How to fund your purchase
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:
- Having already sold your previous home and holding money in the bank whilst you look for a new property.
- Releasing equity from another property to fund a further purchase
- Downsizing – if you are moving to a smaller property there may be enough equity left in your current home when you sell it to fund the purchase of a smaller property outright
- An inheritance or other windfall payment
Where available, buying a property using cash rather than a mortgage to finance it has advantages:
- You will own the property outright
- You do not incur the additional costs of arranging the loan and valuation surveys or the monthly costs of paying the money back
- It will allow you to purchase a property that mortgage lenders would typically not lend against.
- You don’t have to ask permission from any lender to make changes and can do what you want with the property (subject to planning permissions etc).
- Arguably it makes buying a quicker process as there will be fewer parties involved in the transaction and therefore fewer criteria to satisfy.
- You are not susceptible to increases the interests rates
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.
Family & Friends
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 someone is helping you fund the deposit, you will need to explain to your solicitor where the money has come from, and provide the necessary proof, in order to satisfy the money laundering regulations.
- Are you being given the money for good or will you need to repay it at some point in the future?
- If you have to repay it, will there be an interest charge and if the value of the property has increased, do you pay more back than you borrowed?
- What happens if the property has fallen in value?
- Is there a contingency plan in case the person lending you the money ever needs it back before they intended?
- Put a written agreement in place confirming what has been agreed.
- The person lending the money could pay to have a ‘second charge’ put on the property to guarantee that any money that has been lent is paid back when the property is sold and the mortgage (the first charge) has been paid off.
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:
- If the deposit is split equally, will the mortgage repayments be split equally too (regardless of room sizes etc) and the same with the bills?
- If the deposit is not being paid equally how will you split the mortgage payments and bills so as to be fair?
- How long is everyone going to commit to the arrangement? If you all have an exit plan, make sure that you buy a property that you are confident you’ll be able to sell quickly when needed.
- What happens if one person wants to sell? Do the others get the option to buy the other out and at what price does this happen?
- If the others cannot afford to buy the other person out, can one person force everyone to sell?
- What will happen if one of the owners wants their partner to move in, how will the costs be affected?
- If you sell the property and make a profit how will this be shared amongst the owners (especially if each put in different amounts of money)?
- You will need to agree whether you are tenants in common or joint tenants. If you are joint tenants and one of you dies, your share of the property will automatically pass to the other owners. If however, you are tenants in common, your share will pass to your estate and not necessarily to the other owners.
- Don’t forget that the owners are collectively responsible for the mortgage so if one person doesn’t pay it will affect all of the owners.
- Get a legal document drawn up, often a Deed of Trust is used, to outline who owns what and what will happen in all the scenarios mentioned above.
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:
- To help buy a first home worth up to £450,000 at any time from 12 months after you first save into the account
- If you become terminally ill
- From the age of 60
If you withdraw the money for any other reason, you will need to repay the bonuses that you have received.