How to buy a house

This guide addresses one of the most exciting and most widely underestimated things in life: buying you own house.

You are done with renting and having to deal with the whims of mean landlords who refuse to renovate the rotting bathroom and try to increase rent by 10% every year. You will be your own landlord at last.

But before you start writing the invitations for your house-warming party, there are a lot of things to consider; buying a house is more complicated than it might seem at first.

In order to make buying you own property as pleasant, safe and unfussy as possible for your, we have put together a guide to lead you through the process. It will provide you with an overview of all the things you will have to taken care of and advice on how to deal with difficult issues.

The Price Range

The first thing you will need to figure out is how much you can actually afford to spend. Buying a house is a cost-intensive matter. Apart from the actual price of the house, there is a whole lot of other one-off costs you have to consider. Therefore, before starting off on the much more interesting and thrilling house-hunting, you will have sit down and calculate all the costs that will incur, and how much money you have at your disposal.

How much can you borrow?

At this stage, you have to decide on a mortgage lender to get an “Approval in Principle”. The lender will tell you how much they are willing to give you, which helps you estimate how much you can pay for your property. Furthermore, the Approval serves as a guarantee to the Estate Agent and the potential vendor that you have obtained the necessary funds; this make dealing with them much easier..

You do not have to decide on your mortgage type yet. However, you might want to get informed and read about the Mortgage Code which sets out minimum standards in order to protect the borrower. For details on the code or any other enquiries regarding mortgages please contact the Council of Mortgage Lenders.

Council of Mortgage Lenders
3 Savile Row, London, W1S 3PB
Tel: 0207 437 0075
www.cml.org.uk

It is advisable not to go for the first mortgage you are being offered, but to shop around for a bit. You can compare mortgage lenders yourself by visiting banks and building societies and using internet resources. If you would rather pay someone to do it for you, employ a mortgage broker who will search a big database of lenders to find a suitable loan for you.

In order to calculate the how much they are willing to lend you, the lender will require:

  • evidence of your income and employment status
  • evidence of financial commitments, such as mortgage and bank statements
  • information form credit reference agencies, your employers and your landlord

Another important aspect the lender will take into account is how much you are willing and able to pay as a deposit (they are not going to cover the entire cost of the property). If the lender covers more than 75% of the property price, you might have to pay an insurance premium called Mortgage Indemnity Guarantee.

A bit about the costs involved

This list of one-off costs that will incur during the house-buying process provides you with a rough estimate of the expenditures you will have to cover. Please note that in case one party withdraws in the middle of the buying process, for whatever reason, some costs (e.g. for surveys and conveyancing) will incur twice. It is advisable always to take all eventualities into account when making your estimates.

Deposit

You will not be able to borrow the money to cover the entire price of the property. Instead, mortgage lenders usually require you to put down at least 10% of the price. Note that if you put down less than 15% of the property price, you might have to pay additional “risk interest”.

Solicitor

You will need to employ a solicitor for all the legal aspects of buying a house. Some charge a flat rate, others a percentage of the property price (usually 1%). We recommend to get some quotes before choosing one.

  • Basic Survey (required by lender): £100-£300
  • Housebuyer’s Report: £250-£500
  • Full Structural Survey: up to £1,000 + VAT
  • Stamp Duty

    The government charges a tax based upon the property’s purchase price.

    Up to £60,000 Nil
    £60,000 – £250,000 1%
    £250,000 – £500,000 3%
    over £500,000 4%

    HM Land Registry Fee

    Registration confirms you as the legal owner of the property and registers you at that address. The fee charged depends upon the price of the property.

    Up to £40,000 £40
    £40,000 – £70,000 £60
    £70,000 – £100,000 £100
    £100,000 – £200,000 £200
    £200,000 – £500,000 £300
    £500,000 – £1,000,000 £500
    over £1,000,000 £800

    Local Authority Search Fees

    Your solicitor will carry out a local authority search in order to find put whether there are any development plans that could affect the property’s value. Fees will amount to at least £60.

