The first thing you need to do is decide how much you can afford. You will need to look at how much money you have available yourself and how much you can borrow. There are a number of different financial institutions which offer loans to people buying a property, for example, building societies and banks. You should find out if you are able to borrow money and if so, how much (for information on mortgages, see under heading MORTGAGES).
The amount a lender will be willing to lend you varies widely with each setting their own limits. They base their view of affordability (which is likely to be different from what you believe you can afford) on a number of factors. Most obviously they will start with your income (either as a single applicant or jointly where there are two of you buying). Normally a lender will take your gross income (that is, before tax and national insurance) as shown on your payslip. For the self employed it’s a bit more complex as they will use your SA302 (provided by HMRC, the tax man!) or accounts and will use your net profit. It’s more complex also as some lenders require 3 years of accounts or SA302’s in order to make a decision, but not all require this and we can help understand which lender is best.
Other forms of income may be acceptable such as tax credits, child benefit, other state benefits, child maintenance, overtime and bonuses. Again, each lender has their own criteria that determine what they will take into account, how much of it (sometimes it can be 50%) and what they won’t.
Once your income has been noted they will then turn to your committed outgoings. These can range from loans, credit card balances, and other items such as pension scheme payments, insurances etc. The list isn’t easy to clearly determine as each lender deals with affordability differently. The saving grace is that we have access to all their affordability calculators and have a wide experience of how each lender judges both income and expenditure. Lenders will look at these outgoings and offset them against your income to produce a net income they will use to base their lending decision on. Lenders will also take into account the kinds of expenditure that a homeowner will have such as energy costs, council tax and insurance costs and will include these in their calculations. Again each lender does this in different ways hence the reason why the amount they will lend differs so widely.
Most lenders now provide buyers with a Decision in Principle (DIP) certificate that states that a loan will be available based on the income and outgoings described provided the property is satisfactory. You may be able to get this certificate before you start looking for a property. Lenders state that this certificate may help you to have your offer accepted by the seller. Chancery House Finance can help you to get the DIP certificate before you start looking for a property and avoid the disappointment of finding your dream home only to find out you can’t raise the finance you need. It is at this stage that a lender will access your credit history to check how well you have managed your affairs in the past. If there are any glitches then this may well affect the outcome. We recommend that you regularly monitor your personal credit file and make sure that you are aware of what it shows. It can be very disappointing to make an application and have it declined as there is something on your credit report you weren’t aware of or where you didn’t realise it would cause you a credit problem. We normally ask all our clients to provide us with a copy of their credit file to make sure we know of its contents and approach the best lender for your circumstances.
Before finally deciding how much to spend on a property, you need to be sure you will have enough money to pay for all the additional costs. These include:-
- survey fees
- valuation fees
- Stamp Duty Land Tax
- land registry fee
- local authority searches
- fees, if any, charged by the mortgage lender or someone who arranges the mortgage, for example, a mortgage broker (our fees are very competitive and, we believe, really good value for money)
- the buyer’s solicitor’s costs
- removal expenses
- any final bills, for example, gas and electricity, from your present home which will have to be paid when you move.
For more information about Stamp Duty Land Tax, go to the GOV.UK website at www.gov.uk and for more information about Stamp Duty Land Tax in Northern Ireland, go to the NI Direct website at www.nidirect.gov.uk.
You should be aware that if you start the process of buying a property and then the sale falls through you may have already paid for a valuation or a survey. If the solicitor has started any legal work you may also have to pay for the work done.
You should also take into account the running expenses of the property you wish to buy. These may include:-
- council tax (in England and Wales)
- water rates (in England and Wales)
- rates (in Northern Ireland)
- ground rent, if the property is leasehold
- service charges, if the property is a leasehold flat
- insurance costs, including life insurance, buildings and contents insurance
- heating bills. An energy performance certificate can help you work out how energy efficient your property is.
You will have to pay a deposit on exchange of contracts a few weeks before the purchase is completed and the money is received from the mortgage lender. The deposit is often at least 10% of the purchase price of the home but it can vary. The UK government led Help to Buy scheme can reduce this deposit to 5% but there are a restricted set of lenders who are involved. Look at out Help to Buy Section for more details.