If you’re considering buying your first home, the most important step is to consider how your finances will be affected and how you can secure the best mortgage deal for your needs.
Here are our top tips for ensuring you are ready to buy before you begin your house hunt:
- The first thing you need to do is work out your budget. You can use an online mortgage calculator for a rough idea of the amount you will be able to borrow and how much it will cost, based on your savings and your income.
- In addition to your deposit, you’ll need to have enough saved to cover the associated costs of buying a home, such as legal fees and a lump-sum Land and Buildings Transaction Tax.
- Get a copy of your credit rating so that you can see what potential lenders will see when considering your application. If it’s not looking great, there are some simple steps you can take to try and improve it. Similarly, if there are any errors, seek to have these corrected before you apply for a mortgage.
- Pay off as much of your existing debt as you can afford before applying – large amounts of unpaid debt can give lenders the impression you are financially irresponsible.
- Gathering all the paperwork you will need for the application process in advance can help prevent potential delays. This should include bank statements and payslips from the past three months, proof of any bonuses or commission and your latest P60 tax form. You may require additional documents depending on your situation.
- In addition to your income, lenders will assess your monthly outgoings to consider whether or not you would still be able to afford your repayments if interest rates were to rise. It is best to cut back on your spending in the months before you apply so that lenders can see your finances will be able to cope with such a rise.
- The bigger the deposit you are able to save, the less interest you will have to pay each month. If you can significantly increase your deposit in the next few months, it may be worth holding off until you become eligible for a deal with a lower interest rate.
- If you are unable to save a substantial enough deposit, look into government initiatives which are aimed at helping first-time buyers get on the property ladder.
- Once you have a rough idea of your monthly repayments, consider all of the additional costs of being a homeowner such as building and home insurance, furnishings, general maintenance, and potential increases in utility bills and council tax.
- Before you begin house hunting, you should seek an Agreement in Principle. This not a binding offer of mortgage but an indication of a lender’s willingness to give you a mortgage and the amount they will allow you to borrow before you begin viewing homes and putting in offers. The agreement is non-binding and you can continue to shop around for a better mortgage deal as you search for your dream property.
Christmas and New Year is a time of reflection for a lot of people who see moving into a new calendar year as a chance to make changes and grab opportunities, which is of course why so many properties go on the market in the first few months of the year as people decide to make fresh starts in a new home.
If you are thinking of selling up and buying a new home in 2016, have a read of our top tips on things to consider if you’re thinking of making the move:
- The biggest question of all is – can you afford to sell? Get your home valued so you are confident in what it is worth. If you are armed with this info you will know how much you’ll be left with once you’ve paid off your current mortgage. This will allow you to calculate the amount you can afford to put towards a deposit on your new property.
- Look around for the best mortgage rates and deals. Chat to a mortgage advisor about your best options to establish if moving home is affordable.
- Decide whether you want to buy a new home right away, or if you should consider renting for a time. While renting can be more costly, it will also give you some breathing space to find your next perfect home to buy, rather than feeling pressured into buying somewhere once you get an offer on your current property.
- Choose your estate agent and solicitor wisely! Check out www.gspc.co.uk where you can find a list of GSPC member firms in your local area as well as look at properties currently on the market.
- Do your research and get to know the local market place. Your GSPC member firm will be able to help you with this but it is always wise to be armed with knowledge on what sort of prices similar properties are going for in your area.
- If you have some time off over Christmas and New Year, why not take the opportunity to get your home ready for potential buyers in 2016? You don’t need to spend a fortune. A declutter and fresh lick of paint can be enough to brighten up your home and make it more attractive to viewers.
- Remember a ‘For Sale’ sign in the front garden won’t be enough to sell your home. Exposure is key. This is where a GSPC member firm will come into its own with a variety of marketing tools to promote your home. As well as advertising your property for sale on gspc.co.uk and in the GSPC Property Guide you will also have the opportunity to potentially showcase your home on the official GSPC Facebook and Twitter pages and have further potential to have your home featured as a spotlight property within the Property Guide.