    House-hunting Expenses

    House-hunting can be quite a costly business. Expenses include money for eating out, travel and telephone calls, and hotels if you are buying in a different area.

    Removal Fees

    Doing the removal yourself is time-consuming and stressful. If you decide to employ a company, ask around for quotes first.

    How to work it out

    After having assessed how much you can borrow and what the expected one-off costs amount to, you can easily calculate how much you can afford to pay for a house.

    Amount of money in savings and investments (if usable)
    +
    Amount you can borrow
    +
    Expected income from sale of current property (if any)
    -
    Costs of buying and moving
    =
    Maximum property price

    Find a Home

    After having calculated how much you can afford, you can start on the most exciting part of the house-buying process:selecting your future home.

    But before you start spending your nights digging through piles of property brochures, it is advisable to sit down and think about what exactly you want. House-hunting is exhausting and time-consuming, and you can save yourself a lot of work and energy by deciding on certain prerequisites before starting out on the actual property search.

    This will probably be the most expensive purchase in your life, so you should be completely sure of everything. You can take a pair of shoes or a TV set back to the shop if you change your mind – with a house it is not that easy!

    Choose a Neighbourhood

    Make sure you select an area you feel comfortable in, and which suits your personal needs. If you are a young, childless professional, you might want a lively pub scene in the area, whereas if you are an overworked parent of three, a good school and a playground might be more important to you.

    Here are the essential points to consider when choosing your future neighbourhood :

    The Prices

    Find out what area you can afford a decent property in by looking at the prices of properties sold recently in different neighbourhoods. Some companies offer property price estimates based on asking prices (see for example Hometrack), but these are not a good indicator, since they can differ substantially from the amount the property eventually changes hands for.

    The most comprehensive property price database is held by HM Land Registry. While a one-off search is still affordable, attemtping to gain an overview of the the prices in a certain area will become a costly affair. The Land Registry database is made accessible via the internet by a private company (see www.mouseprice.com) for free; thus, you can find out what neighbourhood you would be able to afford.

    Your feeling

    Make sure you feel comfortable in the neighbourhood. You will probably be living there for a long time, so you should feel you belong there, too.

    Workplace

    Consider how you would get to work, and how long it would take you.

    Local Amenities

    What you need depends on your lifestyle and preferences. Look out for shops, public transport, leisure facilities like pubs and clubs, children’s activities, parks etc.

    Council Tax

    Find out what council tax band you would be in and make sure that you would be able to afford it.

    Schooling

    If you have kids, find out the quality of local schools by looking at rankings. Living close to a very good school inevitably pushes up the price of the property, but you should look for compromise solutions.

    Social Issues

    Find out the crime rate in the neighbourhood by checking with the local police station. Also, you might want to find out about drug-related and other social problems.

    Condition of the neighbourhood

    Keep in mind that the state of the houses in your street influences the value of your own.

    Local Authority Services

    Find out how often the waste is being collected etc.

    Choose a House

    In addition to deciding what area you want to live in, you will have to make up your mind in regard to the characteristics of your future home.

    Again, we have compiled a list of property features you will have to consider :

    Property type

    Do you want a house or a flat? If you prefer a house, should it be detached, semi-detached or terraced?

    Property Features

    Determine what size your future home should be (keep in mind that bigger houses mean higher heating costs!)

    Decide on the number of bedrooms and bathrooms, whether you want a garden, central heating or double glazing.

    Old or new?

    A new house will be more expensive to buy, but with an old property high expenses might incur for repairs and improvements

    Parking

    If you own a car, check whether you have good parking facilities on the street or if there is a garage.

    Leasehold or Freehold?

    Freehold means that you fully own the property, the land it is on (if it is a house) and the space it encompasses. It also means you will be responsible for maintenance and repairs.

