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The Ultimate First Time buyers guide – part 1 (of 3)

Mortgages

Moving house – the ultimate first time buyers guide

I’ve seen a few guides for first time buyers knocking about but I’m not sure that any of them really hit the mark – they tend to just cover the bit that the person writing it is involved in – so if written by a solicitor they just cover the legal bit, if by an estate agent then just the property selling bit. I thought I’d have a go at doing something a bit wider (and hopefully more useful) than that – and here it is.

This guide is meant to cover buying a house or flat in England, Wales or Northern Ireland – note that Scotland has a different legal system in relation to buying a property. Also during the guide I’ll often talk about buying a house, but exactly the same applies if you’re buying a flat.

There’s a lot here! Because of that I’ve decided to split the guide into 3 parts – I’ll be doing the second part next week and the final part the week after.

Part 1 deals with your research – before you start looking round houses
Part 2 deals with the process of looking round houses – what to look out for and so on
Part 3 covers what happens when you strike a deal – the process from then until you move into your new home

Research – before you actually start
You can’t just jump in there and start the process off – you need to do a bit of research first, starting with…

1. What can you afford?
Good question – and it’s probably the most important one to answer before you start. Unless you’ve got a shedload of cash hidden away then the likelihood is that you’ll need to get a mortgage. The bad news is that even with a mortgage you’ll probably still need to have a small shedload of cash available.

What exactly is a mortgage?
It’s a loan, normally over a longer period of time than most loans – often over 25 or even 30 years. The other difference to ‘normal’ loans is that a mortgage will be fixed onto the title deeds of your house (they actually just write details of the mortgage onto the title deeds). That means whenever the house is sold then the mortgage must be paid off. It also means that if you stopped paying the mortgage then they could repossess the house and sell it to clear off the loan.

Can I get a mortgage?
In deciding whether to give you a mortgage the bank or building society will basically look at 2 things
1. Can you afford to pay the mortgage?
2. The value of the house

Deciding whether you can pay the mortgage involves looking at your income – they normally use a multiplier on your salary here – so for example they may lend you up to 5 times your annual salary as a mortgage (this multiplier in turn is affected by your credit rating). If there are two of you then they usually have a slightly different formula (e.g. 4 times the joint salary). So if you’re earning £20K a year they’d lend you a maximum of £100K as a mortgage. Don’t take these figures as gospel – they are just examples.

The value of the house is important to the mortgage company because it affects the amount of ‘security’ in the house – they need to be sure that if it ever came down to selling the house to get their money back, that the house would be worth enough to cover the debt. They link this in to the percentage that they are lending.

So for example if they lent £50,000 on a house worth £100,000 then if they eventually had to repossess they wouldn’t have a problem – even if they took a price reduction for a quick sale and sold if to £90,000 then they would get all their money back.

If however they lent the full 100K, and later had to repossess then there is more of a risk of them being out of pocket – they will have legal costs in repossessing the property and also will want to get back the interest they should have been paid. So from the lender’s point of view a 100% mortgage is risky

It’s a bit difficult to advise properly here because I’m writing this in August 2009. The mortgage market has been on a massive roller coaster for the last year, and it’s hard to see how things are going to be going forward.

What’s changed then?
Well if you go back to mid 2008 and earlier – for the previous 30 years or so it was not too hard to get a 100% mortgage. Although 100% mortgages are more risky for the lender, prices have risen so consistently over the last 30 years that if there was a problem, then by the time the property was being repossessed it had gone up in value and there was plenty of money for the mortgage company to be paid from.

During the credit crunch/recession/bank collapse mortgage lenders came under a lot of pressure not to take any risks. Because of this and a whole host of reasons that I don’t fully understand (but about which everyone seems to have an opinion) it’s not as easy to get a mortgage now as it used to be. At the time of writing 100% mortgages have only just started to come back onto the market. Anything I write here any what deals you can and can’t get will be out of date, so the best thing is to get yourself a broker to let you know what you can actually borrow.

An excellent source of information on mortgages generally is www.moneysavingexpert.com – they have quite a big section on mortgages. When I remortgaged a while ago I followed a recommendation on their site for a broker that looks at the whole of the market – I used London & Country (www.lcplc.co.uk) – I phoned someone up and they gave me examples of what I could borrow. I get no incentive for recommending these sites – I just think they’re good.

Personally I’ve found a lot of the online stuff so confusing (i.e. with so many conditions, and exceptions) that it was easier to speak to a human being and let them tell you what deals they can get you.

