The Ultimate First-Time Buyer’s Guide – Post Brexit Edition

In the immediate aftermath of the referendum vote for the UK to leave the European Union, a huge number of unknowns have been identified. However, the one certainty is that the entire process is likely to be a legal and political headache. The ramifications of the process are going to impact on nearly all aspects of life, from working conditions to freedom of movement and from the ability to trade in Europe to the underlying investment environment. Of chief interest to anyone who wants to own their own home will be the last of these factors. Although buying a home can be seen nothing more as an alternative to renting, for a good many people it is their principle investment and involves the largest transaction they will ever make in their lives. For first-time buyers, there are many things to consider, but how will the UK’s Brexit status impact on home ownership, especially for people who are looking to take their first step on the property ladder?

pre purchase considerations

Pre-Purchase Considerations

Before you even get to making an offer on a property there are a number of financial considerations to make. These include things like deposits, borrowing and government-led buying schemes. An independent financial adviser can give you more detailed help with your particular circumstances, so it may well be worth consulting one if you have lots of questions to answer.

Save for a Deposit

When you want to buy a place, having savings behind you is almost essential these days. In the pre-financial crisis world of the early 2000s, one hundred per cent mortgages were often marketed, but these days a minimum of five per cent is often needed to secure a mortgage. If you can save a greater proportion of the capital cost of your dream home, then it is usually advisable to do so. However, based on a five per cent deposit, the amount you have saved will offer you an indication of the value of properties you might potentially buy. For example, if you manage to save £5,000, then the upper value of homes you might look at is £100k. Likewise, if you can save £20,000, then homes worth about £400k will be in your price range. Saving for a deposit is always tough when you are forking out for rent already, but in the post Brexit UK rental prices may fall if there is less demand-led pressure on housing which may mean that saving becomes a bit easier.

Mortgage Agreements

Until you make an offer on a home, your mortgage will not be fully sorted out. However, it is a good idea to get some indicative advice from a few mortgage lenders about how much they would be willing to lend you. They will need to know the amount of deposit and other savings you have, the value of the property you might be looking at, your income (or incomes in the case of joint buyers) and finally any other debts you might be servicing, like credit card bills. Having a good idea of what sort of mortgage you will go for before house hunting means that you are often more realistic about what you can afford. Look at the repayment terms, such as fixing the interest rate and the length of term of repayment. Many mortgage lenders have handy online calculators, but these only give a notional indication of how much you might borrow. An independent financial adviser can help you to navigate the mortgage market in more detail and also deal with related financial products which are sometimes required by mortgage lenders, such as life assurance and buildings insurance.

Government Schemes

Usually called ‘Help to Buy’, there are actually a number of different government schemes in the UK, depending on where you happen to live – England, Scotland, Wales or Northern Ireland. Some of these schemes allow buyers who have only managed to put together a five per cent deposit to access mortgages that would otherwise be unavailable to them. In the 2015 budget, the Chancellor also announced a ‘Help to Buy ISA’ which is a savings product designed to help deposits be saved for without paying tax. Indeed, the government add a bonus of £50 for every £200 saved in one. [1] The scheme is only be available for homes valued up to £250,000, or £450,000 in London, and the maximum input of the government is £3,000. As this is a UK-backed saving scheme it is unlikely to be changed as a result of Brexit, but future governments might limit access to it or potentially scrap it all together.

House Hunting

Once you have a good idea of the sort of budget you have in mind from a combination of your potential mortgage borrowing and deposit, it is time to get on with actually finding a new home. Everyone’s priorities with the sort of property that will suit them are different, but it is crucial to have some idea of the sorts of properties that are out there.

Tenure Considerations

There are two main tenure options for properties in the UK, freehold and leasehold. These are not likely to change in post-EU conditions. With a freehold arrangement, you don’t just buy the flat or house but the land it stands on in perpetuity. With a leasehold, on the other hand, the property is bought with a limited period of time attached to its ownership. It is important not to rule out leasehold properties from your purchasing considerations, especially when the lease term is very long – in some cases it can be hundreds of years. Even with much shorter lease periods any restrictions on the ownership over time tend to be reflected in the purchase price and they frequently make for convenient ways to get onto the home ownership ladder. Lease holding is the norm in some developments, particularly those with blocks of flats and luxury apartments. It is worth bearing in mind that rules surrounding leasehold property are different in Northern Ireland. Finally, another type of tenure is available for some types of buyers. Called shared home ownership, so-called SOHO tenure allows you to buy a share of your property whilst also paying rent. This approach is usually not available for properties placed on the open market, however.

Location and Economic Factors

Choosing where to buy might come down to where you work or live already. There again, you might consider schools and access to local amenities as important factors. However, in the post Brexit world, economic considerations should play a big part in where you decide to buy. Look for areas in the UK where you might see potential growth in the market. Places that are up and coming or which are seeing significant infrastructure investments tend to be good bets. Remember that many of these sorts of community and infrastructure developments in the UK tend to have been funded from the EU historically. When such funding is no longer applicable, it will be more important to factor in UK government spending on large projects, such as the HS2 rail link for example, as well as what private investors are doing in the area. Realising growth in the value of the property you buy usually comes down to a blend between good economic activity locally along with a high quality of life. Any areas that specifically rely on lots of EU trade may suffer from short-term downturns in their economies, depending on how negotiations proceed.

