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Buy a home and get a Mortgage.

People toying with the idea of getting their first home should find out how much they can afford, how much deposit they would like to save for, roughly when they would like to get a home and where they would like to live. Other considerations include the type and size of a home. A single person should be able to borrow 3.5 times their salary, couples 2.5 times. A typical deposit is 5 percent. Play with different possibilities: Do I really need a big deposit? Can I live in a flat? Is a permanent base suitable when I work all over the country? Toying can take weeks, can take years, decades even. You can read the homepages at your leisure until the market becomes more affordable.

When you feel ready then its time to get the ball rolling on your game of "HouseTrap".

Please read on.

The Location

Consider the location carefully. We may have to face up to living in a less desirable neighbourhood unless we get a smaller home.

  • Make a shortlist of suitable areas to live in, then work out how much space you need.
  • Buy the local papers to see what's on offer at what prices and visit the area to see what's up for sale. Have a drink in the local pub. If there are undesirables in the area, this is where they'll show their faces. And if blokes wearing too much jewellery start selling tracksuits from black bin liners, Money Surgery recommends reconsideration of the area.
  • Ask the landlord about the area. Has it gone downmarket or is it improving?
  • Get a feel for the atmosphere of the place. Go for a walk in the area at night. Some streets that may be attractive tree-lined avenues during the day may become racetracks for joyriders after dark.

Please read on.

The Lender

If you are under 40 with a good credit rating and in full-time employment, lenders will be keen to lend. However, confusing as mortgages can be, don't be intimidated. Always ask questions if you are unsure about anything. At Money Surgery, we recommend that you scour the money pages of the better newspapers then speak to as many potential lenders as possible so that you get the best possible mortgage deal that the market can offer, leaving no stone unturned. Talk to independent brokers who will tell you what are the best deals at that moment. You can use their information to confirm your own feelings for the market, then just walk away. Don't forget that carpetbagging is always in fashion, so have a preference for Building Societies when courting a lender. You could get over a thousand pounds if a society converts into a bank and historically, societies generally have offered the best mortgage rates, anyway.

  • Arrange various meetings with potential lenders from your shortlist.
  • The main question is to find out how much they will lend you. Prepare to be quizzed about your earnings, outgoings, loans and employment status which they will check out later. Don't attempt to lie.
  • Each lender has their own limits when it comes to the maximum lending figure but its usually 3.25 times your annual salary. Couples can combine their earnings and get 2.5 times their joint earnings.
  • A deposit of 5 or 10 percent is usually required although you can get 100% mortgages. Generally, the more you have as a deposit, the better the deal will be from the lender.
Please read on.

The Dream Home

Estate Agents are not popular creatures but remain the favourite method of viewing potential homes. There are cheaper estate agents sprouting up on the Internet but if this is your first home you don't pay them anything anyway.

  • Visit as many as possible, explaining what you're looking for and how much you have to spend.
  • Produce a Home Buying Certificate showing the agent that, in principle, you have access to the required funds. These are supplied by the lender that has approved your mortgage application.
  • Begin viewing as many properties as possible. Don't expect to find the right place straight away. Instead focus on the experience gained and you will quickly see homes that represent good value, and others that are overpriced.
  • Eventually, you will find the place thats right, not necessarily a dream home, so put in an offer. Under normal market conditions, you wouldn't pay the asking price. Sellers expect offers say 5% lower than the advertised price but homes that have been on the market for some months may be easier to get. Conversely, rapidly rising prices in up-and-coming areas will be harder to haggle over. When prices are rising sharply, a seller may receive and accept a higher offer than the one they accepted previously and cancel the first sale even though that original buyer has spent a lot of money on surveys and legal fees. The original purchaser may even have sold their home. This is called gazumping. Under current legislation, this is unfortunately quite legal.

Please read on.

The Legal Side

The ownership of the property has to be transferred into your name. You can do it yourself but even the experienced would prefer to use a solicitor. He or she will charge about £300 for a £50,000 home. When looking for a mortgage, one important criterion to check is whether the lender will pay the legal fees.

