Buying a house is almost certainly the biggest purchase you will ever make in your life, and yet its something that I felt completely unprepared for when the time came.
In this series, we will cover everything you need to know about how to buy property – from how to save for your first home, my tips on how to have a successful property purchase, and even building your Buy to Let portfolio.
Before we get stuck into the details, lets cover the basics! Here are some of the words and concepts which you will need to know to begin your property journey.
1. Mortgage
Almost everyone that is looking to buy a home will, at some point, have to take out a mortgage in order to do this. In simple terms, this is a loan, provided by your bank. The difference with this loan is that it is taken out over a long time (usually somewhere between 20 – 35 years), and that the property itself is used as collateral. This just means that if you are unable to pay back the loan at any point, the bank can take possession of the property.
Within the world of mortgages, there are different types – for example you might hear of fixed or variable rate mortgages. These are two different kinds of interests, and the decision on which you want to take is up to you. There is quite a lot we could say about this, so maybe a topic for another day!
You might also hear of interest only mortgages and repayment mortgages. In a normal homebuying situation, you would usually have a repayment mortgage: a mortgage where the monthly repayments consist of repaying the loan amount borrowed (capital) as well as the accrued interest. Interest only mortgages are more common if you are a property investor and in these cases you do not pay back the capital.
2. Agreement in Principle
This is provided by the lender (your bank) confirming what they are prepared to lend you subject to the approval of the property. This is usually needed once you make an offer on a property as it shows the prospective seller that you can afford the property.
3. Loan to Value (LTV)
This is a term that you will see all the time while you are applying for your mortgage. The loan-to-value is the ratio between the value of the loan you take out and the value of the property as a whole, expressed as a percentage. The remaining value is paid as a deposit.
This is best seen as an example:
The value of the house you want to buy = £100,000
The amount of deposit you have saved up = £15,000
Therefore, the amount you need to borrow from the bank = £85,000
In this case, the size of your loan, as a percentage of the value of the property is £85,000 / £100,000 = 85%. So this would be a LTV of 85%.
4. Freehold / Leasehold
When you buy a property that is classed as freehold, this means that you own the property outright, including the land it’s built on.
If a property is leasehold, it means that you (as a leaseholder) owns the property and its land for the length of the lease agreement with the freeholder. This is much more common for flats, as they all share the same land. During the period of ownership, you will be required to pay ground rent and possibly also service charges for the maintenance of the building and land.
5. Stamp Duty (“Stamp Duty Land Tax”)
This is a tax that is paid to the government on the purchase of a property. The value of this tax can vary as it’s based on a percentage of the purchase value of the property. It is payable at the point of completion.
Now that you are armed with the knowledge of the key terms, hopefully this process will seem a little less intimidating! Next step: understanding the timelines all the way from mortgage application to getting the keys to your dream home.
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