Conveyancer
The job of a conveyancer (or solicitor) for a purchase is to help:
– Carry out a search of local planning information for items that may impact the value (e.g. upcoming land developments, new roads)
– Prepare a fixtures, fittings and contents list – this makes it clear what you are buying (e.g. kitchen appliances, lights, carpets)
– Confirm from the vendor whether they are aware of any material, structural or other defects to the property that you should know about
– Obtain proof that the property legally belongs to the person you are buying from – Research and find the property’s legal boundaries
– Review and advise you on the contract for sale (prepared by the seller’s solicitor) – Agree a completion date
Most lenders will be prepared to accept your choice of conveyancer, as most experienced solicitors will have acted for the lender in question before. However, it can be best to check beforehand.
Credit reference agencies
These agencies hold information on most UK adults. That data helps lenders assess the risk of lending to a specific person.
There are a number of agencies in the UK, the main ones being Experian, Equifax, Callcredit and Checkmyfile. You can request a copy of your credit file from them, which is very worthwhile. You may be charged for this and some also have a monthly fee, so take care to check their terms and conditions.
Credit score
To help a lender assess your application, it is usual that they will use a form of scoring system to decide whether to accept your application. Different lenders give different levels of importance to your circumstances, and some set a higher pass mark than others.
It is normally based on three core areas:
– Public record information (e.g. the electoral roll)
– Credit account information (e.g. records of amounts of loans and your payment history), and
– Search information (e.g. the number of applications you have made for credit)
This means that care is required to ensure you approach the most suitable lenders, as an application will be recorded as a search (even if unsuccessful) and can then influence other lenders’ decisions.
What you can do to help:
– Check your credit file – the information isn’t always accurate and you can ask the agency to correct any inaccuracies
– Make sure you’re on the electoral register – lenders can be a bit suspicious of anyone not registered to vote
– Check your address is current on all your credit, bank and mobile phone accounts – you don’t want to give the impression that you have more than one address
– If you have credit cards you don’t use, close the accounts, having several credit cards can count against you
– If you’ve never had credit in the past, apply for a credit card so you can build a credit score
– Make sure you pay all your bills on time – being only a few days late can result in a default showing on your credit file – Avoid using pay-day loans – it will make you look like someone who can’t manage money
Critical illness cover
This is insurance that pays out when a defined medical event occurs. For example, following a heart attack, stroke, cancer or some other specifically defined critical illness.
Cover is for a set term, which may be equal to a mortgage term, for when children have grown up, until retirement or another life stage milestone. It may be worth considering having one policy for a set term to cover the mortgage, and another that will provide money to help provide for your different lifestyle if a serious illness happens.
Most people choose a lump sum to be paid out. There is the option of receiving it as set income over the term remaining, which is often a lower cost option.
Deposit
Lenders are no longer happy to take all the risk of buying your new home, and so do not lend 100% of the value of the property. If you are, unable in the future, to pay your mortgage, the lender needs reassurance that it can take your home and cover the loan by selling it. Less risk taking means lower loan-to-value (LTV) ratios, and personal deposits need to be larger than in the recent past.
You will need typically 20% to access the most competitive interest rates on the market. The source of the deposit may come from your current property, savings, inheritance or a gift.
Be aware that deposit loans from family and friends can still not be accepted as a source of deposit by some lenders, or can influence how much they may lend you.
Current Account Mortgage
A single account from which you run your day-to-day finances and your mortgage. It is like a current account with a large overdraft facility secured against your property.
The advantages of this type of mortgage are the lender calculates interest on the current debit balance. There are no fixed monthly repayments; you can overpay, underpay or take payment holidays as long as the debt is within your agreed borrowing limit. Your savings effectively earn interest at the mortgage rate. You effectively have a credit facility where you only pay interest at the mortgage rate.
The Disadvantages are the lender will usually charge a one-off arrangement fee. The flexible repayment nature means you need self-discipline to ensure you repay the mortgage by the end of the term.
If you are not a higher rate tax payer or have substantial savings, you may be better off with a more traditional option that has a lower interest rate. Also, other interest options sometimes allow overpayments and offer better rates.