  • If the lender doesn't supply a free solicitor, they can certainly recommend one, that you will have to pay for. Alternatively, check out our contacts page for the CAB who can provide an independent recommendation.
  • As soon as your solicitor gets the details of the property, he will check the Contract Of Sale and property titles to make sure that the seller can legally sell the property. this is the point at which the solicitor will conduct a Local Authority Search to check that there aren't any nasty planning developments concerning your new home.
  • Finally, you will be asked to check and sign the Contract Of Sale. The seller signs an identical contract and a completion date is then agreed. Last of all, the solicitors exchange the signed contracts and your deposit is paid to the seller's solicitor. Now you are legally bound to buy!
  • The whole legal process can take ages. Solicitors stress the importance that "Everything has to be right on both sides, and thats what you pay for" while both buyers and sellers get frustrated fearing that the deal will fall through. Money Surgery believes that the process has some flaws and welcomes new initiatives to reform home purchase legislation.
  • Don't forget to add on to the price of the home the effect of stamp duty. Stamp duty is a government tax on the purchase price of the property. No stamp duty is payable on properties costing less than £60,000 but the charges are 1% for those over £60,000, 3% for those over £250,000 and 4% for those over £500,000. So if you buy a house for £100,000, you'll have to find £1,000 to hand over to the Treasury.

Please read on.

The Mortgage

There are different types of mortgage repayment options but don't worry, simply focus on getting the one most suited to your circumstances.

  • Repayment Mortgage.
    This simply pays off the money borrowed and interest charged in one monthly payment. You know that at the end of the term your mortgage will definately be paid off.
  • Endowment mortgage
    This method pays off the interest only. An endowment policy runs alongside which hopefully grows, through your monthly contributions, to be at least as big as the capital of the mortgage. Supplied by life assurance companies, there is an inherent life assurance cover with endowments. Some experts are not recommending endowments at the moment.
  • ISA mortgage
    Similar to endowment mortgages, the ISA is invested in the stock market to, hopefully, provide a pot big enough to pay off the capital of the mortgage at the end of the term. ISA's are tax efficient saving funds, described in more detail on our Saving Money section.
  • Pension mortgage
    Similar to endowment mortgages and ISA mortgage, the pension pot builds up to pay off the capital. Any extra gets repaid to the borrower in the form of a pension. This method is seen by some as riskier but offering the greatest potential rewards.

The next choice concerns the mortgage "product" offered by the lender. These set out how the interest part of the mortgage will be paid to the lender.

  • Flexible payments
    This method allows you to overpay your mortgage, allowing it to be paid off earlier. You can also request a break from your monthly repayments. This product makes more sense if your income fluctuates and they tend to have variable rates of interest.
  • Variable rate
    The interest rate you pay goes up or down, according to how interest rates move nationally. Standard Variable Rate is the normal rate of interest offered on a mortgage by lenders. Other mortgage schemes, such as discounted mortgages are often linked to this rate.
  • Fixed rate
    The interest rate you pay stays the same for a set period, even if general interest rates go up or down. You can plan your budget with confidence.
  • Discounted rate
    A guaranteed reduction in the Standard Variable Rate giving you the benefit of lower monthly payments for a period of time.
  • Capped rate
    The interest rate you pay is 'capped' at a top level.You pay no more than the capped rate. You can also benefit if the Standard Variable Rate goes down.
  • Tracker rate
    An interest rate directly linked to another - usually Bank of England Base Rate

Tied in with these "products", that have a rather limited shelf life, are other incentives. These can be cashbacks, free surveys, free or discounted legal fees, no-compulsory home insurance. Conversely, lenders may impose conditions on their mortgage products. These may include High Loan to Value Fees (otherwise termed Mortgage Indemnity Guarantees), compulsory home insurance, penalty charges upon early redemption, fixed dates for the cessation of discounts, maximum Loan To Value percentages that cap the maximum amount that can be borrowed against the assumed value of the property. Before entering into detailed discussions with lenders we recommend that prospective mortgagees draw up a spreadsheet with the lenders product down the side and each of the features above along the top. The boxes in the spreadsheet can then be filled in and added up for each product, giving a concise financial value for each product on the shortlist.