    Leasehold means that you own the property for a limited period of time only. You are practically leasing it from the freeholder. When the lease runs out, property ownership is again passed to the freeholder. Today, leasehold properties are mainly flats – the freeholder retains possession of the land underneath them.
    When you consider buying a leasehold, check who is responsible for repairs and maintenance (the proviso is normally included in the lease). Furthermore, you will have to pay ground rent to the leaseholder, usually on a yearly basis. Check that the seller is up to date with his rent payments.

    It is recommended not to buy a property if the lease is less than 60 years. Mortgage lenders usually require a minimum of 20 years left on the lease at the end of the mortgage term. For details on how you can extend leases please contact:

    Leasehold Advisory Service
    70-74 City Road , London , EC1Y 2BJ
    Tel: 0845 345 1993
    www.lease-advice.org

    Registered or Unregistered Property?

    A property is registered when the title to the property is recorded at HM Land Registry and thus certified by the government. It is less complicated to buy a property from a seller with a “Land Certificate”.

    The ownership of unregistered property is not certified by the state. The title can only be proved by a copy of the title deeds, (your solicitor will check back on that) and unfortunately, disputes over title can arise.
    A new law states that unregistered property now has to be registered with HM Land Registry when it changes hands. This draws out the buying process and your legal expenses.

    House-Hunting Resources

    After having decided on your priorities, you can start off looking for a house. There are different resources for property listings.

    Estate Agents

    A seller may employ an Estate Agent to advertise the property and handle negotiations. Agents usually have a wide range of properties available and can offer detailed information.

    We recommend to contact as many local Estate Agents as possible and to make sure you keep informed about all the latest house on the market.

    Potential Problems: You should keep in mind that an Estate Agent is employed by the seller and might try to get the best possible deal for their client. It is always good to get some independent information about market prices in order to prevent you from being taken advantage of.

    Private Sale

    Some house sellers prefer to handle their sale privately, by advertising locally. You will usually recognise a private sale by the handmade sign outside a property or by an advert in your local paper. Since the seller does not have to pay Estate Agent fees, you might end up paying less.

    Potential Problems: A private seller might not deal with you in the same professional manner as an Estate Agent does. Especially when difficulties or delays arise, the situation can become a bit tense.

    Internet

    Online property listings are very convenient to get a quick impression of what’s on the market, and for buyers who want to move to a distant area. It is usually possible to look for properties according to features, price range and location. Internet listings can be accessed via Estate Agents’ home pages or independent property web sites.

    Potential Problems: A photo posted on the internet might not give you an adequate impression of the property, so it is better to remain sceptical until you have actually seen the house

    Find your dream home

    If you find a property that interests you, call up the Estate Agent / private seller to arrange a viewing. You should see as many properties as possible in order to get a comprehensive idea of the property market.

    Here are some general tips for property viewings:

    • Keep a record of every property you have visited. It is good to have a checklist for area and property features (see the lists above) and your thoughts to take with you to every viewing. This helps you keep track and compare different houses.
    • Make critical notes. Check every property you view for:
      • General Condition (fixtures and fittings, layout etc.)
      • State of Repair (insulation, heating, plugs, plumbing etc.)
      • Structural problems (dampness, cracks in walls or ceilings, crooked doors, damaged foundations etc.)
    • Visit at least twice . A property can look very different at night, when the neighbours are throwing wild parties. Or during rush hour, when the passing traffic and frequent trains cause the floor to vibrate.
    • Take a camera . This helps you remember certain features and to see the property in a more objective light at a later date.
    • Bring a friend . The excitement of a viewing can make you overlook important things – another pair of more sceptical eyes can help you make a better judgment.
    • Don’t get too attached to a house . It is easy to fall in love with the first potential home you see, but remember that there are many more to come and try to keep an open mind.

    Make an Offer

    So you have finally found your dream home (or the modified version that’s within your price range) and can’t wait to tell the Estate Agent to secure the deal.

    Before you decide to put in an offer, however, you should find out whether the asking price actually reflects the market value of the property. On the basis of this valuation, you can then decide how much you think you can reasonably offer for the property.

    Sales Comparison

    In order to get an insight into a property’s market value, you should compare the sales prices of properties similar to the one you are interested in, in similar locations. To take into account market fluctuations, the properties should have been sold within a recent period of time (about 3-4 months).

