war with other interested parties and could end up paying over the asking price. In other areas, prices may still seem too high and you should expect to pay under the asking price. However, understanding the vendors, and the things that are most important to them, remains universal regardless of location – and this knowledge will help you focus your negotiation. Could it benefit you if vendors have a house they wish to build but don’t plan on completing for another few months? Perhaps there is work required in a part of the building that you intend to demolish and extend? Or they may be desperate to move quickly: could you find funds to buy cash and later re-mortgage or bridge short-term in exchange for a lower price? Estate agents will be keen to find any way to make a deal work for both parties.
As ever, using an experienced and resourceful mortgage broker can help you navigate these difficult transactions. Here at AALTO Mortgage and Property Solutions we advise you throughout, giving you the benefit of our experience as both mortgage brokers and estate agents to ensure you know all the options and in order to get the best results.
Your home may be repossessed if you do not keep up repayments on your mortgage.