Please read on.

The Survey

After application, one of the first things that the lender usually arranges for you is the survey. Its paid for by the borrower but its main purpose is to assure the lender that what you are using their money to buy is genuinely of the value you are paying. The results of the survey should show you if big expenditure is needed and can be used as a way of re-negotiating the price lower to reflect these findings. Lenders may limit the amount that they are prepared to lend if a lot of repairs are necessary. Some may provide the purchase price then say £4000 to fix the roof followed by more to fix something else, up to an agreed limit. There are generally three different levels of survey.

  • Weighing in at about £140 is whats commonly called the Valuation Survey. This is what some unkind people call the "drive-by" survey as its comparatively light on detail. It is the bare minimum required by lenders.
  • The middleweight is often called the Homebuyers Survey and costs from about £250. It expands upon the valuation survey but is certainly no heavyweight.
  • The survey heavyweight is the Structural or Full Building Survey. It can cost between £300 and over £1000 but it goes to much greater lengths to assess the condition of the property. It should tell you about any defects and advise you about the possible implications. If the surveyor cannot be certain about a particular defect, they may recommend a further investigation.

Please read on.

Moving Home Costs Approach £6,000

(19:30 Tuesday 14th June 2005 news sory)

Latest figures show that moving home costs £5,551, on average, up £174 from last year in the UK. The Woolwich has calculated that a total of 10.6 billion pounds was spent in 2004 on moving, with none of this amount going on the actual property.

This figure can vary, of-course, but it is worth budgeting for a realistic figure. In more detail, selling a home for £150,000 and buying for £200,000 will mean typically £2,146 for the estate agent and £498 for the solicitor for selling, and £150 land registry fee and £571 for the solicitor for buying. Then there's stamp duty on the property bought, which is between 1 and 3 percent, depending on the purchase price.

Many people find themselves moving more than others. Move four times in ten years and that's easily past £30,000 with a sprinkling of interest. Move more than this, or simply choose to avoid the geographical restrictions of home purchasing, and we have another reason for renting your home.

A Dangerous Home-buying Subsidy

(20:00 Thursday 26th May 2005 news story)

So the government is going to subsidise the purchase of homes for first-time buyers, so that only up to 75% of the property value needs to be borrowed by the buyer, with the remaining 25% being owned equally by the government and the housebuilder/mortgage company. The homebuyer then rents this remainder, with the option to add it to their mortgage in due course.

The intention is to help first-time buyers onto the property ladder. Why?
Does the government fear that because many first-time buyers are priced out of the market, the risk of house price deflation is more likely, or that "key workers" can't get somewhere to live? The problem is caused by excessively inflated house prices, which is caused by demand outstripping supply. Pumping public money, in the form of an indefinite loan, to bridge the gap between what people can borrow and the asking price is irrational, will push house prices up even more, and ensures that any correction crash will hit harder later. People are already risking their homes too much by taking on loans at 4 or 5 times their salary and are encouraged by some intermediaries to exaggerate their earnings.

The amount ear-marked for this exercise is £1 billion, enough to cater for 110,000 homebuyers by the year 2010. After that, there'll be another wave of people wanting to be on the property ladder and wanting the subsidy. If the crash comes, the government's share of the equity, our (public) money, will be written-off first from defaulted mortgages. This means that homebuyers have a shield from any negative equity risk - another incentive to buy.

This measure is a reaction to absurdly high property prices but effectively inflates the housing bubble further. Lets build more homes, but lets also be careful about where they go, how they're designed and how they're funded. Renting can be the alternative that takes the pressure off housing demand. People would be happy to live in rented accommodation, if it was made cheaper and more attractive. Renting will suddenly look very attractive if house prices start to drop.