Disclosure
It is a legal requirement that you disclose your circumstances fully and accurately. Also, non-disclosure of credit commitments, missed payments, County Court Judgements (CCJs), accurate address history, and number of dependants will have a big impact on your application now and also on any future application for financial services (as evidence of this may be loaded onto fraud databases).
Disclosing any issues to a lender does not automatically mean the application will be declined – indeed many lenders have provision for this type of business.
You may wish to consider obtaining a credit report to identify any historical or current credit issues, as well as check your past address history.
Drawdown
During the completion stage, this is when funds are released from your lender to be used for the property purchase.
Droplock / Switch to Fix Mortgages
A discount or tracker mortgage, which has an option to switch to a fixed rate at any point within the initial discount or tracker period without paying any early repayment charges.
The Advantages of this type of mortgage is you benefit from base rates when they are low, with the option to switch to the protection of a fixed rate should interest rates look set to rise significantly.
Disadvantages are there can be an arrangement fee when this is exercised. There may not be a fixed rate product available at the time the borrower wishes to switch.
Family Income Benefit
This cover will pay out if death occurs, and provides an income per year for the term remaining on the policy. For example, for a 20 year term, where the claim occurred after five years, there would be 15 annual payments made in total.
The payments are not normally subject to income tax but may impact some state benefits.
Early repayment charge
This is normally shown as a percentage of the loan but can also be a fixed fee. They apply if you repay your loan during any special incentive periods (e.g. discount). Some products extend that time beyond the initial period so be aware. Part payments can also sometimes trigger this, although most lenders allow a small percentage a year to be repaid without this happening.
Guarantor
A guarantor doesn’t have to be a parent but usually is. A guarantor takes on some of the risk of you being unable to meet your repayments. The lender will normally require your guarantors to offer their property as security against the guaranteed part of the mortgage.
Technically they become immediately liable to repay the outstanding loan if you are no longer able to make your payments. In reality what usually happens is an agreement is made between the lender and the guarantor, so they maintain payments until you are able to do so.
The amount of lenders willing to consider this for buy-to-lets is very limited.
Equity
The difference between the value of your home and your outstanding mortgage is known as equity. You could use the equity in your home as your deposit for your new mortgage.
Less risk-taking by lenders means lower LTV ratios, so the more equity the better. If you get into trouble making your mortgage repayments your lender needs to be sure it can cover the outstanding mortgage by taking your home and selling it. The lower the LTV the more chance your lender has of achieving this. To get the best deals on interest rates you’ll need around 20% equity. As a rule, the more equity you have, the lower your interest rate.
Higher lending charge
This was previously known as a mortgage indemnity guarantee (MIG). It is where high LTV lending happens and an insurance policy is taken out by the lender to protect itself – should you default and property values decline. This cost is passed on to you through this charge. Not all lenders charge this.
Income protection
This provides income where you are ill or injured, and as a result your income through employment or your normal route stops. If Houseperson’s cover is included, then it will pay out upon illness or injury, irrespective of any income stopping.
Income protection (Cont’d)
It is designed to replace most of your net income. Cover lasts for either a set term in whole years, or to a given age (typically your state retirement age).
The amount you pay is called the premium. It can either be guaranteed not to change, or it can be reviewable. Reviewable cover normally changes based on the claims experience of the life assurance company.
Indexation of benefit
This is a feature that can be added to some insurance plans. This allows the amount of benefit and cover you have in place to increase during the term of the plan. Increases can be set amounts, or linked to inflation or national average earnings increases.
Normally increases happen at each anniversary. Premiums also increase to reflect the higher level of cover.
Interest only mortgage
With an interest only mortgage, your payments to the lender cover only the interest on the loan (i.e. they do not repay any of the capital). The total amount of your debt does not reduce over time and the full amount of the loan still has to be repaid to the lender at the end of the term, so you will need to ensure you have that money ready.