One last point on this – Don’t believe the hype. Don’t listen to what you hear in the press – their role is not to tell you whether or not you can get a mortgage, their role is to sell newspapers – nothing more, nothing less. So don’t be put off by press speculation about mortgage availability – speak to someone who knows and find you what you can actually borrow.

So from all that, you should have an idea of what sort of money you can borrow on a mortgage and how much money you will have to chip in towards the purchase price yourself. It’s also a good idea to work out what other costs you’ll have to fork out when you buy a house (e.g. conveyancing, stamp duty etc – if you can’t wait then click here for an instant conveyancing quote) but I’ll come back to that later – this talk of mortgages is practically sending me to sleep – lets get onto the house itself!

2. Finding the property of your dreams
The good news over the last 10 years is that with the help of the internet it’s got a lot easier to search for properties – you can search within a given area, London borough, price range, whatever. Perhaps the best known of the property portals is www.rightmove.co.uk but there are a fair number of others out there too such as www.primelocation.com and www.home.co.uk

Using these sites helps you check out a whole area quite quickly. However it’s still worth taking a drive around areas you’re interested in – you sometimes get a feel (good or bad) for an area that doesn’t come across on the websites – there could be a scary-looking pub at the bottom of the street – or a wonderful park. It’s also worth driving or walking through at different times of the day (and night).

On the question of where you should buy – although it’s corny it’s still true – the 3 most important factors are Location, Location, and Location. Buying in a good location will make it easier when you come to sell. However if a property’s in an excellent location then of course you’ll pay more for it, and it’s sod’s law that the one you really like is just too expensive. You may therefore have to compromise to get a property that contains all you need and in an area you can afford.

There’s so much out there!
I know whenever I’ve started to look for a property, I’ve found that I get very excited by that massive number of properties available – once you start looking it seems there are loads and loads – you must be able to find something in this lot!

There’s nothing out there!
However when you start looking through you start to realise that this one’s too small, that one’s next to a pub. This one’s got a pokey kitchen, that one smelled funny, and so on. It’s not long before you do an about-face and decide that there’s nothing out there after all. What you’re doing here is narrowing things down – which is very important unless you just want to be viewing properties every day for the next year.

Stuff you might want to take into account to help narrow down the choice includes
– How many bedrooms
– Does it have central heating? If so – is it fairly recently installed?
– Does it have double glazing?
– What’s the kitchen like?
– What’s the bathroom like?
– How big is the garden?
– Is there a garage/off street parking?

Now it may be that because of your price range and where you want to buy some of these things are non-starters. But things like the number of bedrooms is pretty crucial and should help you to weed out a lot of properties quite quickly.

What sort of property should you look for?
Most first time buyers will be buying a smaller, cheaper property. If you’re in London this will almost certainly be a flat, (most of London is divided into flats) and if you’re in other parts of the country flats will still be something to consider because they are generally cheaper than houses. Most first time buyers will either be buying a new or newish flat, maisonette, or town house, or an older mid-terrace property or flat.

New properties
A number of builders have gone into the market of selling starter homes – building developments of flats, town-houses and maisonettes. These can often look very attractive as you can normally move in with no work to do.

Pro’s and cons of a newer property:-
– extras are often thrown into the price such as dishwasher, washing machines. Whilst these are useful they can sometimes be used as justification for a slightly higher price. The only reason I mention this is that if you have to sell the property again quite quickly then it might not fetch what you thought – when you’re coming to sell yourself then things like the washing machines etc will generally be ignored
– Don’t forget you’re buying from someone whose job it is to sell you the property (as opposed to buying from a private seller – an ‘amateur’. That’s not necessarily a problem – just bear it in mind)
– You will normally get a 10 year guarantee on the property from the date they are built
– The rooms in newer properties can be smaller than on older properties
– Insulation in newer properties can be a lot better than on older properties
– You usually have no work to do – you can just move in
– The property has no ‘character’
– People generally love them or hate them

Older properties
As a starter home you’re probably usually looking at mid terraced properties – from around 100 years ago. Usually solidly built but at that time builders paid little attention paid to damp proofing so this has often been a problem over the years. However an injection damp proof course usually sorts sorts this out and most mid terraces should have one.

Pros and cons of an older property:-
– You’re more likely to have to do stuff to an older property (again though the previous owner may have sorted all this out)
– They can have character
– Insulation etc will not normally be very good (but can be remedied quite cheaply)
– Double glazing – they won’t necessarily have this
– Again people love them or hate them

Finally in terms of the value of houses on the same street, a good piece of advice is to try and buy the worst house on the street – it will be pulled up in value by the better houses; conversely a spanking house on a shabby street will never achieve it’s potential value.

