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4. Expert Mortgage advice

Tighter lending practices have made it more difficult to secure a mortgage. As a potential buyer, you need be well-informed to ensure you get a deal that’s right for you.

A. A brief guide to key legal terms

Legal jargon can be confusing. When you’re buying a house, it can also be daunting. You want to understand exactly what the experts and legal documentation are referring to. As an overview, here’s a breakdown of key terms you’ll hear:

Leasehold: If you buy a leasehold property, you own it for a fixed time with details set out in a legal agreement with the freeholder. Leases tend to be long-term, around 90 to 120 years, although they can be as high as 999 years. When a lease has years remaining, it can be bought and sold. However, you need to be wary of leases that have 90 years or less because you’d need to think about lease extension, which can be expensive.

Freehold: When you buy a freehold property, you own it forever – unless you decide to sell. You own the house and the land it stands on, without any lease agreement.

Party walls: Walls that are shared by two or more owners. It could form part of one property or more, but belong to different owners. It could be the wall of a house, or a garden wall, for instance.

RESTRICTIVE COVENANTS: These are clauses in a deed or lease that limit what the owner of the land or lease can do with the property. Restrictive covenants vary and could prevent you from building another property on the land, or even stop you from keeping chickens. It’s important to note any in your contract before signing.

CONVEYANCING: Refers to the legal transfer of home ownership from seller to buyer. The conveyancing process is usually carried out by a solicitor or conveyancer.

LAND REGISTRY: A government department which registers the ownership of land and property in England and Wales. Anyone buying a property must register as the new owner of registered land or property, or to register the property for the first time.

TRANSFER OF EQUITY: When you need to change the legal ownership of a property with a mortgage, you’ll need a Transfer of Equity. It allows you to add or release someone from the mortgage - for example, if you separate from a partner and need to remove them from a jointly-owned property.

MORTGAGE IN PRINCIPLE: Based on your income and outgoings, lenders will give you an indication of the size of mortgage they’d be prepared to give you. They’ll provide it as a certificate or statement, which you can use to show, in theory, you’re able to afford to buy a property. This could make you a more attractive buyer.

VALUATION FEE: A fee paid to the mortgage lender to cover the cost of the valuation of a property by a surveyor. This must be done before the mortgage is granted, although not all lenders will charge you for it.

STAMP DUTY: Full name Stamp Duty Land Tax (SDLT). This tax is collected by the government on every home costing more than £125,000. It starts at 1% and rises to 12% for homes costing over £1.5 million:

House Price Stamp Duty
Up to £125,000 0%
Over £125,000 to £250,000 2%
Over £250,000 to £925,000 5%
Over £925,000 to £1,500,000 10%
Over £1,500,000 12%

B. Deciding whether to use a mortgage broker

The role of a mortgage broker is to find the right finance deal for you. They should know the market well and be up to speed with the latest deals, so can be helpful securing a mortgage with lenders. If you’re in an unusual position – on freelance earnings, for example – they’ll be better placed to know which lenders are used to offering suitable mortgages.

A good mortgage broker will offer you invaluable help and guidance, acting as your advocate with mortgage lenders. As such, many people now receive mortgage advice to ensure they’re better informed about the choices available to them. Although it’s a service you’ll have to pay for, their knowledge of lending conditions of each mortgage provider, as well as your personal financial situation, is invaluable when making recommendations tailored to you.

It’s not only mortgage brokers who can advise you, though. Financial advisors can provide guidance, as can lenders. However, with the latter, bear in mind they’ll only recommend their own products.

Getting advice can help arm you with the following necessary information:

  • The lender’s name
  • The interest rate
  • Interest rate type (fixed or variable)
  • The length of the mortgage term
  • The value of the property
  • The amount you want to borrow
  • Whether you want an interest-only or repayment mortgage

A spokesperson for the FCA explained to the Money Supermarket: “If you choose to get a mortgage without advice, your lender or advisor must tell you in writing or in conversation about the legal protection you will lose. This may include the right to complain about how suitable the mortgage is for you.”

C. What lenders will want from you

The Financial Conduct Authority (FCA) sets rules to ensure lenders act responsibly, and only offer people finance which they can pay back – including mortgages. In the past, it was arguably easier to secure a loan to buy a home. But when people struggled to make repayments and fell behind – or even had their property repossessed – something had to change.

Nowadays, lenders have to look closely at your finances to assess whether you’d be able to cope with the mortgage you apply for, on top of your existing monthly outgoings. To decide, a bank will ask you for the following details:

  • Your bank statements
  • Whether you have any existing debts, and details
  • Proof of your income (at least three years’ accounts if you’re self-employed)
  • Information on your outgoings, including:
    • Childcare costs
    • Pension contributions
    • Food costs
    • Holiday spending
    • Extra expenses such as a gym membership or what you spend on a night out

It’s surprising lenders will consider such detail as what you’re budgeting for holidays, or how much you’d spend at a friend’s birthday - but it’s not a personal judgement. Their priority is to lend responsibly. They’ve also got to establish whether a borrower could afford repayments now, as well as if the current interest rate increased.

To do so, they do a stress test with market expectations of rate movement, generally over the next five years. For example, if you secure a deal with a 3% interest rate, you might need to show you’d be able to afford repayments even if that rate doubled. What does this mean for you? Some people might not be able to borrow as much as they initially thought, and those with low incomes and small deposits could also struggle.

There are some things you can do to make it an easier decision for lenders, such as:

Check your credit score. All lenders will check if you’re a good credit risk before they lend any amount of cash. It’s worth finding out what they’ll see before you start applying. This gives you time to make improvements.

Have a credit card – and pay it off every month. Major lenders use computerised credit scoring systems to assess your applications. To make it easy for the system to see you’d be a good person to lend to, have one or two credit cards (and pay them off in full every month) to prove you can handle credit.

Ensure you’re on the electoral register. Having a permanent address and the ability to register is another way of improving your credit score.

Pay off any debts. Make sure you don’t miss any credit card payments or loan repayments, as they’ll stay on your credit record for six years. Even if you’ve kept up with your repayments, and still have outstanding debts, it’s worth seeing if you can clear them before you apply for a mortgage. This gives you the best chance of being successful. However, there’s a balance to be struck. Lenders consider all your regular monthly financial commitments, so overpaying on debts could reduce your net disposable income from a lender’s perspective.

A lot of these things you can do whilst you’re saving up for a deposit. Indeed, the more you can save, the better. Unless you qualify for one of the first-time buyer schemes, you’ll need to save at least 10% of the purchase price. The more you save, the better mortgage deals you’ll be able to secure. Buying your own home is a tough, but rewarding, commitment.