The home-buying process begins with the evaluation of your financial situation, and ends when you exchange contracts – thereby taking legal ownership of the property regardless of whether or not the mortgage is paid.
The steps in between involve financial accounting, negotiation, and market research – with many possible roadblocks that can occur and hinder your progress. When the Bank Says No has compiled this step-by-step guide to demystify this process, and make it as smooth and streamlined as possible.
Conducting a financial assessment
The first step to any property purchase is the assessment of your finances. Without a comprehensive overview of what you can afford, how much you can save and how much of an impediment overextending yourself could be to your future – you cannot make efficient decisions, and this will be quickly discovered during any meeting with a mortgage lender.
The following is a step by step guide to gathering and assessing your finances in your property purchase journey.
1. Household income and affordability
With the exception of loans and other external factors, your household income is how you’ll be paying for the things in your life – bills such as rent (or mortgage repayments) and energy being some of the most major expenses. Mortgage lenders will want to know how much income you make, and where the money is going, in a bid to understand what you can reasonably afford.
The UK’s money advice service recommends that a person should pay no more than 35% of their monthly income on their monthly mortgage payments. This is because going above this percentage begins to cut into the budget of other essential expenses, such as utilities, groceries, transportation etc. Savings, in particular, are a massive area of concern when it comes to budgeting, as failing to put together enough capital to protect against unexpected expenses or as a buffer against rising costs means possibly falling into more debt and hardship.
Even if you believe in yourself enough to know you can live a more frugal, low-expense lifestyle to offset higher percentage mortgage costs, mortgage lenders look for long-term financial health.
2. Deposit requirement
Halifax conducted a study named “2022 first-time buyer review”, which analysed the housing market trends and deposit requirements across the UK for those buying a house for the first time. There, they discovered that the average deposit requirement by mortgage lenders for these buyers was £62,470 — about 15% of the average property purchase price at the time.
Does this mean that anyone who wants to start the house buying process requires this amount sitting in the bank before they begin? No. In fact, 46% of all first time buyers receive the support of family when paying the deposit amount.
The percentage of the deposit that you pay stands for a lot in the overall mortgage term. How much you pay impacts the loan to value ratio of the mortgage, with higher deposits lowering the ratio and signalling a lesser risk.
A mortgage provider will often raise deposit amounts to offset any risk they see with an application, such as adverse credit. Furthermore, if you’re borrowing less money overall by paying the deposit, then you are also paying less on your monthly repayments. Interest rates have been known to increase, especially the longer that mortgage deals go on, and being able to shrink your monthly repayments and principal means that it will impact you much less.
3. Additional costs of housing
There are plenty of ongoing costs that occur during homeownership that are separate from the monthly repayments. For a quick rundown on possible expenses, take a look below:
- Maintenance costs – Zoopla’s 2023 research states that UK homeowners spend an average of £850 per year on maintenance tasks such as plumbing, electrical work, roof repairs, general upkeep etc. None of this includes unexpected repairs, but rather routine checks and measures to ensure long-term functionality.
- Property taxes – Depending on the location of the property and its valuation band, council tax can range between £1,200 to £3,500 per year.
- Stamp duty – You must pay stamp duty tax on properties over a certain value (£250,000 for most buyers, £425,000 for first time buyers).
- Home insurance – Contents and buildings insurance costs £307 annually on average, and is considered essential. It covers risks such as fires, flooding, thefts and accidental damage. Without it, homeowners risk facing expenses for damage or loss that can reach a sum beyond their means.
The possibilities of additional costs of housing should be accounted for when gathering your finances, so long as they have a reasonable expectation of happening.
4. Determining interest costs
Interest rates are a percentage figure that is taken from your overall principal, which is the remaining amount borrowed that you’ve yet to pay off. It is effectively the price of borrowing, and how the mortgage provider makes a profit.
The exact interest rate figure differs depending on several factors, mainly the risk involved on behalf of the mortgage lender. The higher the risk, the higher the interest rates. This provides an extra boost as compensation for the risk, and also to cover potential extra resource usage for things such as monitoring and enforcement of the debt.
There are two types of interest rate formats in a mortgage offer:
- Fixed-rate mortgages – The interest rate on this type of mortgage stays the same, giving predictable monthly payments. That being said, the fixed rate is usually higher than that of variable rates.
- Variable-rate mortgage – This type of interest rate can change over time, following any benchmark the mortgage lender wishes – though it’s usually the Bank of England base rate.
Risk and the remaining principal amount are the two main factors that determine your interest rate. Knowing what your interest rate could be ahead of time will help, as well as how much interest you may be paying in total.
Obtaining a mortgage pre-approval letter
A mortgage pre-approval letter is a formal document given by mortgage lenders that indicates that you are approved for a mortgage up to a certain amount, based on an assessment of your finances, credit score and income. It determines your borrowing capacity, and acts as confirmation to sellers and estate agents that you are a serious buyer. That being said, this letter has an expiration date of between 60 to 90 days, after which it must be renewed.
Several important documents are needed for a pre-approval letter application:
- Bank statements – These are essential in allowing a cash flow assessment.