- It can be a difficult process for some people, but try to keep emotion out of the way when preparing to sell. You have poured years of your time into making your house a home, but remember your taste might not match with that of your viewers. With this in mind, be prepared to ‘white wash’ your home to an extent ahead of viewings, avoiding too many personal touches. You want potential buyers to be able to envisage living there, which can be difficult if someone else’s personality shines through from every room.
- Make sure you are fully aware of all the legalities, fees and paper work involved in selling and buying. As a solicitor and estate agent you’re a GSPC member firm will be able to help you with this but it is worth making a list including mortgage requirements, Lands and Buildings Transaction Tax, solicitors’ fees, valuation costs etc so you aren’t met with any surprise costs.
- Take your time! Do your research and take advice from valued advisers. Don’t be pressured into accepting an offer lower than what you are comfortable with.
You wait ages for some news and then two interesting new reports come out at once.
Although they were issued by two very different organisations (Registers of Scotland and The Bank of England) when you put them together, they give an interesting insight into what is happening in the property market.
First up is the review of the last 10 years in the Scottish property market issued by Registers of Scotland. You can find the report here.
The obvious thing to take away from the report is that averages are no guide to what has happened to the value of your home. Prices in Scotland over the last 10 years are up, the report says, by 32%. But in Glasgow, the increase is just 6% while in Aberdeen it is 83% (see graph).
The more interesting point, however, is that the number of transactions is down by over a third over the last decade. Even in areas where prices have risen sharply, volume of sales are down by as much as 50% compared to 2005 (see graph). For more detail, you can see the number of transactions per month in Scotland from 2003 onwards here.
The question is why? And here the Bank of England report might help. The Bank’s latest stats on Mortgage Lenders and Administrators show that overall lending is markedly lower post-recession. Approvals to buy a home (rather than re-mortgage) fell by almost 38% between 2007 and 2014.
In short, the decline in lending almost exactly mirrors the decline in transactions.
Perhaps understandably, lenders today are significantly more risk averse than they were. You can see this most clearly in the figures for lending at more than 90% loan to value. Eight years ago, around 14% of all mortgages issued were for purchases where the loan made up 90% or more of the house price. By the start of this year, 90% loan to value mortgages accounted for just over 3% of all loans issued (see graph).
Yet it is this group; first time buyers, people trading up to family homes, people with little capital but perfectly good jobs, who drive the market. Throttling back on mortgages at over 90% loan to value locks them out of the market and affects everyone else who aspires to move.
Of course, no-one wants to return to the cavalier days of 110% mortgages, but the evidence today is that mortgage lending is not risky. Indeed, the number of mortgages in arrears is lower today than it was in the heyday of 2007 (see graph).
Yes, interest rates will rise at some point and yes that will have an impact on household budgets. But the latest City consensus is that base rates will only reach 1.4% in three years’ time (see graph).
In other words, the City expects interest rates to rise by just 0.9% by the middle of 2018. And the ‘spread’ – the difference between base rates and the interest rate charged on a mortgage – has been falling steadily for some time, so even that increase may not feed through in its entirety to mortgage interest rates.
In short, the risk aversion of lenders and the increasingly tough rules set by the Bank of England are locking some perfectly credit-worthy buyers out of home ownership and making life more difficult for everyone who is already a home owner. The property market will only return to proper health when regulators and banks take a more common-sense approach.
For the first time in September this year, mortgage approvals were lower than they were for the same month last year (see table).
Approvals have been falling gradually for most of this year, but September is the first month in which they were lower than the same month the year before. Moreover, it seems likely that this will also be true for the next three months, partly because there was a steep rise in approvals at the tail end of last year which won’t be matched this year.
It’s hard to avoid the conclusion that mortgage lenders and the Bank of England have stamped harder on the brakes than was necessary.
No doubt, some borrowers are being put off by fears of increases in interest rates, but it’s unlikely that the slow-down in approvals is entirely attributable to consumer concerns about rising mortgage payments.
It seems much more likely that the Mortgage Market Review (MMR, you can find out more about it here) is having more of an impact than expected. And new rules on the proportion of mortgages that can be made available at high multiples of income (more here) which came in to force in October may have made lenders more cautious still.