    Sales price data for properties in England and Wales is collected by HM Land Registry. The problem with this data is that it is usually 2-3 months old, but since it is the only source for actual sales prices, it will have to do. As mentioned above, instead of accessing the information from the Land Registry directly, you can take the free route and obtain it from the private service provider (www.mouseprice.com).

    An example to illustrate the matter:

    The seller of the property you are interested in currently asks for £120,000. According to general custom, you offer would lie somewhere between £108,000 and £114,000. However, after having looked at similar properties sold recently in the area, you get the impression that the market value of the property is closer to £100,000.

    How much should you offer?

    The typical offer for a house is somewhere between 5% and 10% below the asking price. Sellers know this and deliberately set their asking price a bit higher. However, what the property eventually changes hands for is decided by various factors, not least you own haggling skills.

    There are several things you should keep in mind before deciding on an offer:

    • How accurately does the asking price reflect market value? (see above)
    • Is it a freehold or a leasehold property?
    • How much of the fittings and other interiors would be included in the sale?

    Keeping these factors and the property prices in the area in mind, decide on an offer you want to put in.

    Negotiating

    After you put in your offer, negotiations start. Consider the factors influencing the negotiations:

    • How many other potential buyers are bidding for the property? The more buyers, the stronger the seller’s negotiating position, the more likely that he will get the asking price. In a strong market the property price might even exceed the initial asking price!

    If you know there are many bidders, make up your mind on how much you are willing to pay and put in a higher offer. Make sure not to be drawn into a bidding war!

    • How long has the property been on the market for? If the seller has been trying to sell the house for a while, or if he even had to lower his asking price, you are in a much stronger position.
    • Is the seller under time pressure? If for whatever reason he wants to sell the property as quickly as possible, you are likely to get it for a much lower price.

    Some advice on negotiating:

    • Be well-informed ! Make sure you know what is going on in the property market and show it. That will prevent you form being taken advantage of and earn you respect, a definite advantage in negotiations.

    You will already have gained an overview of property prices in the area when you were looking for houses. If you feel insecure, check again what properties have sold for in the neighbourhood recently, using the Land Registry records (see house pricesfrom mouseprice)

    • Play it cool! If you show that you are head-over-heels in love with the house, the seller will take advantage of you. Let him know this is not the only property you are interested in.
    • Be nice ! Do not forget your good upbringing and stay polite. A seller will feel more comfortable handing over the house he gets on well with.
    • Be there ! Negotiate face-to-face, not over the phone. That makes a better impression and gives you the opportunity to interpret the seller’s reactions.
    • Beware of Estate Agents ! They are professional negotiators and have made an art of ruthless bargaining. Don’t let them bully you and stay confident. If you decide to contact the seller directly to avoid the bully, keep in mind he might be even worse.
    • Act reasonably ! Do not let this guide govern your bargaining behaviour completely. Evaluate the situation and act accordingly. Consider whether it is worth risking your dream house for a minimal price difference.

    What happens next

    If your offer is rejected it is up to you whether you want to put in a higher offer or go and look for another dream home. Surely there are plenty on the market!

    If you offer is accepted you will receive a letter of confirmation form the Estate Agent. This is the sign for you to arrange the survey and complete your mortgage application.

    Note that this is not legally binding until contracts are exchanged – neither for you nor for the seller!

    Gazumping

    This term describes the sellers’ practice of initially accepting an offer, only to abandon it later on in favour of a larger one. Especially when the property market is strong and house prices are rising fast, the seller might be tempted to reject your offer as soon as a another buyer with a higher one comes along.

    Unfortunately, in England and Wales there is no legal protection against being gazumped. So be aware that you are always running the risk of losing your expenses on legal counsel and surveys.

    The Conveyancing

    After your offer has been accepted, the conveyancing process starts. This includes all the legal and administrative issuesthat have to be addressed when a property is transferred from one owner to another.

