How To Finance A Property Purchase
Looking to purchase your property? Whether you plan to buy a property to live in or a property to generate an income each month, you need to initially evaluate the costs associated with buying and building a house.
Fortunately, no matter your financial situation is, there are a wide range of options available in order to buy a home in the UK.
A property to live in is probably the most valuable item you will ever buy.
Unless you are fortunate enough to be able to afford the whole purchase price, you will need to borrow a substantial sum of money in order to buy your home.
Here are a variety of options and points to consider when thinking of ways to fund your property purchase…
While the majority of buyers purchase their properties by taking out a mortgage, some are able to pay in cash to cover the full purchase price of the property – and they are called “cash buyers”.
Cash is known to be the simplest way in purchasing a property - funds could come from savings, investments or the sale of another property. In order to fund your acquisition using cash, you’ll also need to show where your money has come from to serve as a proof that you will not violate the Money Laundering Regulations.
What are the pros of buying a house with cash?
· Potentially less stressful - less room for the chances of your deal falling through.
· No complex chain – it’s highly likely that the property transaction will push through and run smoothly as cash buyers have no financial reasons to withdraw from the sale as they are not dependent on mortgage lending.
· No risk of mortgage issues – failed sales are due to potential buyers who are unable to secure a mortgage. The sale is more guaranteed as a cash buyer will not be looking for mortgage assistance.
· Quicker process – getting a mortgage takes time as you have to wait for at least four weeks before the application approval. In a cash sale, funds are already available and the deal can go through in a short period of time.
· Greater security for the buyer – cash buyers have the security of knowing that they will own the property outright without lending.
A higher percentage of home buyers prefer to arrange for a long-term mortgage rather than purchasing the property in cash. You can apply for a mortgage directly from a bank or building society, choosing from their product range.
Purchasing a property with a mortgage means the buyer is able to put down a percentage of the total money owed, typically at least 5% of the purchase price. 10% and up is much more common.
Have a think about…
· The type of mortgage you want:
o Standard Variable Rate (SVR) Mortgage - has an interest rate that is set by the lender and it can go up or down during the life of the mortgage
o Tracker Mortgage - will follow movement in the bank base rate which is set by the Bank of England
o Fixed Rate Mortgage - will have a set rate of interest for a certain period of time, usually between two and ten years
o Interest-Only Mortgages - these are for specific circumstances and are not generally suitable for owner-occupier buyers
· The type of property you want to buy
· How much you want to borrow and for how long
· The type of interest and rate that you want to borrow at
When buying a property, you’re going to need a hefty mortgage deposit. The minimum deposit for a house is usually 10% of the property’s value, but having a 15% deposit or more could help you secure the best mortgage rates. Mortgages are generally available at up to 95% loan-to-value (LTV) - it's possible to get on the property ladder with a deposit of 5% of the property price.
4. Help to buy
The Help to Buy scheme offers an equity loan where the government lends first-time buyers in England money to buy a newly built home.
The scheme essentially allows buyers to purchase a property with a 5% deposit, and receive a loan for up to 20% of the property value, which will be interest free for 5 years. You must then take out a standard mortgage for the remaining 75%.
Help to Buy equity loan is:
· Free of interest for the first 5 years.
· In the 6th year you will be charged 1.75% of the loan.
· After this, the fees will rise in line with the Retail Price Index (RPI) plus 2% per year.
The Pros of Help to Buy:
· Loan is interest-free for five years
· Access to cheaper mortgage rates
· You can reduce your loan when you want
· You’ll only need to save a 5% deposit
· You will be required to repay more than the government initially loaned you.
· Only certain lenders offer Help to Buy mortgages.
· Help to Buy is often only available on new build homes.
· After your interest-free period ends, your loan will become more expensive as you will pay an additional 1.75% interest in your sixth year of having the loan.
· It can be hard to remortgage as it is not offered by all lenders.
· You often need permission to make improvements before proceeding.
5. Co-Buying or Co-Ownership
If you want to buy your property but, you cannot afford to buy without help, you might consider Co-Buying or Co-Ownership.
Buying with a partner can be a cost-effective way of getting on the property ladder as you got to share the financials and split the deposit and expenses - which makes it feel much more affordable and less burden.
In co-buying, there's a cap on the value of the property you can buy as a co-owner – which is £175,000. You can start with as much as you can afford from 50% - 90% of the price of the property.
But before you enter into co-ownership, you must be eligible by ensuring that you can afford to make the payments involved in buying a property.