The MMR was designed to ensure that borrowers could afford to repay their mortgage, even if interest rates rose sharply. All of which makes perfect sense.
But the way the rules are currently applied means that lenders make no allowance for the ability of a borrower to reduce their spending elsewhere if their mortgage costs rise.
Indeed, so strictly are the rules being applied that Pensions Minister Steve Webb has written to the Council of Mortgage Lenders urging banks and building societies not to take pension payments in to account when calculating mortgage affordability (more on that here).
And he’s right. Pension payments are discretionary – you can suspend them if you need to. The same is true for a raft of other things. The Money Advice Service, for example, says that lenders will take in to account your spending on things such as cinemas and nights out, TV subscriptions and gym membership. But these are exactly the sort of things you drop if other financial commitments – such as a rise in mortgage costs – make it necessary.
The rules requiring lenders to calculate affordability in the event of a rate rise are also unnecessarily draconian. The Bank of England requires lenders to assess affordability if the interest rate payable on a mortgage rose by 3% over the next five years. But the Bank itself acknowledges that the City expects rates to rise by just 1.75% over the next two years and Governor Mark Carney has said several times that rates will not return to their ‘normal’ levels for many years.
To be fair to the lenders, they are terrified that the Bank of England will penalise them in the event of defaults if they can’t prove that they took every possible item of expenditure in to account. But the impact of the way they have implemented MMR is to deprive perfectly creditworthy borrowers of the opportunity to buy their home.
They and the Bank of England should get together to agree that discretionary spending is not included in the affordability calculations and to reduce the potential rise in interest rates that lenders have to allow for.
Interest rates on fixed rate mortgages have been falling recently – despite expectations that the Bank of England will start to increase base rates at some point next year.
It means that you can now get a five year fixed rate mortgage with a sub 3% interest rate and a two year fix with an interest rate of less than 2%. What’s going on?
In part, lenders have put back their expectation of when the Bank will start to increase rates to some time early next year. Until recently, they had assumed that it would be November this year.
But more importantly, this seems to be an unexpected result of new rules on mortgage lending (known in the industry as MMR – it stands for Mortgage Market review) designed to make sure that borrowers can afford their mortgage payments even if interest rates rise. You can find out more about the MMR rules here.
That was followed in June by the announcement that the Bank of England would set new rules to limit the number of mortgages lent to borrowers at more than 4.5 times their income. You can find out more here. The new rules come in to force next week (1st October).
The overall effect has been to limit the ability of banks to grow their business by lending to less creditworthy borrowers or at higher multiples of earnings. All of which has intensified competition for those customers who pass the more rigorous affordability tests now in place.
The net result has been a reduction in rates charged to creditworthy borrowers. Pretty much every major lender announced at some point in September that their fixed rate deals would be cut, including big names such as Barclays, Nationwide and Halifax as well as smaller players such as Virgin Money and Leeds Building Society. Nationwide has even come out with a promise that it will match the lowest rate offered by its six biggest competitors to existing customers thinking of re-mortgaging with another lender.
So, if you are a Nationwide customer and you see a fixed rate on the market lower than you are currently paying, why wouldn’t you tell the building society that you are thinking of switching lender?
The Council of Mortgage Lenders (CML) says that re-mortgaging activity is relatively weak as the prospects of a rise in the base rate meant rates on new mortgages are no better than existing rates. But with more competition between lenders, now might be a good time to take another look.
To judge from the figures, you would think Help to Buy is just for first time buyers.
Stats issued by the Treasury show that almost 8 out of 10 home buyers who took out a 95% mortgage through the Help to Buy mortgage guarantee scheme were first time buyers. Earlier reports suggest that the same is true for the equity loan version of Help to Buy. You can find a brief description of both schemes here.
In fact, the scheme is open to everyone – including existing homeowners – and it’s a bit of a mystery why so few movers are taking advantage of the scheme.
One of the attractions of a 95% mortgage (which is what Help to Buy is all about) is that it gives existing owners with little equity in their home the chance to move to a larger home if circumstances make that desirable.
Say, for example, that once you have sold you home you are left with £15,000. A mortgage that requires a 15% deposit would give you a maximum purchase price of £100,000. That probably means that its not worth moving.