    The common practice is to hire a solicitor or a licensed conveyancer to deal with the legal aspects. Hiring a professional solicitor has become cheaper and his services are well worth the money.

    Most mortgage lenders require you o hire a solicitor or legal conveyancer, as does the majority of sellers.

    Nevertheless, some people prefer to do it themselves, but keep in mind that this is a time-consuming and risky business. If the conveyancing is not carried out properly, you could end up fighting some lawsuit over legal boundaries or property title.

    Therefore, conveyancing should only be undertaken by someone with legal expertise. Moreover, you should have some knowledge of the business jargon and be able to deal with huge piles of paper-work.

    What the conveyancing process involves

    Before the exchange of contracts :

    • Checking the “title deeds” of the property to find out whether it really belongs to the seller
    • Establishing the property’s legal boundaries
    • Putting together a list of fixtures, fittings and contents to establish what is to be included in the sale
    • Preparing a enquiry form for the vendor to find out about any material or structural defects they are aware of
    • Surveying local authority plans for details on upcoming developments that could influence your property’s value
    • Negotiating with the seller any repairs or changes to the offer
    • Advising you on the draft contract for sale prepared by the vendor’s solicitor

    Exchange of contracts :

    • Arranging the date for the completion and the exchange of contracts
    • Handing over the deposit
    • Signing the mortgage deed
    • Performing final searches

    Completion :

    • Handing over the keys and title deeds
    • Paying stamp fees
    • Arranging the transfer at HM Land Registry

    How to find a good solicitor

    It does not really matter whether you employ a solicitor or a licensed conveyancer.

    What does matter, however, is that you can trust your solicitor or conveyancer, and that he is experienced. The best way to find a good solicitor is by asking around among your family and friends. Also, your mortgage lender will know about experienced solicitors.

    Make sure your solicitor / conveyancer is registered with and recognized by the Law Society or the Council for Licensed Conveyancers.

    The Law Society
    113 Chancery Lane , London , WC2A 1PL
    Tel: 0870 606 6575
    www.lawsoc.org.uk

    The Council for Licensed Conveyancers
    16 Globe Road , Chelmsford , Essex , CM1 1QG
    Tel: 01245 349599
    www.conveyancer.org.uk/directory.asp

    Get Your Mortgage

    Now it is time to complete the mortgage application process and decide on what type of mortgage you want. Your lender will usually be happy to provide you with details on the range of different mortgages they offer, but we have still compiled a summary of mortgage options and types for your convenience.

    Mortgage Options

    There are two possible mortgage options. Which one you choose depends solely on your personal preference:

    Repayment

    You pay capital and interest back on a monthly basis, thus increasing your stake in your property over time. By choosing a repayment mortgage, you can be sure that your mortgage will be paid off.

    Interest Only

    You pay back just the interest every month. In order to be able to pay back your mortgage at some point, you would probably pay into some alternative investment product. Some lenders actually require you to have an alternative investment product.

    Mortgage Types

    There are four main mortgage types; they differ in regard to the interest rate settings.

    Tracker

    The interest rate moves up and down with the Bank of England base rate.

    Fixed

    The interest rate remains the same, independently of base rate variations. This makes sense for big loans, where rate rises could hurt you quite badly.

    Capped

    The interest rate can fluctuate, but will not exceed a certain value during a certain period of time. Some have both a ceiling an a floor between which they can fluctuate (“cap and collar mortgage”).

    Discount

    The interest rate is lower than the current standard rate, but only for a certain, fixed period of time (e.g. 2 years). After that the rate becomes variable.

    We recommend you book an appointment with your mortgage adviser to discuss the different aspects of the mortgage options and types.

    Survey and Valuation

    You are basically conducting a mini-survey and valuation every time you view a property. This includes checking for damp patches or cracks and comparing the sales prices of similar properties.

    However, when you apply for a mortgage, your lender will require you to perform a professional, basic survey and valuation in order to assess the property’s condition and find out whether the house is actually worth its price.