Oh, and well done to the unbelievable Liverpool FC.

Warning on 130 percent Mortgage

(Tuesday 18th January 2005 news story)

Experts are warning people to avoid a mortgage deal which offers up to 130 percent of the value of the property. The Max130 product from Mortgage Express, the specialist lending arm of Bradford and Bingley, is aimed at first-time buyers or those wanting to merge debts. Online broker, Purely Mortgages said it might encourage consumers to run-up large credit card bills which can be consolidated into a 25-year mortgage.

A mortgage that offers so much more than the value of the property, specifically to first-time buyers and those already struggling with debts, is another example of how easy it is at the moment to borrow money. The lenders are relying on the continued growth in the value of homes as collateral on the loan. Don't rely on household high-street mortgagers to act responsibly or in your interests, rely on yourself and regain control of your financial life. Don't tell us, here at the Surgery, that there won't be someone who takes on this loan, consolidating his credit card and overdraft debts in the process, to buy his first home and face the decorating/furnishing/homebuying bills that accompany this otherwise memorable experience, only to slide back into using the old credit card and running-up the old overdraft, praying that negative equity is a thing of the past. Don't tell us because we've looked after dozens of them here at Money Surgery. Don't merge debts, get rid of debts, say the doctors.

Home Information Packs Become Law

(Friday 19th November 2004 news story)

Home sellers' packs aimed at speeding up the home-buying process in England and Wales will become law on Thursday. They will force sellers to have surveys and local authority searches done before putting properties up for sale. But critics say Home Information Packs, which will cost about £600, could go out of date before properties are sold and are a waste of money.

The Housing Bill comes into force on Thursday, but the seller's pack will not be compulsory until 2007, with pilot schemes due to start in 2006. The government says the Housing Bill will "help the most vulnerable and help create a fairer and better housing market". Millions of pounds are wasted each year when sales fall through before contracts are signed.

Peter Bolton-King, chief executive of the National Association of Estate Agents, warned that the cost could put people off selling their homes. However, Which?, formerly the Consumers' Association, supports the packs, arguing they will increase transparency and cut the time it takes to process a house sale.

The Five Ages of Homebuying

(Tuesday 24th July 2004 news story)

A new report by the Royal Institution of Chartered Surveyors (RICS), has identified five different "ages" of homebuying which influences where people in different age groups choose to live and buy property.

Over 90% of homeowners with children buy a property because it is close to good schools, it reveals. Last year, data showed that homebuyers were prepared to pay a premium of around 12%, simply to buy property in a good schools catchment area.

Of the first age, "Single Buyers", 77% felt the nightlife was an important factor, affecting where they bought a home. Public transport was important to 62% of people in this group while 59% said the shops in the area would be important.

For "Couples with No Children" the buying priorites evolve, with 62% saying having a garage or offstreet parking was important. The same percentage also wanted to be close gyms, theatres and art galleries.

For "Couples with Children at Home", gardens are also very important, in addition to schools and nurseries.

To "Couples Whose Children have Already Left Home", the main selling point is likely to be the neighbourhood, with nearly 80% saying that a quiet neighbourhood was important.

Homebuyers "Over 65" are also keen on quiet neighbourhoods, with security and safety an important factor for nearly 80% of respondents.

The RICS said: "This research highlights a natural segregation or "ghettoisation" when it comes to buying a home. People tend to gravitate towards places which provide them with the facilities they want during different stages of their lives."

Could the ideal home be one that satisfies ALL age groups or is that home simply the most expensive?

Homeowners Ignore Rate Risks

(Tuesday 21st October 2003 news story)

Many homeowners might have become oblivious to the impact that rising interest rates might have on their mortgage bills, according to a report by Yorkshire Bank.

The bank said that recent buyers might be "lulled into a false sense of security" by current rates, assuming that housing costs will stay affordable. The warning comes as Bank of England governor, Mervyn King, warned that rates will have to rise at some point and that our economy will be sucseptible to greater shocks than seen in recent years.

