Do I need a new mortgage?
Some mortgages are called “portable” products, and this is often promoted as a useful selling point. What lenders don’t always tell you, is that it’s not as simple as just picking up your loan and transferring the mortgage to a new house. Lenders will still insist that you reapply, and will examine your finances (and the proposed new property) just as they would with a new customer.
Unfair as it may seem, because rules on lending have become tougher in recent years, your lender might decide that the new mortgage is not affordable – even if you are not borrowing more money and your circumstances haven’t changed, and so may refuse your request to port your loan.
If you want to borrow more money than your current loan (a fairly common scenario for second steppers and upsizers) then you may find your lender is unwilling to extend the original loan but might offer you additional funds on a higher interest rate. If this is the case, it might be preferable to completely remortgage so you should shop around.
If you are out of any early repayment period on your existing mortgage then the obvious thing to do is to look at all the deals available, from your existing lender and from others (a mortgage broker such as Embrace Financial Services can help you to do this). If you are in the early stages of a fixed rate deal with high early repayment penalties, however, you might want to consider whether it’s better from a financial point of view to wait until you are out of the penalty period before moving, if your existing lender is unwilling to port your loan.
Government incentives for house-movers
While most of the Government’s effort to help people buy homes is concentrated on first time buyers, there are some incentives that might help you if you are moving home.
Mortgage Guarantee Scheme
The scheme is available from April 2021 and aims to help first time buyers, as well existing homeowners, who have a deposit of just 5% to buy a property, provided it is valued at under £600,000. The property can be a new build or an older property.
The buyer then has to obtain a mortgage loan of 95% of the value of a property from a lender who is participating in the scheme. As the loan amount is high, lenders are being incentivised by the government (through a guarantee system) to encourage them to take part in the scheme.
Help to Buy: Equity Loan
This scheme is open to home-movers until April 2021, after which it will only be offered to first time buyers. The current scheme means the Government will lend you 20% interest-free for the first five years (40% in London), so you only need a 5% deposit combined with a 75% mortgage. The scheme is available only on new homes that are worth up to £600,000.
The main advantage is that as 75% mortgages are lower risk for lenders, they come with a lower interest rate than if you had to take out a 95% LTV mortgage, so the Government loan acts as a large deposit, enabling you to move sooner and borrow less at lower interest rates.
However, after five years you will begin to be charged interest on the Government loan (initially at 1.75%, but increasing every year after that at RPI plus 1%), which will push your monthly bills up, although many people find they are able to remortgage at this point to pay it off. When you repay the Equity Loan, whether by remortgaging or if you sell your house, the amount due is the percentage of the property price that your borrowed, not the amount in pounds. If prices have risen you will have to pay back more (although your house will be worth more), but if prices have fallen, the amount you need to repay also falls.
This calculator provides a guide to Help to Buy Equity Loans:
Shared Ownership is usually aimed at getting first time buyers on to the property ladder, but in some circumstances the scheme can be used by home-movers as well. In essence, if you need to move (perhaps because your family has outgrown the property, or you have to move for work) and you are unable to afford a suitable property to meet that need on the open market, then you can also use Shared Ownership as long as you sell your current property at the same time. You need to have a household income of less than £80,000 (£90,000 in London).
With Shared Ownership you buy a part-share of a home, from as little as 25% (and the Government is planning to reduce this to 10%), then pay rent on the rest of it. Over time, through a process called staircasing, you can buy additional shares until you own the whole home. Most Shared Ownership properties are new, but some resale properties are available. Shared Ownership properties are sold as leasehold so there is ground rent and service charge to pay in addition to rent on the non-owned share.
With both of these Government schemes it can be harder to get the right mortgage as the selection of lenders is smaller (particularly with Shared Ownership), so if you are considering using either option it can be especially beneficial to use an independent financial adviser or mortgage broker such as Embrace Financial Services.
Older People’s Shared Ownership
This is a special version for the over 55s. Most of the same criteria apply, but you can only own 75% of the property, at which point you no longer pay rent on the rest.
Do I still need a deposit if I’m moving house?
When you exchange contracts on your new home you will need to pay a deposit, usually 10% of the purchase price. If you are selling and buying a home at the same time, you will all exchange contracts on the same day, so the deposit from the people buying your home can be put towards your new home deposit. If you are downsizing or doing a sideways move this may be sufficient, but if you are upsizing you will need to have the cash to make it up to 10% of the value of the new property, unless your solicitor can negotiate a smaller exchange deposit.