What about a fixer-upper?
Usually when you’re looking round you’ll find something that would normally be out of your price range because it ‘requires modernisation’ – a fixer-upper. Now you don’t need me to tell you whether it’s within your abilities to do DIY work on a house – personally it’s something I really enjoy, but if you’re taking on something like this:-
– Go in with your eyes open – get estimates for all the work required
– This WILL cause hassle with your mortgage – especially if you’re having a high percentage mortgage – they will often make a retention (hold back part of the mortgage money) until key works have been done – you’ll then have to come to an arrangement with the seller on getting some of the work done between exchange of contracts and completion OR borrow extra money to tide you over until the work has been done
– If you’re planning on doing the work yourself you need to make sure you can comply with any statutory requirements (planning regulations, building regulations etc), but also make sure you’ll have the time – fixing up a property yourself is rewarding but knackering. It’s no use having a lovely house and a broken marriage!
– If you have the patience, skill and time, it can mean that you get into a nicer property than you thought you could

3. Is it the right time to buy?
It’s stick my neck out time! I would say that YES! this is about as good a time as you’re going to get to buy a property. Prices are on the rise once again. Interest rates are at an all time low. Although mortgage deals are nowhere near as good as they used to be when compared to the bank of England base rate, in terms of the actual rate you’d be paying they’re still pretty good.

As an example a couple of years ago the bank of England base rate was 5.75% At that time you could get mortgages with special introductory periods of below the base rate – Cheltenham & Gloucester were doing a 2-year tracker deal at 4.74%

Currently the bank of England base rate is 0.5% One of the best trackers you can get (today) is from RBS/NatWest – at 2.89% which is 2.39% over base.

Now if you focus on comparison with the base rate it looks awful – you used to get a deal below base and now the best you can get is way over base. However what actually matters to you is the amount you’re paying out. 2 years ago you’d have been paying out 4.74% – now you’d be paying out 2.89% – that’s about £150 a month less!

So even if the banks aren’t offering great deals when compared to the base rate, the actual rates you can get now are actually pretty damn good!

In terms of house prices we’ve seen house price increases in all the statistics for the last few months. As conveyancers we’ve noticed this in terms of the volumes of people moving house. The low point for us was the 6 months leading up to January 2009 – from February the number of people moving has gradually risen.

It’s impossible to say how quickly prices will rise from here on in, but I do believe they are only going one way now for the foreseeable future and that is upwards.

4. Cost of buying a house (legal fees stamp duty etc)
Part of working out what property you can afford is working out the total costs of buying. Here are some of the things you should take into account:-
– Mortgage administration fee – many mortgage companies charge this – it’s basically a fee for saying yes. They charge it because they can. It can be anywhere from a few hundred pounds to a few thousand but should be made clear to you at the outset of arranging your mortgage
– Mortgage valuation fee – This is the mortgage company getting a valuation on the property – you have to pay for this – it’s normally a few hundred pounds. See note below on Surveys
– Conveyancing fees – this is where we come in – Click here for an instant conveyancing quote. This quote will also include things we need to pay to other people on your behalf (such as Stamp Duty, Land Registry Fees, and additional searches)
– Moving costs – are you going to use a removal company, hire a van, or borrow your dad’s car?

5. HIPs and Energy Performance Certificates
Every house being sold now should have a Home Information Pack (usually called a HIP) prepared on it and available for you to look at. It’s worth checking this out now as any HIP prepared after the 6th April 2009 will include a questionnaire filled out by the sellers – useful to read through this before you look round the house as it can give you a bit of background information. The HIP will also include an energy performance certificate (known as an EPC) – this basically produces an energy rating for the house.

At the time I’m writing this (August 2009) this information is largely irrelevant – other than that if the house is inefficient it will cost more to heat than one that is more efficient. However, in view of the importance of all green issues politically, I think it can only be a matter of time before we start to see tax implications for inefficient houses – so for example if your house is very inefficient you may pay more in local government tax. It’s not relevant yet, but it may become a factor in the future. Having said that, even if your house is inefficient you will be able to take steps to help it (such as more insulation, energy-efficient light bulbs and so on).

If you want a quote for providing you with a HIP, then click here for a free HIP quote.

That’s it for now. Next time we’ll deal with the process of looking round houses, and making an offer to buy one.

Cheers

Mark

2 Responses to “The Ultimate First Time buyers guide – part 1 (of 3)”

  1. Anonymous says:

    Nice article

  2. Online Estate Agents says:

    I think interest rates will start to go up by the end of the year – maybe by a quarter of a percent and the remain static for several months thereafter whilst the effect of the rise is analysed.

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