Home Information Packs

You may have heard of home information packs or even been advised you need one. When buying, any seller of a home with three, or more, bedrooms used to have to legally produce a home information pack for you to read. The rules about what needed to be included in it were specified under Part 5 of the Housing Act (2004), but these packs were suspended by the UK government in 2010. [2] Therefore, don’t be put off a property because the current owners have not produced one. Nevertheless, an Energy Performance Certificate is still required by UK law. Given that this is covered under British statutes, leaving the European Union is unlikely to make any difference to this legal requirement placed on sellers.

Buying Your Home

Once you have tracked down a property that you can afford to buy in a location that meets all of your needs and which looks like providing a good investment opportunity, it is time to get into the business of actually buying it. There is a legal process which must be followed to buy any property and this will include the way in which your mortgage is handled by other professionals, such as your solicitor. After all, a mortgage lender is stumping up a large amount of cash and controls over how this reaches your seller are strictly maintained. Let’s take a look at what you need to consider.

bidding on properties

Bidding on Properties

Now that you have your dream home in sight, you will usually need to put in an offer for the seller to asses through their estate agent. Not all properties are sold through agents, but most are. Some vendors sell directly having marketed their home themselves. Others come up for sale at auction. However, assuming the sale process in normal, you’ll need to come up with a figure that reflects the asking price. As a first-time buyer, you will also need to prove that you can secure a mortgage that meets this figure. That is why it is a good idea to speak to mortgage lenders well before you start looking at properties. If you bid below the asking price, then you may save some money, but your offer could be rejected, as a result. Remember that first-time home buyers tend to be in a good position to negotiate over price because they are not part of a chain that means they also have to find a buyer before their purchase can proceed. In other words, you are more flexible and can get the rest of the chain going if your offer is accepted. Remember that you will need to apply for your mortgage fully only once your offer has been formally accepted – something the vendor’s estate agent should make clear to you when they take the property off the open market.

Stamp Duty and Other Buying Costs

Stamp duty is a tax which comes into force depending on the value of the property being bought. You pay Stamp Duty Land Tax (SDLT) on increasing portions of the property price above £125,000 when you buy residential property, eg a house or flat.  Buy to Let properties are treated differently.  On the first £125,000 you pay zero stamp duty, on the next £125,000 you pay 2% and then from £250,000 to £925,000 you pay 5%.  In addition, higher rates apply for more expensive dwellings.  You can access Stamp Duty calculators online to ensure you are aware of the amount of tax due for any property you wish to purchase. The tax only needs to be paid when you buy a property above £125,000 in England, Wales and Northern Ireland. In Scotland a similar Land and Buildings Transaction tax applies. Therefore, your mortgage should cover the purchase price of the property along with any taxes that might apply. Furthermore, you will need to fork out for some other buying costs so you need to have this money set aside, or borrow sufficiently to cover them, too. One of the commonest ‘hidden costs’ that first-time buyers fail to take account of is their legal fees. Although it is the seller, not the buyer, who is responsible for paying the estate agent’s commission, both parties will incur legal fees from their solicitors. Solicitors need to be engaged in order to buy a property since this is a requirement of mortgage lenders. They undertake a process known as conveyancing and produce a fee as a result. Another professional fee you may need to pay for as a requirement of your mortgage lender is for a survey to be completed by a qualified surveyor. Moreover, other expenditure that you might need to think about in advance include professional moving costs and the initial outlay that may be required to set up the home’s utilities in your name, for example for a fixed line telephone connection.

Mortgage Repayments

Once you are in your new home and settled in you will have to maintain your mortgage repayments. Most first-time buyers opt for a monthly payment to the mortgage lender by a Direct Debit mandate or standing order. It is very important to keep up with your mortgage repayments and not to miss one. Just like failing to pay the rent on time, it can lead to serious consequences and your home ownership is at risk if you miss mortgage payments or make them late. Prioritising things like decorating your home or buying new furniture might be tempting, but the mortgage should come first and be the first thing you pay when your salary clears. If you do face difficulties, then it is always a good idea to talk to your mortgage lender about the options rather than burying your head in the sand and ignoring the problem. In the immediate post referendum mortgage environment, lending rates are very low and set to remain that way. The Bank of England set the underlying lending rate which reflects in the rates of interest you are charged in your mortgage, unless you have chosen a particular product such as a fixed rate or endowment mortgage. However, after the UK leaves the EU the Bank of England may see fit to increase interest rates. [3] If so, this will mean that your monthly repayment costs are likely to go up even though you are not borrowing any more money. Try to budget so that you can afford to cope with a rise of a few percentage points from day one and set some savings aside to help you out if the market conditions change.

In Summary

Some of the things first-time buyers need to know are unlikely to be affected by Brexit, but a good deal of uncertainty still remains. In the next three to four years, more certainty is likely to return to the UK as what shape Brexit takes becomes clearer. Remember that a mortgage commitment is often one that is taken over the course of 25 years, or more, so shorter terms considerations, like the ongoing role of the European Union in the UK’s economy, should not colour your judgement unduly with such a long-term decision.

[1] https://www.helptobuy.gov.uk/help-to-buy-isa/how-does-it-work/

[2] https://en.wikipedia.org/wiki/Home_Information_Pack

[3] http://www.bankofengland.co.uk/education/Documents/resources/postcards/mpc2.pdf