Whether you plan on buying a new home or plan to build it yourself, you need to first evaluate the total cost of buying or building a new house. Secondly, find out how much money you have in hand. The difference is the money you need to borrow. Then decide which home financing option suits you the most.
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Before we look at the various home financing options that are available in the UK, here are some terms that you should know.
Deposit: This is the money you need to pay when exchanging contracts. Usually, 10% of the purchase price is the minimum amount payable. If the purchase price is £500,000 then the deposit amount is £50,000.
LTV: Loan-to-Value or LTV is the loan amount with reference to the value of your property. If you put down 10% of purchase price as deposit, then the LTV would be 90%. Lenders favor lower LTV mortgages.
In short: put down a larger deposit, borrow less, and get better benefits from lender.
Fees and duties: You will have additional costs like valuation fees, agreement fees, solicitor’s fees, estate agent fees, surveyor fees, registration fees, taxes and so forth. For purchase price exceeding £300,000, there is Stamp Duty.
Then, there are moving costs, utility costs, touch-up/modification/repair costs even in a new home. For a complete picture of fees and costs, it is better to get in touch with local real estate agents in the area where you are looking to buy property.
Once you get a fairly good estimate of the costs involved, you can look at the home financing options.
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1. Bank Mortgages
Banks are the leading mortgage lenders in the UK. Bank mortgages typically have two types of interest rates—Fixed or Variable. With the fixed rate, the interest component of your monthly repayment installment remains fixed. The outstanding principal reduces at the same rate for the tenure of the loan.
With a variable interest rate, the interest rate is flexible and follows the base rate of the Bank of England. If the base rate goes down, your interest rate also comes down. For a certain time in your loan’s tenure, a larger proportion of your monthly repayment installment will go towards the outstanding principal. This helps in reducing the outstanding principal at a faster rate. On the flip side, interest rates can go up as well. In that case, for a certain duration, the larger proportion of your monthly installment goes towards the interest, not the principal.
Banks do not accept all financing requests. You need a robust credit history and should be able to demonstrate adequate cash flow. It is best to approach banks individually to understand their rates and the benefits offered.
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2. Mortgage Companies
In the UK, there are several companies specializing in finance and insurance that also provide mortgages. Interest rates of such companies are not linked to the base rate of the Bank of England. The company will have its own variable rate system; only those rates will be applied to your repayment agreement.
Mortgage companies tend to ask for higher deposit money to be arranged than banks, so home buyers should prepare for this eventuality.
As with banks, it is best to approach such companies individually to understand the mortgage offer that is most suited to you.
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3. First Time Buyer Mortgages and Guarantor Mortgages
For many of us, saving up a large deposit is not possible. With First Time Buyer Mortgages you can get high LTVs. Lenders are willing to cover up to 95% of the purchase price. Some banks and several finance companies have this mortgage on offer.
You can even get up to 100% LTV with a Guarantor Mortgage. In this, a family member or a friend can offer their personal savings or their property as collateral against your mortgage. They co-sign the mortgage agreement. If you are unable to repay the loan, the co-signer is responsible for the repayment.
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4. Help to Buy Programs
The UK government also has programs to ease the home financing process. Under Help to Buy, the government loans you up to 40% of the purchase price to put down as deposit. This loan is interest-free for five years. You only need to find financing for the remaining amount.
With Help to Buy ISA, you can set aside up to £200 every month in your bank account towards your home buy deposit. The government will add a 25% bonus on such savings.
Right to Buy allows you to buy the council house you have lived in for more than 3 years. You may get up to 70% discount on the purchase price under this program. Mortgage providers are known to consider this discount instead of a deposit.
Shared Ownership allows you to buy between 25% to 75% of the property share at the outset. The balance share can be purchased when you can afford it.
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5. New Build and Self-Build Mortgages
New build mortgages are given by the property developers. When you buy a property from a developer, they lend you the deposit money. You need to remember that in such case you have to repay both the developer and your mortgage provider on a monthly basis.
Self-build mortgages are applicable if you develop the property yourself. The loan amount is not handed out as a lump sum. It is handed out in stages—land purchase, foundation laying, build up to eaves, roof ready, interior walls, and then at final completion. Each stage is evaluated for completion before the next sum is released.
While you need to put down a larger deposit, you don’t need to pay stamp duty on the built-up property. Another advantage is that self-built homes tend to appreciate in value quickly. Your property will typically be worth more than it costs to construct.
To reduce the stress from the home financing process, hire a local real estate agent. If you are looking for a house in Wapping, for example, then estate agents in Tower Bridge can get you the best financial information and assistance. From property evaluation to reports and taxation to mortgage agreements, local estate agents can accurately guide you in your home buying quest.