That's a big step. But amazingly it's sometimes generally considered cheaper
to buy accommodation and pay back a mortgage than to rent in London in the long
run. You have two categories:
- Freehold: you own the land (or shared freehold
if you buy a flat, for example).
- Leasehold: you buy the accommodation (the
building) but rent the land. Usually 99 years contract, this period can be
longer and shorter. You must remember that the shorter it is, the less expensive
the value of you property will be… until the end where you might have to leave
the property (absolutely speaking); Most of the leasehold rents represent
a peppercorn (very small amount, e.g. <£100 p.a.) in London, but can be increased
substantially with service charges.
If you want to extend the leasehold or if you want to buy the freehold, you
must calculate the value of the lease (term + reversion). For a house with a
market value of £500,000 with 90 years lease, the amount could be £5,000-£10,000.
If there is a conflict on the value of the leasehold, the Leasehold Valuation
Tribunal determines all outstanding issues. The law has been amended to grant
the right to more than 50% of the leaseholders to force the landlord to sell
the freehold.
For more information, consult: http://www.lease-advice.org
Once you have decided the flat you want to buy, you can make an offer to the
Estate agent, who will talk to the seller. Remember though that this is just
an offer and if anyone else offers more when the advert is still in the window,
you may miss the opportunity. Once the owner accepts the offer, this then becomes
a legally binding offer (usually displayed as: "under offer"). There
are now a number of property web sites that have huge databases of properties
available for sale or rent. Before jumping online, there are a few tips to be
aware of. You should go to a reputable site that is fast and easy to use with
a good range and number of properties: [please note that there is different
practices if you purchase property in Scotland]
Here we need to study the difference between buying your main property
and the buy-to-let market.
Buying your home
You can usually borrow up to 90% of the value of the
property (95% mortgages are subject to additional insurance). The lender
(a bank or a mortgage company) will typically lend you 3.5 times your gross
annual salary (if you are joint buyers, you can usually borrow up to 3.5 times
the value of the highest wage, and 1.5 the value of the lower one). A basic
survey of the property will be arranged by the bank (the cost will be added
to the mortgage). You can request a more in-depth survey but you will need to
pay additional monies for this service.
Buy-to-let mortgage
If you intend to buy a property as an investment to rent it out, conditions
are different. The lender can give you up to 75%
of the value of the property. The value of the monthly repayment made
must not exceed the expected value of the monthly rent income / 1.25. Therefore
the lender will mandate a survey to value the expecting rent.
E.g.: if you expect a rent of £1000, your maximum repayment must be £800.
If you repay interest only (assume 6%) it means that you can borrow up to £160,000
(160,000 x 6%/12 = 800) of a property (total value = £213,333 - 100%).
Remortgage your property
Without moving you can also decide to remortgage your property for different
reasons: you want to save money by switching to a lower rate, you want to extend
your borrowing in order to free up equity to use as a deposit of a buy-to-let
mortgage…etc. The lender will mandate a survey of the property in order to value
it. The cash available will be the difference between the mortgage you still
have to pay and the new value of the property (minus 10% deposit).
The usual duration of the mortgage in Britain is 25 years.
You can find a mortgage planner by visiting a bank or broker websites:
You can consult a lot of banks' and building societies' mortgages with the
website http://www.moneyextra.com/.
A mortgage broker will be useful to help you find the
cheapest rate and the best conditions (100% mortgage or 80% buy-to-let) by comparing
with several banks and mortgage companies. For complex mortgages or if you want
as much help as possible, we recommend Chelsea
Mortgage Management (020 7629 6688) that can avoid a lot of hassle (but
will take 0.75% fee).
You have several types of mortgages available:
- Capital repayment: this is by far the most popular option for mortgage
borrowers. Each month you pay a sum to your lender, which consists partly
of interest that you owe on your loan and partly repayment of your outstanding
capital debt. You have to arrange life insurance separately. -
- Interest only: unlike resident borrowers, most buy-to-let investors
opt for interest only mortgages, simply paying off the interest owed to the
lender, but not the outstanding capital. This is repaid on the sale of the
property. -
- Endowment plan: based on the stock market performance to repay the
capital debt, it is now out of fashion due to falling investment returns.
An endowment plan allows you to pay only interest and to put the principal
in a saving plan, which provides interests. At the end of the plan your saving
plan will be used for paying the principal. If the interests are higher than
expected, you will get some money back. These sorts of plans have been used
a lot at the beginning of the 80's and gave huge fees to the lenders. General
advice is not to go for that option in the current market climate, as if you
leave the plan at mid-term, you lose an important amount retained for the
set-up fees.
and different interest rates:
- Variable rate: during the course of the loan, the interest charge
can go up and down. The base rate tracker is the most popular, with lender
charging at a set margin over the Bank Base rate for the life of the loan
(typically BBR+1%). Lenders can offer a discount rate for
the first years (but usually include a penalty if you leave before
the end of the discount period).
- Fixed rate: More expensive than a variable rate, it fixes usually
the rate for a few years only. However it provides security as you know in
advance how much you are going to pay each month.
- Partly fixed, partly variable
Fees
Once you have made an offer to the agency and contacted a lender, you will
have to find a solicitor. He is responsible for carrying
out the checking of the documents on the property and liasing with the solicitor
of the other party. You will have to pay several fees: stamp duty (1% of the
value of the property < £250K, 3% if more, land registration fee, … for a total
of about 1.5% of the value of the property (including the
solicitor work).
When the mortgage is secure and the solicitor is ready, you can exchange
the contracts and agree a completion date. Upon completion,
you get the keys and the total amount of the mortgage must be paid to the seller
at that point.
You will find addresses of solicitors through estate agents, yellow pages or
lenders, but we recommend: Stephen Bishop - Tel: 020 7631 4141
Letting fees and tax
If you let a property, letting agents may charge anything from 10% to 17.5%
of the rental income, depending on whether they simply find the tenants or offer
the full management service.
Tax will be charged at your highest marginal rate of income tax - either 22%
or 40%. You can deduct interest payments on your buy to let mortgage, maintenance
costs, 10% a year depreciation of furniture, cleaning costs, ground rent, service
charges, insurance, letting agent's fees…
Copyright EasyExpat Ltd © 2002-2008. All rights reserved.