Finances and Buying Property
Make sure you understand the costs involved in buying a house or apartment and how to go about arranging finance...
Before starting to look for a property, if it is to be financed by a loan it is necessary to work out how much can be borrowed. If buying alone, it may be possible to borrow up to four times the person's annual salary. If buying with a friend or partner, up to approximately two-and-a-half to three times the combined salary may be borrowed. However, this is only a guide and the range of mortgage products on the market means that each buyer must do their own research.
Remember that the cost of the mortgage may go up if interest rates rise, so take that into account before deciding on the loan required. The buyer must also take into account the stamp duty land tax. The more money put down as a deposit, the more can be spent on a property, so take into account any savings. Also, don't forget to count any money from the sale of the current property (if applicable). Finally, make sure the lender gives a written 'in-principle' mortgage agreement.
Finding the right mortgage can be complicated. Some people employ an independent mortgage adviser, who will search for the deal that suits their needs. Other people choose to find their own mortgage and scour the market for the best products around; price-comparison websites have now made this task much easier. Estate agents may be able to recommend a local mortgage adviser. Beware of mortgage-arrangement fees, which can increase the cost of an apparently cheap mortgage.
Repayment or interest-only mortgage?
There are two basic types of mortgage: repayment and interest only. The buyer just has to decide whether they want to start repaying their mortgage now, plus the interest charged on it, or whether they want to just pay off the interest every month and repay the mortgage later (usually at the end of the mortgage term). If interest only is chosen, the lender will want the person to set up a saving plan to provide a lump sum that can be used to repay the debt, such as an individual savings account (ISA) or an endowment pension plan. If the person starts paying their mortgage straight away, they will clear the debt much sooner.
The buyer will also need to decide what kind of interest rate they want with their mortgage. There are a few to choose from:
Fixed rate: With a fixed-rate mortgage, the interest stays the same so the buyer has the security of knowing exactly how much they will be paying every month for a fixed number of years. So even if interest rates go up, repayments won't.
Standard variable rate: At the end of any agreement with the lender, the mortgage will switch to a standard variable rate. This means mortgage payments will go up and down in line with the bank's base rate, plus a little more on top.
Tracker rate: This works in a similar way to the standard variable rate, but follows the Bank of England's base interest rate. The tracker rate will be more than the Bank of England's rate, but lower than the lender's fixed rate.
Capped rate: A capped-rate mortgage means the borrower won't pay above an agreed rate for a fixed number of years. If the base rate falls, the interest rate on the mortgage will also fall accordingly.
Discounted rate: The interest rate charged is lower with a discounted rate than other standard mortgages, for a fixed period of time.
Offset: Simply put, a mortgage can be offset against the borrower's current account, their savings account or both. This way interest is only paid on the remaining sum. However, this means no interest is earned on current and savings accounts for the length of the agreement.
Before entering into any mortgage agreement, remember to check important details such as any penalties for overpayment, late payment, early repayment or switching providers before the term of the mortgage agreement ends. Also make sure it is is clear when any discount or fixed rate ends.