The different types of mortgages explained

The different types of mortgages explained

Repayment mortgages

A repayment mortgage is where you pay back the capital and the interest of your mortgage together. At the end of the mortgage term, you will have paid off the entire mortgage.

Interest only

With an interest-only mortgage, you initially only pay back the interest on a monthly basis and repay the capital (mortgage) at the end of the mortgage term, meaning your monthly repayments will be lower. People with interest only mortgages tend to invest the money they are saving with the view of paying off their mortgage at the end of the term.

NB. You’ll need to demonstrate to the lender that you’ll have some way of paying off the debt in the future. Interest-only mortgages are commonly chosen when you’re buying to let.

Fixed rate mortgages

The interest rate you pay will stay the same throughout the length of the deal no matter what happens to England’s interest rates.

Lenders normally advertise fixed rate mortgages as ‘two-year fix’ or ‘five-year fix’, along with the interest rate charged for that period.

Variable rate mortgages

With variable rate mortgages, the interest rate can change at any time and is not fixed. Interest payments are adjusted at a level above a specific benchmark or reference rate.

Variable rate mortgages can come in various forms:

Standard variable rate (SVR)

This is the normal interest rate a lender charges and it will last as long as the mortgage term or until another mortgage deal is taken out.

Changes in the interest rate might occur after a rise or fall in the base rate set by the Bank of England.

Lenders tend to automatically put you on their standard variable rate as soon as the term on a fixed term mortgage is over; this is often not the best rate available.

Discount mortgages

This is a discount of the lender’s SVR and usually only applies for a defined length of time, normally two or three years. Once you come to the end of that period, you start paying the more costly SVR, unless you remortgage onto a better deal.

Tracker mortgages

Tracker mortgages follow the Bank of England’s Base Rate and rise or fall along with it. If England’s base rate rises by 1% so will your mortgage.

There are ‘lifetime’ trackers for the life of the mortgage, and term trackers which may be for two or three years.

Offset mortgages

Offset mortgages link your savings and current account to your mortgage so you can reduce the amount of interest you pay on your outstanding mortgage balance.

You still repay your mortgage every month as usual, but Instead of earning interest on your savings, you will reduce the amount of interest charged on your mortgage.


*This article is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published.

Five house hunting tips to consider now that will help you long term.

Five house hunting tips to consider now that will help you long term.

We’ve listed some tips to consider that may influence the price and pace at which you may be able to rent or sell your property in the future.


Look near a station

Don’t look more than a mile away from a station and search by station name rather than area. Whether you’re renting out the property or planning to live there yourself; nobody wants to be too far away from transport links.

Understand differences between local areas

Sometimes going across the road into another area can have a significant impact on house prices. As an example, compare the price difference between similar properties in an area like Harold Wood and Harold Hill (London Borough of Havering). Whilst they are literally across the road from each other, the price difference is stark. Choosing the right location can have a BIG impact on future growth/rental income.

Old build v new build

We’ve all heard people say, “new build properties aren’t built as well as old build properties”.  Whether or not that is the truth is hard to say. However, many people believe this to be the case and can often be a deal breaker for prospective buyers (not so much tenants). On the flip side, if you’re buying to rent, a brand new apartment tends to be more desirable for prospective tenants.

Road appeal

Whether you like it or not, kerb/street appeal affects the desirability of a property. Ideally you want to buy the worst property on the best street rather than the best property on the worst street. Always check the street view before going to view a property and have a look at the surroundings. Streets with buildings such as pubs, old housing estates or cemeteries can often put off buyers/renters. Living on a busy/main road can also be off putting to many because of noise pollution and general busyness. 

Lease length

A leasehold property with a short lease reduces the value of the property and the lease can also be costly to extend. A “short lease” is generally regarded as a lease with fewer than 80 years remaining.

Including all fees, the cost to extend a lease can run into £10,000s for properties with only 60 to 70 years remaining on the lease. Properties with less than 60 years remaining, can be even more expensive to extend.


*This article is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published.

Budget 2021: Key property changes explained

Budget 2021: Key property changes explained

1. Mortgage guarantee (95% mortgages)

What is it

The mortgage guarantee scheme is designed to increase the appetite of mortgage lenders for high loan-to-value lending to creditworthy customers. It will provide lenders with the option to purchase a government guarantee that compensates them for a portion of their losses in the event of repossession.