- Proof of income – Payslips from the last three months prove that you have a stable income.
- ID documents – Proof of identification such as a passport/drivers licence, as well as a proof of address.
- Credit report – Required to make credit checks, assessing a borrower’s ability to make payments on their monthly expenses.
- Proof of deposit – All mortgages require a deposit, and documentation proving that you have the amount is necessary to get your foot in the door.
Once a mortgage lender has these documents, they will conduct a more basic mortgage application approval process to see if you tick the boxes necessary in starting the home buying process.
Begin your house search
The local market is an important thing to understand. After all, depending on location, demand, and proximity to amenities (such as schools, shopping, transportation etc), you will come across wildly different prices. For example, in areas of low demand properties could be cheaper, allowing you to afford more impressive homes at the cost of being in a low demand area. This research yields a lot of understanding on what traits of a property influence pricing.
Tools for house hunting
There are many popular sites online, such as Rightmove, Zoopla and OnTheMarket, that allow you to filter listings by price, location, size etc. This allows you to focus all of your attention on homes that match your criteria, allowing you to sort through multiple options at once.
There are also online-advertised open house events that let you explore multiple properties quickly, allowing you to get a proper feel for the home and area.
What kinds of properties are there?
Two types of property purchases influence the rights you have over the property — a freehold and leasehold property:
- Leasehold property – When buying a house that is a leasehold property, you own the property, but not the land that it’s built on. As a result, the ownership of the home is typically given a fixed term that lasts for a substantial amount of time (99 years, for example). Leaseholds are less expensive upfront as a result, though there are also ongoing costs for ground rent and service charges. There will also be restrictions applied over property modifications that interact with the land the property is built.
- Freehold property – When buying a house that is a freehold property, you have full ownership of both the home and the land itself. There are few restrictions imposed on what you can build on the property (within permitted development rules) at the cost of a more expensive home, with all maintenance and repair responsibilities falling on the owner’s shoulders.
The age of the property also implies a lot:
- New build property – A new build property has been created with modern design choices in mind. They are built for longevity, boasting energy-efficient features that will allow you to use more energy for less money and come with warranties that offer you extensive protection. Considering it’s a new property, the maintenance required will be almost non-existent, and breakdowns will likely not occur for a very long time. The downside is that they are going to be more expensive per square foot, and upon a first-time buyer purchase, it may drop in price due to becoming “second-hand”.
- Older build property – Older homes typically come with bigger rooms and gardens, highly advantageous for those with families or large pets. Whilst it’s not always the case, it’s worth pointing out that these builds, having been around a long time, usually have infrastructure such as transport, schools, shops etc built in the local area. That being said, there are some downsides. Many older homes score low on energy performance certificate checks, meaning they don’t have modern energy efficiency measures, such as insulation and glazing. This could lead to higher energy costs, as well as maintenance for the ageing infrastructure of the building itself.
Tips for choosing the right property
Let’s say you find a property that you like and ticks your basic checks. How do you know for sure it’s worth the investment, and you won’t regret your choice later? The following are some tips recommended by experts that should streamline your possibilities and ensure you can make an informed decision.
House survey report
A house survey is a detailed inspection of a property, for the purposes of assessing its condition. It identifies possible structural issues and defects. Whilst a survey can be carried out at any time in the house buying process (it’s a requirement for most lenders) it’s of paramount importance to have one done before you purchase. This is because if a structural breakdown were to happen, you may find yourself having to pay high amounts to fix it.
Finding defects doesn’t immediately write the house purchase off, however. You can use the newfound knowledge in the negotiation process, possibly renegotiating the price, or requesting the issue is fixed before proceeding.
Befriend local estate agents
Your local estate agents are also indispensable, providing you choose the ones with good reputation and portfolios. By establishing a working relationship with your estate agent, and giving them the relevant information of your budget, preferences and timeline of purchase, you can make an ally that is actively looking for a property that aligns with your goals.
An estate agent can also get your foot in the door to view properties before they’re even listed online if they’re thoroughly convinced that you’re a serious buyer. That being said, remember one thing – they are your contact, not your friend. Estate agents make their money from the seller of the property, not you. That being said, an estate agent has access to databases of listings that have yet to become public, offering you a huge advantage.
Making your offer
Making an offer on the purchase price of a property involves following a set formula, reducing the guesswork involved and ensuring you get maximum value for money.
Determine property value
- Market comparables – Look at the recent sale prices of similar properties throughout the area by the last six months. Find three of the most comparable ones. By “similar”, we mean:
- Location
- Property type
- Size and layout
- Condition
- Outdoor space
- Energy efficiency
- Property condition adjustment – Properties that require repairs or adjustments should have this accounted for within the contract.
- Local market trend – Check to see if house prices are rising or falling – and adjust. Check the yearly percentage change, and add that percentage to the overall price.
Add the three comparable properties together, then divide it by three. Subtract the adjustment figure, then apply the local market trend.
Negotiating the Price
If you stumble across a rare scenario whilst buying a house where the asking price and the property value are the same figure, then congratulations, you have an easy deal. Otherwise, the following is the general rule of thumb for negotiation of the price.