If you are taking out a new mortgage, you will get a cheaper deal the lower the loan-to-value (LTV) that you are borrowing in relation to the value of the property, so if your mortgage is less than 90% LTV you may need to pay an additional mortgage deposit on completion (For example, if you are buying a £500,000 house you will have to pay a £50,000 deposit on exchange, but if you are only taking out an 80% mortgage, you will need to have an additional £50,000 of your own money ready at completion). You might provide this through savings, or if you have been in your current home for long enough to build up some equity, you can effectively use that equity to form this additional part of your deposit – on completion day, your solicitor will receive the money from your buyer, pay off your outstanding mortgage and then use the equity, along with the money provided by your mortgage lender, to purchase your new home.
What about Stamp Duty?
How much will I need for Stamp Duty?
Stamp Duty Land Tax is a Government tax paid when you buy a house in England or Northern Ireland. If you have owned a home before, but are selling it at the same time as buying a new home, you pay the standard rate. If you are buying an additional property you pay a higher rate of Stamp Duty, although if the new home will be your main home and you then sell your previous main home within three years then you can reclaim the additional Stamp Duty you have paid (this could happen, for example, if your sale falls through but you use bridging finance to proceed with your purchase, or if you buy a home that requires significant renovation and live in your old home while you are doing the work).
Can I add Stamp Duty to my mortgage?
If you don’t get any exemptions for being a first time buyer, Stamp Duty can be significant - £15,000 on a £500,000 home, for example. You might find that your lender will be willing to add the amount to your mortgage, but bear in mind that not only will you be paying interest on it for the next 25 years, but if it pushes you into a higher LTV band then it could make your whole mortgage more expensive.
Finding the most suitable mortgage
You will want to make sure that you get the best mortgage deal that you can, which means spending some time discovering what’s available:
- Speak to your existing lender to see if it will port your mortgage or offer you a good new deal (but don’t just accept it without checking what other lenders have to offer)
- Look at best-buy tables online and call in to see what is offered by High Street banks and building societies
- Consult with a mortgage broker or financial adviser to be sure that you have considered every option. Embrace Financial Services, for example, has more than 350 fully trained consultants across the country who can access thousands of mortgages from a wide panel of lenders, including exclusive deals. The first appointment is always free of charge
- Have all your documents ready. When you see a lender or broker you will need to provide proof of identity such as passport, driving licence and a utility bill; proof of income such as three months’ payslips, proof of any regular bonuses and a P60 or, if you are self-employed, three year’ accounts or self-assessment returns; evidence of any deposit you have saved up and proof of outgoings such as three months’ bank statements and credit card bills
What type of mortgage should I choose?
With a fixed rate mortgage, the interest rate will not change for a set period of time – from a year to up to 10 years. Some lenders even offer lifetime fixed rate mortgages. The advantage of a fixed rate is that you know exactly how much you will have to pay for the period of the fix. Points to consider:
- Short one-year fixes often have great headline rates, but if the mortgage comes with fees, and you have all the hassle and possible expense of remortgaging after 12 months, then they may not offer the best long term value
- With any fix you normally revert to the lender’s SVR (standard variable rate) at the end of the term, which is usually expensive, so you will need to remortgage at the end of the fix
- The longer the fix, the higher the interest rate tends to be, so the greater the possibility that mortgage rates might drop while you are tied in to a more expensive deal that has early repayment charges
These mortgages offer a fixed level of discount off the lender’s SVR for either a specific term or the life of the mortgage. The monthly amount you pay will vary if the lender’s SVR changes (usually, but not always in response to changes in the Base Rate).
This is a variable mortgage, so the interest rate can change and you may pay more or less as a result. Unlike SVR, tracker mortgages are linked to the Bank of England Base Rate, so they will only change if the base rate changes, not on the whim of a lender. The rate is fixed at a certain percentage above the Base Rate. These deals are often cheaper than fixed rate deals because the risk to the lender is lower, but you need to be sure you could cope with your mortgage going up.
This is a sophisticated kind of flexible mortgage, where your home loan is linked with your savings and/or bank accounts. Instead of paying interest on the whole outstanding amount of your mortgage, the amount you have in savings is taken off when the interest is calculated. You don’t earn interest on your savings, but instead you don’t pay any mortgage interest on that same amount. If you have large amounts of savings, or even if you have high sums in your current account for the first half of the month, you save on mortgage interest. Those savings, which can be considerable, can be used to either reduce your monthly mortgage payments or reduce the term of the mortgage. Interest rates are slightly higher than non-offset mortgages, so use an online calculator or consult an independent broker such as Embrace Financial Services to be sure it is the right choice for you.