How does the scheme work

The government will provide lenders with the option to purchase a guarantee on the top- slice of the mortgage. In other words, the government will compensate lenders for a portion of the net losses suffered in the event of repossession.

The guarantee will apply down to 80% of the purchase value of the property and will be valid for 7 years.

Lenders will also take a 5% share of net losses above this 80% threshold. This will help to ensure that lenders are not incentivised to originate poor quality loans.

How long is the scheme around for?

The scheme is intended as a temporary measure. It will be open for new mortgage applications from April 2021 to December 2022,

What is the eligibility criteria?

To qualify for the 95% Mortgage guarantee scheme, the mortgage must:

  • Be a residential mortgage (not 2nd home or buy-to-let)
  • Be taken out by an individual(s) rather than a company
  • Be on a property worth £600,000 or less
  • Have a LTV of between 91% and 95%
  • Be originated between the dates specified by the scheme
  • Be a repayment mortgage and not interest-only
  • Meet standard requirements in terms of the assessment of the borrower’s ability to pay the mortgage

NB. The Chancellor says that major lenders such as Barclays, HSBC, Lloyds Bank, NatWest and Santander will be offering deals from April, with others including Virgin Money to follow shortly after.

Does the scheme benefit investors?

If you’re an investor looking to sell, it may benefit you as prices are likely going to be pushed up as a result of the 95% mortgages. However, the scheme is not open to those purchasing a 2nd home or buy to let property.

Does the scheme benefit first time buyers?

Yes, you will be able to put down a 5% deposit rather than 10% which most lenders currently require. This should hopefully allow buyers to get on the ladder at an earlier stage. It will also be a requirement that participating lenders must offer a 5 year fixed rate product as part of their range of mortgages offered under the guarantee. This gives buyers security of predictable repayments for a longer period.

What are the downsides?

Affordability will still be an issue for most first time buyers. Whilst putting down a smaller deposit is helpful, those that don’t earn a big enough salary will be in the same position. The only hope is that lenders may increase their income multipliers as a result of the guarantee from the government. Watch this space!


2. Stamp Duty

What has changed

Stamp duty land tax has been suspended on the first £500,000 of all sales in England and Northern Ireland since July 2020 due to Covid

(NB. Investors have still needed to pay a 3% surcharge on purchases up to £500,000)

The stamp duty break will now continue until the end of June.

After that the nil rate band will be set at £250,000 – double its standard level – until the end of September.

How does this impact investors and first time buyers

First time buyers pay no stamp duty on properties worth up to £300,000, therefore, the doubling of the nil rate to £250,000 from June to September has no impact.

From the end of June to September, investors will pay 3% stamp duty on purchases up to £250,000 and then 8% for purchases between £250,001 and £925,000.


3. Corporation tax

What has changed

  • Corporation tax paid on company profits will increase to 25% in April 2023
  • Businesses with £50,000 profits or less will be taxed at the current rate of 19%
  • Only businesses with profits of £250,000 or more will be taxed at 25% rate
  • The rate will be tapered up for businesses as they get closer to the £250,000 profit level.

How does this impact property?

If you’re buying or have bought a property in a limited company, you will potentially pay more tax on your rental profits if your profit is over £50,000.

NB. Currently, corporation tax is 19%.



*This article is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published.

£7500 Rent a room relief explained

£7500 Rent a room relief explained

The rent-a-room scheme allows you to rent a spare room in your home and receive rental income of £7,500 tax-free each year without the need to declare it to HMRC. Where more than one person receives the income, each can receive £3,750 tax-free. (The limits are not reduced if the accommodation is let for less than 12 months.)

Eligibility

The rent-a-room scheme can be used by anyone who lets a furnished room in their home to a lodger. The relief also applies to those renting (however, you should check with your landlord whether your lease allows this). The rent-a-room scheme can also be used by those running a guest-house or a bed-and-breakfast establishment and provide services, such as meals and cleaning, as well as accommodation.

The scheme is not available in relation to accommodation which is not the individual’s main home or which is let unfurnished.