So you can make this final payment, you can invest so that you generate enough capital to repay the loan at the end of the term. If you choose to invest, some investment vehicles can have tax advantages and when you move or remortgage, your investment vehicle can usually be reallocated to the new mortgage.
However, there is no guarantee that your chosen investment vehicle will grow sufficiently to repay your loan (although you can usually top up your contributions to investments as you go along if this looks likely to be the case).
Legal fees
When you buy or remortgage a property there is legal work that needs to be done. You will often hear this called conveyancing. You will probably use a solicitor to do this work for you although you can use a licensed conveyancer.
Your legal bill will be the fees for the legal work plus other expenses that your solicitor has paid on your behalf, such as searches and Land Registry fees. You may see these additional expenses described as disbursements.
Some remortgage deals may include free conveyancing otherwise expect to pay around £500 + VAT for the legal work plus the cost of disbursements.
Letting agreement – buy-to-let
The type of tenancy agreement will influence the number of lenders who will consider lending to you. A six month assured shorthold tenancy agreement (AST) is acceptable to most providers. Your choice will narrow if you are considering to let to a local authority, a company or housing association.
LIBOR Mortgage
Linked to the London Inter-Bank Offered Rate. This is the rate commercial banks lend to each other, and set every day for different periods. (whereas Bank of England would change at most once a month).
Most popular is the three month LIBOR. It is set for a three month period, and when this expires it is set for another three months. So in a year it can potentially change four times.
Historically LIBOR can be slightly lower than Bank of England base rate.
The disadvantages with this type of mortgage are you have no certainty over monthly repayments. You suffer immediately from any increase in LIBOR rates, and there is no guarantee that it will not be higher than Bank base rate. The lender will usually charge a one-off arrangement fee. There are early redemption penalties should you wish to redeem the mortgage during a period set by the lender.
Life cover
This is cover that pays out on death. Some plans pay upon earlier confirmation of a terminal illness where the prognosis is death within 12 months. It can pay out as a lump sum, or as income for a set period.
Cover can last for a set term called Term Assurance, or can last throughout life, called Whole of Life.
The amount of cover can remain the same or increase / decrease annually. Level term assurance stays the same throughout.
Decreasing cover is sometimes used to cover a reducing debt, such as a repayment mortgage and usually assumes a given interest rate. Provided your mortgage rates don’t exceed that rate, then the cover should reduce at around the same rate as the mortgage. The amount you pay is called the premium. It can either be guaranteed not to change, or it can be reviewable.
Reviewable cover normally changes based on the claims experience of the life assurance company.
Loan-to-value (LTV)
This is shown as a percentage rate, and is the amount of loan compared to the value of the property. The higher the loan-to value (LTV) the lower the deposit required, but typically also the higher the rate of interest payable. See also ‘Deposit.’
Mortgage arrangement fees
Unless you choose a lender’s standard variable rate mortgage you can expect to pay an arrangement fee for your mortgage. Arrangement fees vary wildly, and may be expressed as a fixed fee or as a percentage of the loan. This means it is difficult to give an accurate estimate but it is not unusual to pay something in the range of £500 – £2,000 or more.
You will usually have the choice of paying the arrangement fee up front or adding it to the loan. Adding it to the loan may ease your cash flow but will cost you more as you will pay more interest.
Offer
You will make an offer for the new property and hopefully that will be accepted. Obtaining a legal mortgage offer is the next important part. This is where the lender starts their assessment (underwriting) process of you and the property.
A mortgage offer is normally required by your conveyancer before moving to the next stage. Please note, that although extremely rare in reality, a lender reserves the right to withdraw your offer at any point prior to completion.
One-off costs
When you buy a property you incur certain one-off costs that can add up to a significant amount of money.
These include land taxes (stamp duty), legal fees, valuation/survey fees, and mortgage arrangement fees (see other sections for details).