The Yorkshire Bank's survey revealed that one in four home buyers were prepared to take out the biggest loan they could afford to secure their home.

House Prices Stall

(Thursday 1st May 2003 news story)

House price inflation stopped dead during April. Nationwide Building Society said that the average price of a property remained unchanged at £122,748, while the annual rate of house price inflation fell to 22.2% from 26.2% the previous month.

Alex Bannister, Nationwide's group economist, said: "House prices remained unchanged during the month of April as the trend towards slower house price inflation continued. House prices over the last three months have risen at their slowest pace since December 2001 and the market is clearly less frenetic than April last year when prices jumped 3.3%." But he said there was no evidence of a "damaging correction" at this stage, and added that Nationwide expected price growth to return to 0.5% to 1% during the next few months, although it would remain below the monthly average of 2.4% seen between April and September last year. The building society said the number of sales had also slowed, with 123,000 houses changing hands during March, down from 131,000 in December last year. It said the slowdown appeared to have been driven by a sharp fall in the number of first-time buyers entering the market.

Mr Bannister said, "In the first quarter of 2003, the monthly average number of first-time buyers dropped to 27,000, more than a quarter down on the same period of 2002. If this trend persists for the rest of the year it will take the number of first-time buyers to around 400,000. This would be the lowest level since mortgage markets were deregulated in the early 1980s." He said the fall was largely due to affordability constraints, as well as an increase in the average age at which people buy their first home as a result of more people going into higher education. Mr Bannister added: "A sustained period of lower house sales and house price inflation looks a more likely outcome - even if this appears to be a return to the sort of housing market cycles seen back in the 50s."

Borrowing Against Homes Reaches Record

(Friday 5th July 2002 news story)

A record £8.12 billion was borrowed by people against the equity in their homes in the first quarter of 2002. The Bank of England has revealed that mortgage equity withdrawal was up from £7.46 billion in the final quarter of last year and is nearly double the figure for the first quarter of 2001.

This follows on from yesterday's article and underlines our concern about the burden of debt associated with the house price boom. It is a worrying statistic that the last time mortgage equity debt peaked was in the late eighties, when the figure of £6.3 billion was recorded. We don't want to scare people, nor do we predict that the negative-equity witnessed a decade ago will reappear but we urge people to foster a mentality of "continual control" over money. We try, and often fail, to make light of debt but it has to be taken seriously. It can so easily get out of control.

House Prices Soar in June

(Thursday 4th July 2002 news story)

The price of homes, unlike the temperature, has soared in Britain this summer. House prices rocketed 2.3% on average last month, taking them to 19.3% higher than a year ago. Even since January, prices have risen by 11%, pushing the price of the average home to £109,667. This follows similar figures compiled by Nationwide Building Society earlier this week.

Halifax reported strong price increases in the South West, East Midlands and East Anglia and weakest in Scotland and Northern Ireland. It explained the buoyant property market was being supported by low interest rates, rapid income growth and a shortage of properties. The shortage of available homes is particularly acute in London and the south east. Price growth will ease in the coming months as wage rises slow and interest rates rise, Halifax added.

The opinion of the surgery, since we began in January 2001 in-fact, has been that there is every likelihood that there will be a reversal of house price inflation. Growth has been strong for about six years now, taking prices 30 - 40% above the long term trend, and as Halifax has stated, low rates, income growth and property shortages continue to fuel the boom. And it is a boom. While these environmental conditions prevail, there is nothing anyone can do to stop it. Even the Bank of England refuses to wield its only weapon, its only shield, and raise interest rates. It is such an unwieldy weapon that to combat property inflation, it would harm business at the same time. The "collateral damage" would be job losses, so the Bank sits on the fence while prices click up and up.

Remember, patients, rate rises are likely. If you have a mortgage, consider what effect 1 or 2 extra percent would have on your mortgage interest payments. Don't let Demon Debt in. Don't even ask for ID. Say, "Sorry, there's nobody home." Then slam the door on Debt for good ...with Money Surgery.