- Asking price is 10% above property value – If the asking price exceeds the property value by 10%, then the property is clearly being overpriced. This is unreasonable in the eyes of most people, so unless there’s a good reason to warrant this, or the property market has shifted since the price was set, then their expectations are unrealistic and you should temper your expectations. In this situation, we would highly recommend that you either point this out and negotiate aggressively, or walk away.
- Asking price is 5-10% above property value – This gap is fairly common in the housing market. You could make an offer that is 5% below the asking price, justifying it with the market research and any contributing negative conditions of the property. From there, it’s a matter of haggling until you’re in a comfortable spot.
- Asking price is less than 5% above property value – This is usually the price range for neighbourhoods with a lot of competition in the property market. Bear this in mind if you intend to haggle, as there may be more people interested in the property. Considering how close the property is to the actual value in this case, we recommend only haggling if you’re able to spare it within your budget.
Conveyancing Solicitor
Once your offer is accepted, you will then need to hire a conveyancing solicitor to manage the legal and administrative process involved in the transferring of property ownership.
- Draft and review contracts – Your solicitor will be tasked with receiving exchange contracts from the seller’s solicitor, and they will review the agreed purchase price, completion date and any special terms and conditions. This is a legally binding contract, so once it’s finalised, you are now responsible for the property.
- Property search – The solicitor will conduct essential property searches to uncover and highlight any potential legal or environmental issues. These include:
- Local authorities search – Checks for any planning/zoning issues, including future developments nearby, or restrictions on the property.
- Land registry search – This confirms that the seller legally owns the property, checking for restrictions or disputes (including rights of way).
- Environmental search – In an attempt to protect future value and validate insurability, the solicitor will survey the public water supply and sewer system.
- Water and drainage search – This search confirms that the property has access to the public water supply and sewer system.
- Ensure legal ownership transfer – The solicitor will then handle the formal process of transferring the title of ownership. They will prepare the transfer deeds and submit them to the land registry, officially having you reflected in the database as the owner of the property.
Arrange buildings insurance
Arrange buildings insurance as soon as possible to protect yourself from fires, floods, storm damage and structural damage. Most mortgage providers will not want anything to do with lending money for a property without this insurance. The policy must start from the date of the contract exchange.
Getting a mortgage
At this late stage in this guide, we finally get to the point of looking for a mortgage provider. There is a lot that goes into searching for a mortgage agreement that is good for you, too much to go into in this already lengthy blog.
The ways you can find a mortgage are:
- Online – There are many mortgage comparison sites online, such as MoneySuperMarket etc. There, you can compare mortgage rates, terms, fees etc. with filtering abilities to focus on your criteria.
- Direct with lenders – You could go directly to high street banks or building societies. There, you can speak directly with people and ask them questions directly to their face. Here, you can get a tailored experience, not to mention discovery of exclusive products for those that arrive face-to-face.
Assuming you’re a first time buyer, consider special mortgage products that are being funded by the government, such as Help to Buy or Shared Ownership. This allows you to reduce deposit amounts and gain a favourable interest rate.
Consider a mortgage broker
A mortgage broker acts much like how a lawyer in court would. They are not only intermediaries between you and the mortgage providers, but they have access to a wide pool of mortgage providers that may not even be locateable without their help.
- Access a wide range of lenders – Brokers have access to mortgage deals that aren’t publically available – because there’s no need for them to be. These lenders typically are so specific with their clientele that it’s more worthwhile to gain a working relationship with a mortgage broker and have them find these ideal clients.
- Find the best deal – Regardless of whether the mortgage broker decides to go with their exclusive contacts or not, one thing they will always do is find the best possible deal for you. They are experts in comparing rates and terms across the market to find a competitive mortgage.
- Tailored advice – Once you hire a mortgage broker, they take it upon themselves to understand your personal position in-depth, and approach all deals and adjustments to your mortgage application with that in mind. This is particularly helpful for those who are not confident in their ability to navigate the mortgage world, helping you avoid becoming blindsided.
- Simplify the process – One of the most convenient roles that a mortgage broker provides is taking over the compilation of documents, and completing it in record time. This cuts down the mortgage application process by a great deal.
- Increase approval chances – Brokers know just from the information and the criteria that mortgage lenders have which ones will and will not approve the mortgage agreement. This helps avoid time spent on endeavours that are likely to end in a rejection.
- Fee-free options – A lot of mortgage brokers don’t even require a fee. This is because the mortgage providers that they speak with often pay them commission.
- Negotiation support – Going back to the lawyer analogy, a mortgage broker can also show up and provide support in the mortgage meeting itself, or even represent you. Knowing their craft, they can tell when a deal is fair or not, as well as knowing how to argue for better terms.
Conclusion
The final step is accepting the formal mortgage offer. Once this has gone ahead, the only thing that you have to look out for is ensuring that you pay your monthly mortgage payments on time.
When the Bank Says No are expert mortgage brokers who specialise in finding the best mortgage deal for our clients, regardless of their income or credit status. Contact us today to find out more.