Mortgage issues for a new-build property
There are some additional issues to bear in mind if you are purchasing a brand new home from a developer:
- The legal work for buying a new-build home is more complex that normal conveyancing as there are more things to check and more likelihood of issues. Although the developer may be very keen for you to use its own legal team to “speed things along”, you are well advised to find a truly independent conveyancer with experience in new-builds
- The developer will usually insist you have a mortgage offer in place before contracts are exchanged, but a mortgage offer only lasts a maximum of six months, so if you buy off-plan or at a very early stage of construction and it takes longer than that for the developer to be ready to complete, you will have to apply for an extension from the lender (which will mean a reassessment) or start again from scratch. You can limit the possibility of delays by opting for a lender that offers a specific new-build mortgage offer with a nine-month deadline
- As far as lenders are concerned, new-build homes are often overpriced, so you may find that the lender’s valuation of the property may be lower than the price the developer is asking, which will, in turn, affect your ability to get the size of mortgage you might need
- For the same reason, very few lenders will offer a 95% mortgage on a new-build home (although you can effectively achieve this using Help to Buy: Equity Loan), and it’s harder to find 90% LTV mortgages on new-builds, although using a good mortgage broker, such as Embrace Financial Services, will give you the best chance. When it comes to how much deposit is required on a new-build house, if you have sufficient savings to only need 85% LTV on a house and 75% LTV on a flat, then you should have plenty of choice of lenders
- Lenders are generally more cautious when it comes to new-builds, especially if you are buying off-plan, are seeking a high LTV, or are borderline in terms of affordability, so it might be harder to find a good mortgage deal than for an equivalent second-hand home
Things can be even trickier if you are looking for a mortgage for a brand-new self-build project
- If you are looking for a mortgage to build a new house, whether you are literally laying bricks yourself or are hiring a builder to do it for you, you will find your options are more limited.
- In general, you can only borrow about 75% of the cost of buying the land and 60% of the build cost, so you will need significant savings or equity in your existing home (and be willing to sell it and live in a caravan on site!)
- You might also be able to borrow a larger amount against your existing property to get work underway, but you will really need the advice of a good broker, such as Embrace Financial Services, to work out your finances
What other costs are involved?
If you are buying a brand new home the developer will frequently ask for a reservation fee of £500-£1,000 that is non-refundable if you don’t proceed, but usually taken off the sale price if you go ahead.
Exit fee/closure fee/deeds release fee
This is a fee for closing your existing mortgage and transferring the deeds, and is usually payable whether you are remortgaging or have finished paying your mortgage completely. The amount that will be charged should appear on your original mortgage documentation.
Your lender has a legal charge over your home that needs to be transferred to the new lender, and this can involve a variety of fees, often amounting to several hundred pounds.
Early Redemption fee/charge/penalty
This is usually payable if you leave your mortgage during a fixed term or discounted period, and can be substantial as it is often a percentage of the outstanding amount of the mortgage (so you may find that it is worth waiting until this initial period is over). It is worth contacting your lender to find out exactly how much these fees are, and at which point they finish, as in some cases they can continue even after the initial discount or fixed rate period has ended.
Before giving you a mortgage, the prospective lender will need to value the new property. Some may offer a free valuation, but there may be a charge, and this is separate from any survey that you might organise yourself.
Even if you’ve paid for a mortgage valuation, you should also consider an independent survey. A snagging survey on a new home, or a simple Condition Report suitable for a nearly-new home will cost around £250-£300, a more in-depth HomeBuyer’s Report can cost from £400-£700 while a Building Survey (sometimes called a full structural survey and the best choice for non-standard or older properties) provides even greater detail but can cost up to £900.
This is a fee payable to the lender for organising your new mortgage, and can be as high as £2,000. You may also have to pay further fees, perhaps called administration, booking or reservation fees, to your new lender. An online mortgage calculator or an experienced broker can help you to decide whether a high-fee/low interest deal is better for you that a fee-free mortgage with slightly higher interest.
If you use a mortgage broker to help you get the best deal on your mortgage, you will usually have to pay a fee, although with Embrace Financial Services the first appointment is always free of charge. You should be told exactly what you will be charged when you decide whether to engage a broker.
Conveyancing and legal fees
The process of transferring the legal title from the previous owner of the home to yourself (conveyancing) will cost from around £930-£1,200 for a freehold property and £1,110-£1,390 for a leasehold purchase. Searches will cost around £300 more, plus the Land Registry Fee of up to £540.
A full packing and removals service can cost around £1,500, but you can cut costs by packing yourself, or by hiring your own van and doing the whole job yourself.
You will need buildings insurance from the moment of exchange of contracts.
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE. Embrace Financial Services usually charges a fee for mortgage advice. The precise amount of the fee will depend upon your circumstances but will range from £499 to £999 and this will be discussed and agreed with you at the earliest opportunity.