Britain is essentially a nation of homeowners unlike countries like the Swiss who prefer to rent. Over the decades, property has proved to be a sound investment but now is not the easiest time to acquire a first home.
Many trying to buy their initial bricks and mortar have been spurred on by the Government’s special stamp duty concession which means exemption until March 24 from the one per cent on homes purchased at £125,000-250,000.
Below £125,000, there is no tax. Stamp duty is imposed at three per cent on properties selling for £250,000-£500,000, at four per cent for £500,000-£1m and at five per cent above that level.
Last month first-time buyers flooded back to the market with lenders providing the highest number of home loans – 58,728 – since December 2009.
House prices have jumped almost 60 per cent in the last decade although they have fallen by 15.1 per cent in the last five years. This shows that property should be regarded as a long-term investment and indeed is often – through equity release – a source of retirement income.
Research from the Halifax shows that homes are at their most affordable level for 15 years, calculated as a proportion of disposable earnings since 1997. The typical payment for a new borrower stood at 27 per cent of disposable income in the last quarter of 2011 – well below the 37 per cent average recorded over the past 27 years. Halifax’s housing economist, Martin Ellis, says this is the result of falling property prices and reductions in mortgage rates.
Both Knight Frank and Capital Economics forecast a five per cent fall in property prices this year whilst Savills predict a two per cent drop with a widening north-south gap. On a more optimistic note, the online property portal, Rightmove, says national asking prices will rise two per cent but that there will be a reduced choice as potential sellers hold back for better days.
Before even viewing potential homes, obtain agreement in principle as to the maximum sum that can be borrowed and any lending restrictions. Seek the help of a good independent financial adviser (IFA) and ask about their experience in the mortgage sector.
The language can be confusing and sometimes applicants wince at the ‘arrangement fee’ requested. It’s vital to ask what the annual percentage rate (APR) is for each package in order that there can be a proper comparison. The APR is the interest rate for a whole year (annualised), rather than a monthly rate.
Have all paperwork up to date, not only to show up to six months’ current account bank statements but sources of income, tax papers (including P60 end of year earnings certificates), utility bills and details of other regular outgoings, such as pension contributions and any hire purchase or loan arrangements.
Detail any credit cards. Lenders also require a driving licence or passport.
Do not be surprised if loan providers ask some unusual questions to establish ability to repay the interest and how the principal will be refunded. Santander, for example, the second largest home lender, is now asking about expenditure on Christmas and Easter gifts.
If the paperwork is all ready, brokers should be able to obtain specific responses from lenders within 14 working days but often in less time. When time is important – such as withdrawal of the stamp duty concession – they will probably know which solicitors can act speedily. However, sometimes even the best laid plans come unstuck when there is a chain of buyers and sellers or if the owner of a property suddenly dies.
Work out how the capital will be repaid. The most flexible, tax-efficient way is to build up annual Individual Savings Accounts (ISAs) but you need to be single-minded to not touch the money. Fortunately, the number of repossessions is falling. The Council of Mortgage Lenders reports that 36,200 homes were repossessed last year, which is the lowest annual figure since 2007.
Lenders vary on the level of deposit required for a first mortgage. If you do not have sufficient capital, lenders may accede to such requests but require a capital repayment plan rather than an interest only arrangement.
The UK’s largest mortgage lender, Lloyds – which owns Cheltenham & Gloucester as well as the Halifax – will not now accept cash savings as a way of repaying interest-only loans. It also says that equity ISAs must be worth at least £50,000 and it will then take 80 per cent of such assets into account for borrowing calculations.
Woolwich, the mortgage arm of Barclays, is now not taking potential equity ISA investment growth into account when calculating the amount that needs to be saved on interest-only loans. However, it will accept that endowment plans can grow by up to six per cent annually. It is also considering introducing annual checks to ensure homeowners are on track to repay.
The FSA is proposing lenders check at least once during the term to ensure repayment arrangements are properly in line.
Already both Skipton and NatWest, part of the Royal Bank of Scotland, have stopped offering interest-only mortgages to first-timers.
Make sure that you have adequate money to undertake any essential items at the property which may be required by the lender.
Obtain your own full RICS survey and do not rely on a budget one offered or the lender’s short report. It will help to identify work to be undertaken and should draw attention to any problems.
Remember to ask if any loan can be transferred to another property and, if so, if any additional charges apply.
Lenders are charging first-timers considerably more than those already on the housing ladder. Two of the best which require only a 10 per cent deposit are:
n First Direct (Leeds based HSBC subsidiary) with a four per cent APR (4.19 per cent for two years with £999 fee)
n HSBC on a 4.2 per cent APR (4.49 per cent for two years with a £599 fee, reverting to variable rate, which is currently 3.94 per cent for rest of the term)
Discuss a tracker mortgage where there is one pot for savings, earnings, mortgage interest payments or other outgoings. With an interest rate linked to the Bank of England, this is likely to be the low cost option for some time to come.