Automatic exemption

Where the rental receipts are £7,500 or less (or £3,750 or less where more than one person benefits from the rental income), the exemption is automatic. There is no need to tell HMRC about the rental income.


Using the scheme where rental income exceeds the threshold

The rent-a-room scheme can also be used where the rental receipts exceeds the rent-a-room threshold (£7,500 or £3,750 as appropriate). Where this is a case, the taxable amount is simply the amount by which the rental receipts exceed the rent-a-room threshold.

Where rental receipts are more than the rent-a-room threshold, a tax return must be completed. If the relief is to be claimed, this can be done by ticking the relevant box in the return.


Example 1

Abena lets out her spare room to a lodger for £100 a week, earning her £5,200 a year.

As the receipts are less than £7,500, she takes advantage of the automatic exemption for rent-a-room relief. She does not have to declare the income to HMRC.

Example 2

Paul lets out a room in her home for £10,000 a year. She incurs expenses of £1,000 a year.

If he does not claim rent-a-room relief, she will pay tax on her profit of £9,000. However, by claiming rent-a-room relief, she is only taxed to the extent that her rental income exceeds £7,500. She is therefore able to reduce her taxable profit from £9,000 to £2,500 by claiming the relief.


*This article is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published.

Top tips to get on the property ladder in 2021

Top tips to get on the property ladder in 2021

1. Educate yourself

Read up on the various schemes/options available to buyers and the buying process from beginning to end. This could range from bridging loans and buying at auction for investors to shared ownership, help to buy and Lifetime ISAs for first time buyers. Knowledge is the first step to getting on the ladder!

2. Develop smart goals

Start by working out the true cost of buying the property you desire.Then ensure your goals are “S.M.A.R.T”:

  • Specific
  • Measurable
  • Achievable
  • Realistic
  • Time related

3. Save before you spend

This one is self explanatory. Don’t just say saving for a house is your priority, show it is!

4. Speak to a Property Cohort mortgage advisor

FInd out how much you can realistically lend and plan accordingly. Our mortgage advisors can assist you with all of your mortgage needs from, First Time Buyers, Buy-To-Let Landlords, & Remortgages to Product Transfers, Second Charges & Commercial Loans.

5. Fix/Check your credit

Your credit history provides mortgage lenders with an indication of how financially responsible and reliable you are; and helps lenders determine whether they will lend to you and at what interest rate. The earlier on in the buying process that you are aware of your credit score the more time you will have to fix any issues.

6. Use a budget spreadsheet

Make a yearly budget and review it on a monthly basis. Set out all income and expenditure and cut out any unnecessary expenditure. We have put together a Property Cohort Budget Template which you can download and use for free.

7. Book a Property Cohort strategy session

If you’re an investor looking to get on the ladder; book in a free strategy meeting with Property Cohort where we will work with you to identify an investment strategy and plan that works best for your personal circumstances and priorities.

8. Research

Research areas that are prime for regeneration and possible capital growth. There is a common misconception that the majority of areas (Especially in London) are unaffordable. Do your own research on sites like Rightmove and Zoopla and find out for yourself. You might just be pleasantly surprised to see there are properties available within your price range.

9. Increase your income

Salary is a big issue for many buyers when getting on the property ladder. Consider acquiring another source of income and if you’re employed, consider applying for roles that will increase your salary or consider negotiating a pay rise with your current employer. If you don’t ask, you don’t get!


*This article is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published.

How to buy a property at auction

How to buy a property at auction

An auction is a great way to get a property below market value and avoid the usually lengthy homebuying process.

The great thing about auctions is that you can see all of the bids that have been put in, and once a sale has been agreed, you cannot be out-bidded/ gazumped by anyone.

We have written a brief guide on the process of buying at auction and what yo need to consider.


1. Browse the auction catalogue. 

The catalogue is often released 2-3 weeks ahead of the actual auction date. The earlier you browse the catalogue the earlier you can go and view the properties and ensure it meets your needs.


2. Read the legal documents and identify a conveyancer 

The particulars should contain all of the key information, however, you may need to request a separate legal pack to get the full picture.

The legal pack highlights: 

  • Title deeds
  • Local and environmental searches
  • Fixtures-and-fittings list 
  • Any hidden covenants or loopholes

You may also want your conveyancer to review the legal pack for you in case of any hidden covenants or loopholes. Don’t forget you will only have 28 days to exchange contracts if you win the bid, therefore; the earlier your conveyancer has sight of the legal pack the better.