But with the same deposit, a 95% mortgage would give you a maximum purchase price of £300,000 – which opens up a plethora of choices.
In short, a 95% mortgage can be the difference between staying put and moving to a home that could more easily accommodate a growing family.
And with the property market in the doldrums in recent years, I suspect that there are quite a lot of frustrated would-be movers – newlyweds, proud new parents and expanding families – trapped in a property that doesn’t meet their needs or aspirations.
So, why is Help to Buy being using almost entirely by first time buyers?
There are a number of possible answers and please do let me know what you think using the comments section below. But I can’t help thinking that part of the answer is that many would-be movers assume that Help to Buy is not for them. If that’s right, perhaps it is time to think again?
Home movers in Scotland have increased the amount they borrow to buy a home by £8,000 since the first quarter of this year. First time buyers borrowed, on average, £5,000 more than they did in the first three months of this year.
Stats released today by the Council of Mortgage Lenders show that the average size of a mortgage in Scotland grew by around 6.5% for home movers and 5.5% for first time buyers in the last three months. That’s pretty much in line with the average increase in prices over the same period. Registers of Scotland says that prices rose by 5.7% in the last quarter (with significant regional variations).
So, are rising house prices pushing Scottish buyers in to taking out increasingly unaffordable loans? Er, no.
The same report showed that average mortgage payments relative to pre-tax income actually fell a little in the last quarter. The proportion of gross income taken up by mortgage payments for first time buyers in Scotland fell slightly from 16.9% to 16.7% – well below the national average of 19.4%. For home movers, mortgage payments now account for 17.2% of income compared to 17.3% three months ago.
So, how is it that buyers are borrowing more without sacrificing a greater proportion of their income?
Firstly, interest rates are low and competition between lenders is helping to keep them there. Mortgage Strategy, the leading trade publication for the industry, reports that banks are cutting mortgage rates as competition for credit worthy borrowers heats up.
Secondly, it looks like incomes have grown. The CML reports that the average household income of a first time buyer has risen by almost £2,000 between the first and second quarters of the year from £30,700 to £32,100. The same is true for home movers whose typical household income has grown from £47,400 a year to £49,100. As a result, the ratio of house prices to incomes in Scotland has remained virtually unchanged.
True, not everyone is seeing their income rise and no doubt buyers will tend to be those who are seeing an improvement in their financial circumstances. Nevertheless, and for all the talk of an unsustainable house price boom, there’s no sign yet that buyers in Scotland are experiencing an ‘affordability crunch’.
As it happens, I briefly met the Governor of the Bank of England recently. Yes, Mark Carney himself, in the flesh.
And I had meant to tell him an important story about interest rates and how they influence the property market, but never got the chance. So, I’ll tell it here – it’s worth hearing and I’m sure he is an avid reader of this blog.
Way back in 2004, the Bank of England was very gradually pushing base rates higher. Rates rose from 3.5% to 4.5% between July 2013 and June 2014. The then Governor, Mervyn King, visited Glasgow in June and gave a speech to the CBI.
In it, he said “Anyone entering or moving within the housing market should consider carefully the possible future paths of both house prices and interest rates”.
The next day, the telephones in estate agencies across Glasgow fell silent. One agent assumed there was a fault with its telephones and complained to BT. The truth was that the governor’s widely reported comments had had an immediate impact on the property market and buyer intentions without the Bank having to change rates at all.
The story is important because it illustrates the enormous influence the Governor of the Bank of England can have even without any change in rates.
Fast forward to this year and another Governor of the Bank, Mark Carney, is back in Glasgow giving a speech that, among other things, confirms that any increase in interest rates will be ‘gradual and limited’ You can see the speech here.
But I wonder whether that message has really got through.
The point is that Governor Carney really means what he says about interest rates. In the same speech, he points out that: ‘History shows that the British people do everything they can to pay their mortgages. That means cutting back deeply on expenditures when the unexpected happens.’
In other words, the Bank knows that a significant increase in interest rates (and so mortgage costs) would have a disproportionate effect on consumer demand which, in turn, could damage the speed and scale of the recovery. To put that in context, a recent report from Verum Financial Research suggested that for every 0.5% increase in base rate will cut £4.8bn from householdspending.