Mortgage Lending Hits New Record

(Sunday 23th September 2001 news story)

In the face of an oncoming global recession, mortgage lending continues to surge to a monthly record of £16.7 billion in August, according to the Council of Mortgage Lenders. However, the CML expects the recent incidents in America, and the subsequent collapse of world stock market indices and consumer confidence, to slow the market down.

Ironically, the very tool used by the Bank of England to help stimulate the economy also stimulates the mortgage market. Borrowers are inundated with continually improving mortgage deals as rates come down and they haven't been this low for 37 years. It remains to be seen if the unexpected rate drop of last Tuesday is enough to continue the mortgage boom given that consumer confidence has taken a severe hammering since September 11th.

Worsening Signs for the Housing Market

(Monday 6th August 2001 news story)

The housing boom is over with sales "drying up" as property prices hit a peak, according to data group Experian. The research company said house sales have dropped 35% in the past year, and look set to continue to fall, forcing estate agents and builders to reduce prices in order to "maintain momentum". "Although house prices have appeared to rise, the actual volume of sales has taken a nosedive", said Experian spokesman Bruno Rost.

Two Worrying New Debt Articles:

(2001 news story)

1. Borrowing Binge Alarm

We each owe credit of a whopping £3,000, it seems, according to market analysts DataMonitor. It said that Britons embarked on one of the greatest ever borrowing binges over the last five years with the total amount of consumer credit standing at about £128BN. This comes from five main areas, namely credit cards, motor finance, retail finance, overdrafts and unsecured personal loans. The total represents an average of £2,810 for every Briton of working age.

2. House Market Crash Fears

Latest mortgage lending figures imply that people are buying homes that they cannot afford. The largest age group seeking debt help are those in the 25 - 39 age bracket according to the Consumer Credit Counselling Service. Their problems will be compounded by a sharp fall in house prices and that is just what will happen according to independent think-tank Cambridge Econometrics. The average house price is now FIVE times the average income. That is exactly the ratio we had just before the last "Housing Crash" in 1989. The Financial Services Authority recently added to concerns after it complained of lax and over-generous lending by banks and building societies. The Bank of England has cut base lending rates this year three times, from 6% in January to 5.25% in May, fuelling the market for homes and homeloans.

Some of the people that went through the misery of home repossession and negative equity back in the early nineties have remarked to us how similar the current house price situation is to the situation back then. There are differences. We have significantly less unemployment now and significantly lower interest rates but both these factors could have the effect of fanning the fires of house price inflation to levels beyond the 5 x income ratio mentioned before. The economic climate is precarious. Rates are on a downward trend, for this year at least. Homeowners face an uncertain future. Some homeowners, those with longer memories, may feel able to predict what is around the corner. Strangely, the financial professionals that lend money for homes appear to have no memory. Gone are the days when new mortgagees had to pay an indemnity guarantee to the lenders to cover the lenders' backsides in case the home was repossessed and the lender lost money on the deal. This was all the rage in the mid-nineties, after the housing crash. Gone are restrictions on lax and over-generous lending by banks and building societies, as mentioned earlier. To cap it all, in the face of a stretched housing market and a slowing economy, we all carry Three Grand of debt around. Those who made it through the late eighties and early nineties who have long memories look back and learn lessons.
Don't look back in anger...I heard them say.

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Copyright 2000 - 2007 ©Kevin Anthony Jones. All rights reserved.

Please read on.
Saving Money: Switched on ways to keep hold of your precious cash.
Getting Money: Clever, barely legal ways of getting money.
How a house, open a bank account...
Future Dreams: Planning, after your debts have been eliminated.
Financial X-Ray: Let the nice doctors at Money Surgery X-ray your wallet.
Money News: The latest from the world of personal finance.
The best interest rates for saving and borrowing.
Feedback: Write to the Surgery.
Contacts: Other people who may be able to help, if we can't.
Money Surgery.