3. Do your due diligence

Before investing in a property you should carry out some research to get a better understanding of the properties economical potential and any risks associated with investing in the property. 

You can review the selling and sold prices of similar properties on the market and compare them to the guide price of the property you are interested in. Due diligence should also be carried out on the potential rental income, future regeneration in the area and the condition of the property. All of the above will help inform the maximum bid you will enter.


4. View the property

You should arrange viewings with the estate agent. Ensure you view the property with any necessary specialists e.g. builders, architects, surveyors etc before attending the auction. This will allow you to identify any potential problems and work that needs to be carried out and will inform your calculations especially if buying to refurbish then sell/remortgage. 
NB. A lot of auction properties can come with hidden issues so it is critical to use experts as early on in the process as possible especially if you are not an experienced investor.


5. Register to bid

When registering to bid you will likely need the following:

  • Details of all parties who will be bidding on/buying/paying the deposit on a property
  • Certified ID documents for all parties
  • Details of the solicitor who will be acting on your behalf

6. Get your finances in order

Get a mortgage in principle before attending an auction. This will allow you to set a limit on your bids and will also allow you to move quickly if you win the auction. Once you win an auction you will have to put down a 10% (non refundable) deposit straight away. You normally have 28 days (20 working days) to exchange contracts once you have won the auction.

You can also get a bridging loan when buying at auction. Property investors tend to use bridging loans in the short term to secure the purchase of an auction property (and sometimes the cost of renovations) while they organise a mortgage. NB. Bridging rates are often quoted monthly and the rates tend to be between 0.75% – 1.5%. E.g. if you took out a bridging loan for £200,000 this would cost £2000 a month at a rate of 1%. Annual rates can be more than 10%, compared to 3%-5% on standard mortgages.


7. Attend the auction and bid

This may be done online or in person. Ensure you have a limit that you’re sticking to. This should stop you getting into a bidding war with someone and stop you bidding more than the property is worth. You’ll also need two forms of identification and proof of your 10% deposit.


8. Instruct your conveyancers and get your mortgage ready. 

Once you have won a bid you will generally have 30 days to complete the purchase. You will need to instruct your conveyancers to complete the necessary legal work and you will need to ensure funds are released on time.


Some extra tips

Be prepared to act fast

Whilst it is important to take your time considering any property, there is usually only four weeks between the publication of the auction catalogue and the auction, so you will have to act fast.

Where can I find auctions?

  • Savills
  • Spicer McCol
  • Auction house London

Surveys

Whilst it is not a legal requirement to carry out a survey ; it’s something worth considering. A survey can help you avoid expensive surprises/costs after your purchase; such as hidden damp, or unexpected rewiring and give you peace of mind regarding things you may have noticed e.g. cracks in walls or mould. A survey that identifies major issues will also help you decide the maximum bid you are willing to enter or whether you even want to bid at all.

Guide price and reserve price

The guide price is exactly what it says; it’s just a guide! It is very rare for a property to be sold at the guide price.The reserve price is the minimum price that the seller is willing to accept. 

NB. The reserve price is not disclosed to bidders and is often at least 10% higher than the guide price.

NB. Sometimes, the auctioneer may have permission to sell the property privately if the reserve price is not met.

No refunds

The deposit is non refundable. Therefore, you need to ensure that you’re 100% sure you want to purchase the property. As soon as you win an auction you will be legally bound by the terms and conditions of the sale.

Insurance

As soon as you’re selected as the winning bidder the property becomes your responsibility. Therefore, it is wise to take out building insurance once you have won the auction.

Calculations

Do not base your calculations of the guide price as it is unlikely that it will sell for that amount. Also ensure you consider what your future plans for the property are. If you’re renovating, you will need to consider how long it will take to renovate (you will still have to be paying the mortgage during this period) and you will also need to consider if you will be able to remortgage and release equity when the renovation is completed.

Get familiar with the bidding process

Every auction house will have different rules and regulations. Take time to read up on their terms and conditions and familiarise yourself with what needs to be done in order to submit a bid.


*This article is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published.