And that is exactly why the Bank will be so cautious about increasing rates. That is even more true because wage growth has been so slow. Without an increase in real wages, any increase in debt costs will come straight out of consumer spending, reducing growth at a time when the economy remains fragile.
The latest inflation report from the Bank (you can find it here) suggests that the markets think rates will ultimately peak at 2.25% – and only then after several years. That’s less than half the long term average.
Much of the commentary in the media assumes that – when rates do start to rise again – the Bank will choose to do so in increments of 0.25%. For what it’s worth (which is not much, I admit), I suspect that the Bank will increase the base rate by 0.15% at a time. Even then, it might allow a considerable gap between one increase and the next.
Finally, I suspect that the real trigger for an increase in rates will be rising real wages. Wage increases are important because they have the potential to drive inflation (if not matched by improvements in productivity). But they also give the indebted consumer a chance to cover higher repayments. In other words, rates are likely to rise at exactly the point at which we feel we can afford it.
So, if you are worried about increases in interest rates, read his [Mark Carney’s] lips – he really means it when he says any changes will be gradual and limited.
In a world where aspiring home owners, especially first time buyers, find it difficult to amass a large deposit, high loan to value (LTV) mortgages provide a vital route in to owner occupation. In particular, they give those without financial backing from their family the chance to buy sooner rather than later.
That’s why the news that Help to Buy Scotland (the scheme that provides 95% mortgages for new build homes through a 20% government interest free loan) ran out of money in mid-July was potentially so important. Here’s how the BBC reported it: http://www.bbc.co.uk/news/uk-scotland-28331541. And you can find GSPC’s summary of the scheme here.
So, does that mean the end of 95% loan to value mortgages? Err, no.
First things first, Help to Buy 2 is still up and running. This is the UK wide scheme that provides 95% mortgages by offering the lender a government backed guarantee for 15% of the loan value, provided the buyer has a 5% deposit (and can afford the repayments). The government guarantee – which lasts for seven years – provides the security the lender needs to offer a 95% mortgage.
In some ways, Help to Buy 2 is more valuable than Help to Buy Scotland because it can be used to buy established as well as new build homes. It has also prompted lenders to offer 95% LTV mortgages without taking up the guarantee from the government (because there is a cost to them for taking part in the scheme). Just Google ‘95% mortgages’ if you want to know more.
In short, it’s still possible to get a 95% LTV mortgage provided you can show to your lender that you can afford the repayment – even if interest rates rise.
Even so, Help to Buy Scotland was hugely popular. Not only does it allow you to buy a brand new home with just a 5% deposit, it also provides what is effectively an interest free indefinite loan of 20% of the purchase price. And there is no incentive to pay down the loan. It remains interest free as long as you live in the house.
In short, it means you can buy a home and only pay interest on 80% of the mortgage. Of course, you have to pay the loan back if you sell (plus an equivalent share of any capital gain), but the advantage in lower mortgage payments has been too much for many to resist. It also has the added attraction that lower mortgage payments and a contribution of 20% to the purchase price can help you to buy a larger house than you might otherwise have been able to afford.
No wonder the scheme ran out of the money allocated to it for this year so quickly.
When the scheme was closed for the rest of 2014, the government described this as a ‘pause’ and that is not such a bad description.
Help to Buy Scotland will be available again in the next financial year (starting 5th April 2015), so if you are planning to buy a new home with an entry date of April or later next year, you could still qualify. No doubt builders will start advertising ‘Help to Buy’ properties for sale with a completion date of April 2015 some time this autumn.
Given the huge uptake, the chances are the Scottish government will want to make the scheme somewhat less attractive by the time the next tranche of money becomes available. That could mean reducing the maximum value of properties that can be bought using Help to Buy (the current cap is £400,000) or limiting it to first time buyers or starting to charge interest on the loan at some point in the future (as happens with the equivalent English scheme). A less likely option would be to reduce the size of the loan to 15% of the property value.
Even so, it’s likely to remain a pretty good deal. So, if you want to take advantage of it when it is next available, you’d better start planning now.