Personal income
For buy-to-let remortgages, most lenders will first look at the rental income, yield and property value to assess your
application. They are also likely to look at your personal income and expenditure to satisfy themselves that mortgage payments can be met in the event of a rental void
For both residential and buy-to-let, in order to assess whether you loan is affordable, lenders will look at your current and predicted expenditure. This is of course reliant on your income. Lenders will assess your income looking at areas such as:
– Source – (employed, self-employed, investments, dividends)
– Frequency of payment
– Consistency
– Gross and net levels of income
Personal income (Cont’d)
– Bonuses – some lenders do not include this as income as it is not guaranteed. Others may only allow a percentage of the bonuses to be included in assessing your affordability.
– Time in your current role.
Different lenders place different emphasis on the above criteria when assessing you, and so using the expertise of a mortgage adviser is vital to ensure you approach the right lenders.
Private medical insurance
This is insurance that pays the hospital or Doctor for your treatment. It can include treatment in a private ward, or being seen earlier in an NHS ward. Some plans also allow you to claim if you are not able to be seen by the NHS within a set period. Other plans may charge a little more and don’t have any link to NHS waiting times.
You are either medically checked and underwritten at outset (so you know what you’re covered for and what you won’t be), or have no medical checking at outset (but conditions that occurred two years before taking out the cover are not covered, and often there is no cover for a re occurrence within five years after taking out the plan). Premiums are usually reviewable annually.
Property type
Some properties such as flats over commercial properties, studio flats and ex-local authority premises can be viewed as having reduced future attractiveness and as such some lenders may not operate in that market. This may restrict your lending options.
Listed buildings (e.g. Grade 1, Grade 2) may have restrictions on how you can maintain or alter the property as well as buildings near to it (e.g. garage). Some unlisted properties can also be subject to similar restrictions (e.g. in an area of outstanding natural beauty).
If you remortgage, you maybe tempted to extend the end repayment date in order to lower your monthly payments. However this means that the amount you repay overall increases over time.
Rental yields – buy-to-let
What may be a suitable return for you, may not be seen the same way by a lender.
Typically minimum rental yields are formulaic and driven by two things:
1. The rate used to calculate the mortgage payment
2. A percentage over-ride to allow for any rental void or increases in short term interest rates which might impact your personal finances (these range between 100 – 130%).
Rental voids – buy-to-let
You need to ensure you have enough personal income and resources to maintain payments if your property becomes vacant. This is because your monthly payments to the lender will continue irrespective of your rental situation.
Rent guarantee insurance – buy-to-let
A tenant that falls into arrears can jeopardise your ability to meet your mortgage repayments. If you fall into arrears with your mortgage repayments you risk losing your property. Rent guarantee insurance covers you if tenants default on their rent and protects your ability to pay your mortgage. Some also cover any associated legal costs.
Repayment mortgage
With a repayment mortgage your monthly repayments cover both capital and interest on the loan. As the term continues, the amount outstanding on the loan reduces so the full amount of the loan will have been repaid at the end of the term as long as you have maintained payments. No other repayment vehicle is needed and it avoids the risk of investing (e.g. in the stock market).
If you remortgage, you maybe tempted to extend the end repayment date in order to lower your monthly payments. However this means that the amount you repay overall increases over time.
Risks – for all property owners
As with all investments, the value of a property can go down as well as up. Future housing or commercial development nearby, transport links and route changes can all impact value. Past performance is not a guide for the future. If your mortgage loan exceeds the property value, you will have negative equity. Also factor in the costs of selling, such as using an estate agency, into your net value.
Unforeseen structural problems could prove expensive, so budgeting for regular maintenance is crucial, as is having the right level of buildings insurance. Interest rate rises can also impact your repayments, and while you may be protected in the short term (e.g. fixed rate), you will be exposed to a different market at the end of any initial period.
The biggest risk to you is being able to maintain payments if your income is effected in any way. This may be through redundancy, accident, illness or death. As your adviser we will be able to reassure and advise you about what would happen in your individual circumstance so that you do not lose the family home.
Risks – buy-to-let
Rental income from buy-to-let properties can vary: if the market is saturated with rental properties, your annual income may remain static or even fall. The condition of your property will also impact your rental levels. You need to build leeway into the rent to allow for periods when the property might be empty between lets (it takes on average four weeks to let a property), and to cover maintenance costs. You should also bear in mind the possibility of rent control being introduced by the Government, which may cap your rental income. If interest rates were to rise more than a corresponding increase in rental, then that could impact your ability to pay your mortgage.
