House Buying Options Explained: What The Experts Say
Strata are regularly asked questions about the ways to buy our houses, and what help or tips are available. To offer the best possible support advice to those looking to navigate the house buying process, Gemma Smith, Managing Director at Strata, asked the financial experts some of the common questions that buyers want to know the answers to. In a round table discussion with experts from mortgage lender, Yorkshire Building Society, provider of the Home Reach scheme, Heylo, and new homes mortgage broker, RSC New Homes, Strata find out what buyers really want to know.
Trends in the current housing market
As part of our research, we surveyed those who had bought or were interested in buying a new home, and the results revealed some interesting trends:
- Only 20% of respondents were put off buying currently by Brexit, but 47% wanted to know what impact Brexit would have on future interest rates.
- Personal finances were a bigger stopper for buyers than Brexit issues, and 40% of respondents felt more financial help schemes would make the process of buying easier.
- Greater explanation of mortgage types/financial options, along with more unbiased advice and professional guides also stood out as a need for a significant number of potential buyers.
The experts answer your house buying questions
With these key issues and worries of current house buyers in mind, we asked the experts to weigh in on some commonly occurring questions.
How do I make the mortgage process work for me as a buyer?
“Talk to a whole of market broker; someone who can independently review your personal situation and then give some advice on the options best suited to you,” says Andy Mannion, Managing Director of RSC New Homes. “An initial review will take around 20 – 30 minutes.”
The mortgage broker will need to know the following information to help you find the best options for you:
- Earnings and employment status
- Number of dependent children
- Current monthly budgets/outgoings
- If you have any other houses/mortgages that you want to sell or keep
What is Home Reach?
Home Reach is a part-buy-part-rent option that enables buyers to purchase a 50-75% share of their new home now, while renting the remaining percentage for a small fee per month until they are ready to buy outright.
An alternative to the Help to Buy scheme and shared ownership, Home Reach is government backed and is helping to open up homeownership to many more people.
“Before Home Reach, you had two options if you couldn’t quite afford to buy your own home, and that was either to purchase your new home, outright or with Help to Buy, or really the only other option open to you, particularly as a first-time buyer, was to rent,” says Wayne Bennett, National Director at Heylo Housing, who offer the Home Reach scheme.
The benefits of Home Reach:
- You only need to lend the funds for half of the property, halving mortgage costs and deposit requirements
- Home Reach also means costs such as Stamp Duty and deposits are halved as well. In some cases, with additional government help, these costs disappear entirely
- Home Reach is accessible to everyone, not just first-time buyers
- The lease or rent element is controlled by the government to protect the house buyer. Which also means the mortgage broker can ensure the buyer can afford the future costs
- With Home Reach there is often no Stamp Duty to pay
- Many mortgage lenders will lend against the Home Reach scheme.
What is Help to Buy?
Help to Buy is the government-run scheme that allows you to buy a new build home with just 5% deposit.
- It’s a loan scheme. 20% loan from the government which the mortgage lender sees as a deposit. That means the resulting mortgage interest rate is also much lower.
- The 20% of cost being met by Help to Buy means the buyer has much more purchasing power; you could afford that four bedroom house instead of settling for a three bedroom property.
Is Help to Buy still available?
The government announced the deadline for Help to Buy as we know it, and it’s got people asking what will come next. Here’s what you need to know about the end of Help to Buy as we know it:
- Regional price caps will come in at the end of 2021 and Help to Buy will only available to first-time buyers after this date
- The entire scheme is scheduled to end in 2023, but there have been extensions in the past, so there is speculation that it could continue
- Mortgage lenders are looking to replace Help to Buy with their own, more innovative products to help the first-time buyer when it does end.
Good to know: Help isn’t just for first-time buyers
Another interesting statement to come from Strata’s discussion with the experts is that schemes aren’t just for first time buyers. Help to Buy is available for current homeowners until the end of 2021, and even after this date the Home Reach scheme remains an option for those buying their next home.
The Help to Buy Isa; what is it and how will it help me?
The Help to Buy Isa is essentially a savings product for first-time buyers, with the added benefit of a government boost to help your deposit grow faster.
- Basically, the prospective buyer starts saving money towards a deposit, and the government make an additional contribution of 25% of what’s been saved.
- The saver can only put away a maximum of £12,000. So, at the end of the ISA the government then adds £3,000.
