There are several ways to fund your property purchase, including the use of a mortgage.
Cash is probably the simplest way to purchase a property. When using cash to fund the purchase you will need to show where the money has come from in order to satisfy the Money Laundering Regulations. Cash purchases will typically come from a number of sources:
Where available, buying a property using cash rather than a mortgage to finance it has advantages:
Any cash tied up in a property, however, is not as liquid as it would be if held in the bank and it can take some time to release this money if you need it at a later date. Buying with cash does not allow you to leverage your buying power in the same way that you would be able to do with a mortgage.
When making a property purchase with a mortgage, the buyer is able to put down a percentage of the total money owed, typically at least 5% of the purchase price, with the bank or mortgage lender then lending the difference with a ‘charge’ on the property. The charge means that in the event that you don’t pay the money back under the terms agreed, the bank can apply to the courts to take the property in lieu of the payments that you should have made.
The cost of the loan is spread over a long period of time and mortgages can last for 25 or 30 years and can generally run up until the time that you retire.
Buying with a mortgage allows you to leverage your money so that you can afford a more expensive property than you would be able to if you were buying just with cash.
In the past, the calculation was a simple as a multiple of your income, say up to 5 times for gross annual salary, but since the Mortgage Market Review (MMR) three years ago, the calculations are more comprehensive and take into account all of your spending habits. Each lender will have their own specific criteria and so it is often best to speak to a broker who can compare products for you across a range of lenders.
With the increasing cost of property, some families are in a position to help fund purchases for other family members either by lending them part or all of the deposit or acting as guarantor to the mortgage on the purchase.
Whilst this is often worked through on a trust basis, there are some things to consider:
If you have a smaller deposit or limited income you may be able to get a guarantor mortgage. This will mean that you may be able to put down little or no deposit.
The named guarantor will not co-own the property with you and will not be named on the deeds, but will have a legal agreement to make payments on your behalf if you fail to do so.
Buying with a partner, sibling or friends can be a more economical way of getting on the ladder as there is someone else to share the financial burden with. Splitting a deposit three ways, for example, makes it feel much more affordable.
Similar to deposit contributions, you need to work through worst-case scenarios to make sure everyone agrees before you enter into the agreement as trying to unravel it further down the line can be very difficult.
Things you’ll need to think about:
The Lifetime ISA is a new scheme where, if you can save up to £4,000 per year towards funding your first home, the Government will add a further 25% of the amount you have paid as an annual bonus. That means if you pay in the maximum amount of £4,000 in a year, you’ll receive a tax-free bonus of £1,000 that year. The £4,000 is included as part of your overall annual ISA allowance, currently £20,000.
The scheme is only open to people aged between 18 and 39 and as long as you open the Lifetime ISA before you are 40, you can keep contributing until you are 50.
The money and invested bonuses can then withdrawn without penalty in the following circumstances:
If you withdraw the money for any other reason, you will need to repay the bonuses that you have received.
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