The more cautious investor might prefer to borrow less. You should aim for a rental income of between 1.3 and 1.5 times the monthly mortgage payments.
Risks – buy-to-let (Cont’d)
Many people are put off buying-to-let by the thought that they will have to spend a lot of time fixing problems such as broken washing machines or dealing with tenants who default on payments. A good agent can take care of everything, from finding tenants and checking references, to managing an inventory and dealing with unexpected problems like burst pipes (although there is of course a cost for this).
We recommend that those landlords intending to use a letting agent use a member of the Association of Residential Letting Agents (ARLA) or a similar reputable trade body. These agents may provide practical assistance with general property management. Their services typically cost from 10% to 15% of annual rents excluding VAT, which is often taken up front for the full term and so can impact your cash flow initially.
Agents can also advise on tenancy agreements. Most lenders require you to have a six-month, assured shorthold tenancy agreement with your tenants. You may also find it more difficult to arrange finance if you are planning on letting to students, or for more irregular tenancy periods, such as holiday lets or company lets. You may also have difficulties if you are planning on letting to a DSS tenant.
Self-employed
It is more difficult to get a remortgage if you are self-employed, when compared with employees. Self-employed people often have more erratic incomes and find it more difficult to prove their incomes.
In the past, self-employed people got round the problem of proving income by using self-certification mortgages, where you would state your income and a lender would take it on trust. However, too many people took out mortgages they couldn’t afford and these loans are no longer allowed.
All lenders will want to see proof of your income, often looking to see a track record over three years or more. That way it can take an average figure and smooth out any spikes.
Self-employed (Cont’d)
Proof can take the form of accounts and tax returns, and the SA302 supplied by the HMRC.
Please remember that income means profit not turnover- if you’ve legitimately suppressed your profits to minimise income tax, this will work against you when applying for a mortgage.
The number of lenders also gets limited if your selfemployment is based on being a professional landlord. This is because some lenders see this as a higher risk, as your income is related to the very thing you are mortgaging.
Self-employed mortgages are a bit of a minefield and you really need access to expert knowledge and contacts. We can help you.
Tax implications – buy-to-let
The UK Government in 2015 announced a new way that tax relief on mortgage interest payments and expenses will be treated for buy-to-let investors.
The disposal of a buy-to-let property may be subject to capital gains taxation. You should seek professional specialist tax advice about this.
Valuation and survey fees
The size of the valuation fee will vary by lender and property value but for a property costing £200,000 expect to pay around £200 (source: Halifax January 2018). The basic mortgage valuation is for the lender’s benefit so that it feels comfortable lending against the property.
You may feel you want to add a survey to the valuation that gives you a report on the general condition of the property.
Costs vary but for a valuation and survey on a house costing £200,000 expect to pay around £445 (source: Halifax January 2018). If you are buying an older property, or one in a general state of disrepair, you may choose a full structural survey.
This is a thorough survey that examines the structural condition of the property and gives you advice on repairs. Depending on the property expect to pay between £500 and £1,000. Obtaining comparable examples in the same area and for similar property will help you obtain a benchmark.
For buy-to-let remortgages, your valuation will also need to include rental expectations as compared to a normal mortgage residential valuation.
Before a lender will grant you a mortgage it will insist on a valuation to prove the property is worth what you’re paying for it.
Tenants – buy-to-let
Not all lenders will allow students or DSS tenants, so consider carefully the type of occupant you wish to attract, as it may limit the number of lenders willing to lend to you. Be aware that there could be difficulties with tenants who breach agreements impacting upon time and legal fees, as well as income.
Waiver of premium
This is a feature that can be added to some insurance plans. Should you become disabled, or seriously ill and unable to pay the premiums of a plan, this cover can pay your premiums for you.
There is normally a period before this benefit starts where you need to continue paying premiums (a deferred period). Once the deferred period has passed, you will have your premiums paid for you.