- Bear in mind the Help to Buy ISA is being replaced with the Lifetime ISA as of 30th November 2019. But, if you get the account set up before then you can claim the Government bonus until 2030.
Are Mortgages hard to get? What types of mortgages are there?
The mortgage market is vast and has something to offer everyone, regardless of their financial situation.
- Lenders are taking more responsibility to ensure borrowers don’t over extend themselves. The processes and paperwork are there to ultimately guard against a buyer losing their home if they can’t afford the repayments
- Fixed term mortgages are there to help with budgeting; so, you know exactly what you will be spending every month for the duration of the term, often between 2 and 4 years
- Guarantor mortgages are also available; a family member could help to guarantee your lending to ensure you are approved
- Offset mortgages; you can tie the cost to a pot of savings to, in effect, drop the amount you have borrowed and pay lower interest as a result. You keep your savings so long as you keep making the mortgage payments
- Some products include cash back, zero deposits, etc
How much deposit do I need to save?
Deposits reduce the amount you need to borrow from a lender and therefore reduce the risk to the lender, which means the more you can save for a deposit the more chance of getting approved for a mortgage.
- Why pay as much deposit as you can afford? Because it means the interest rate is lower due to lower risk for the financial company
- Put as much as you can afford into a deposit but keep cash available for all the other costs
- Keep all your documents; bank statements, birth certificates, proof of income, proof of employment. They will all be needed when it comes to getting a mortgage
- To viewed as financially healthy by a mortgage lender, you need to think about not committing more than 45% for your income to a mortgage
Things to consider when budgeting for your new house purchase:
- Moving costs; removal company, or a man with a van
- A decorating/fittings budget and keep to it!
- Stamp Duty
- Legal costs
- Survey fees
- The future monthly costs
Can you explain why my credit score is important?
Your credit score tells a lender how reliable you are when it comes to repaying what you borrow; another way to show how much risk is involved when deciding how much to lend.
Plan ahead when you’re looking to buy a house and start shaping up your credit score, as it needs to be acceptable for you get a mortgage. It’s the benchmark that indicates that you can manage your money.
Key things to consider when improving your credit score are:
- Don’t miss any payments on financial products i.e. cards, or loans
- Make sure you’re on the Electoral Roll; get registered as a voter at your current address
- Don’t exceed overdraft limits and don’t let payments or cheques bounce
- Ensure you have a credit card and make all payments on time. It shows an ability to manage and repay debts
- Don’t take credit out for other people (family members) as its your rating that is damaged if they fail to keep up with payments
- The more credit you have, the less you can get for a mortgage so don’t overextend on cars and loans
- The size of your mobile phone bill doesn’t affect affordability; it is paying them off that matters!
What is the impact of Brexit on the house buying market?
It’s the question on everyone’s lips right now, in particular buyers looking to invest in their own home in this uncertain time. What impacts are the experts seeing from Brexit?
- Driving more fixed mortgage applications
- Low interest rates and government schemes are helping to counter buyer resistance or worries about Brexit.
- The view is that employment (which is increasing) and the available supply of new houses mean the value of houses are stable and are expected to remain that way, regardless of what happens during Brexit.
Top tips for buying a house, from the experts
Finally, we asked the experts to give their top tips for people looking to buy a house. Here’s what they said:
- Speak to a mortgage broker and get an agreement in principle before you go looking at houses. Then you know what you can afford
- Get your credit rating sorted, particularly voter registration
- Research houses, and work out what you need, as opposed to what you emotionally want; so that you are certain of the property you want, rather than what might be a collection of dream features you never use
- Start a Help to Buy ISA or Lifetime ISA as soon as you can and save the maximum possible to get that 25% bonus from the government
- Strata, Customer Survey, 82 respondents, May 2019
- The latest data on house sales in the UK suggest that market is at best stationary. For the year up to September 18, residential property sales in England and Wales were at their lowest in 18 years. https://www.ons.gov.uk/peoplepopulationandcommunity/housing/bulletins/housepricestatisticsforsmallareas/yearendingseptember2018
- The April 2019 Residential Market Survey indicated Brexit uncertainty was still a constraint to positive property market momentum. https://www.rics.org/globalassets/rics-website/media/knowledge/research/market-surveys/uk-residential-market-survey-april-2019-rics.pdf