    Since a basic survey does not include much more than what you have already done when you looked at the house, it is advisable to have a more in-depth inspection and valuation done. There are two different options, theHomebuyer’s Report and a Full Structural Survey. What you will need depends mainly on the type and age of the property you are about to buy.

    A detailed survey might seem expensive, particularly since you are already spending vast amounts of money on about a million other things. Yet, think about it: this is probably the most expensive and valuable investment in you life. Wouldn’t you rather spend a few hundred pounds more now instead of having to spend a few thousand on repairs for faults you were not aware of in a few years time? The importance of the matter cannot be stressed enough; when you buy a house, there should be no eventualities.

    Professional survey options

    The lenders survey is very basic and does not address all the aspects which might cause problems. Therefore, it is strongly recommended that you get a more in-depth report on the property’s condition in order to protect yourself.

    Basic Survey

    Required and performed by your lender (but you might still be charged for it). This survey is intended to assure the lender the property is actually worth is price, and that you will not make a loss if you sell it again.

    It is sometimes said that the basic survey does not actually merit its name, since it is more of a basic valuation than an examination of the property. The surveyor simply compares the prices of similar properties sold recently (see comparable sales, above), taking into account any major damages, and gives you a vague estimate of the property’s worth.

    Cost: £100-£300

    Homebuyer’s Report

    This survey is for your own benefit, rather than your lender’s. It is generally recommended to have this survey done before buying a property.

    The Homebuyer’s Report provides a good overview of the condition of the property. It addresses those parts of the property which are easily visible or accessible. The surveyor will highlight potential problems such as damp, and address the basic construction. Furthermore, the report includes a basic valuation of the property.

    If the surveyor suspects there might be more serious problems, he will recommend a structural survey.

    A Homebuyer’s Report can usually be performed by the same surveyor who sis the basic survey. It takes a few hours and costs £250 and £500, depending on the price of the house.

    Full Structural Survey / Building Survey

    This is the most extensive and most costly investigation.

    A Building Survey is recommended for all properties older than 70 years, for houses of unusual construction, and if you want to renovate the property.

    This survey addresses everything the Homebuyer’s Report comments on, plus the structural features of the building and invisible aspects like the wiring and plumbing. This thorough examination will inform you of any minor and major defects of the property.

    A Building Survey will take longer than a Homebuyer’s Report and cost around £1,000.

    What if…?

    If the surveyor’s report uncovers any faults in the property which were not previously mentioned, you can try to renegotiate the price on the grounds of this new evidence.

    However, if the faults are serious, you are free to withdraw your offer altogether (remember, it is not binding yet). That means, of course, that you will have to pay for a second survey, of another property. This is why we recommend that you budget for more than one survey from the outset.

    Completing the Sale

    After having completed the survey and satisfied your lender, you will receive a formal mortgage offer with a detailed outline of all the conditions. Your lender will also require you to take out a building insurance (your solicitor will help you with that).

    Then you are ready for the last stage in the home-buying process.

    Exchanging contracts

    By now, your solicitor will have prepared the contracts for you and the seller. By signing the contract, you are legally obliged to sign the property, so make sure everything is in order.

    Note that if exchange and completion do not take place on the same day, you will have to put down a deposit of 5-10% of the agreed sales price.

    We have out together a last-minute checklist for you:

    • The survey is complete and the results are accepted by all concerned;
    • You have the agreed deposit on hand;
    • You have the read and understood the written, formal mortgage offer;
    • A firm completion date for the sale has been agreed upon and noted in the contract;
    • Your solicitor has performed all necessary local searches;
    • There are no outstanding issues remaining between you and the seller!

    The last point is of particular importance. After the contracts are signed, there is no going back for you, so make sure all the details have been settled.

    Completion

    The completion date, which has been set in the contract, is the day the house becomes officially yours. It is also the date the seller wants to see the cash. Your solicitor will obtain the mortgage funds directly from your lender and any outstanding funds from you, then forward the money to the seller.

    Now you can finally collect the keys and throw your moving-in party!