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Frequently asked questions
When you buy your property you will pay Stamp Duty Land Tax (SDLT) if your property is valued at £125,000 or more. How much tax you pay depends on whether it is residential, a buy-to-let or second home.
From April 2016 stamp duty for new buy-to-let properties has increased by 3% on the whole purchase value which also applies to people buying a second home. The following table shows how stamp duty is applied in England and Wales:
Stamp duty is paid on the proportions in the above bands. For residential properties up to £125,000 the SDLT is zero but landlords and second homes must pay an additional 3% or £3,750 on this portion.
For a property valued at £300,000 homeowners would pay £5,000 in SDLT whereas a landlord or second home buyer will pay £14,000.
From completion of the property purchase you will have 30 days to pay the stamp duty although your solicitor will usually collect stamp duty tax from you at completion and pay this on your behalf. Always remember it is legally your responsibility to pay the tax so you need to ensure you have paid the correct amount.
From April 2016 stamp duty for new buy-to-let properties has increased by 3% on the whole purchase value which also applies to people buying a second home. The following table shows how stamp duty is applied in England and Wales:
| Property value | Standard rate | Buy-to-let rate |
|---|---|---|
| Up to £125,000 | 0% | 3% |
| £125,000 - £250,000 | 2% | 5% |
| £250,000 - £925,000 | 5% | 8% |
| £925,000 - £1.5m | 10% | 13% |
| over £1.5m | 12% | 15% |
For a property valued at £300,000 homeowners would pay £5,000 in SDLT whereas a landlord or second home buyer will pay £14,000.
From completion of the property purchase you will have 30 days to pay the stamp duty although your solicitor will usually collect stamp duty tax from you at completion and pay this on your behalf. Always remember it is legally your responsibility to pay the tax so you need to ensure you have paid the correct amount.
Deciding on whether you select a fixed rate or variable mortgage such as a tracker or discounted rate can be difficult and is often driven by the economy at the time or future expectations of interest rate movements.
The reason for this is that all lenders have a standard variable rate (SVR) which is linked to the base rate set by the Bank of England. As the Bank changes the interest rate in relation to economic activity lenders may also change their rates. Fixed rate mortgages are influenced more by the cost of borrowing between banks called the ‘swap’ rate and change up or down with market expectations.
The Bank of England reduced interest rates in March 2009 to 0.5% due to the financial crisis and again in August 2016 to 0.25% due to the Brexit vote and lenders also reduced their mortgage rates.
In the long term the Bank of England intend to increase interest rates and this expectation has seen 90% of people select a fixed rate mortgage. The main reason people opt for this route is the certainty of knowing their mortgage payments will remain the same during the term of the special deal, usually for two, three or five years.
A tracker mortgage is a variable rate and offers cheaper interest repayments of about 0.2% compared to a fixed rate but you will pay more if interest rates increase as this mortgage tracks the Bank of England base rate.
The reason for this is that all lenders have a standard variable rate (SVR) which is linked to the base rate set by the Bank of England. As the Bank changes the interest rate in relation to economic activity lenders may also change their rates. Fixed rate mortgages are influenced more by the cost of borrowing between banks called the ‘swap’ rate and change up or down with market expectations.
The Bank of England reduced interest rates in March 2009 to 0.5% due to the financial crisis and again in August 2016 to 0.25% due to the Brexit vote and lenders also reduced their mortgage rates.
In the long term the Bank of England intend to increase interest rates and this expectation has seen 90% of people select a fixed rate mortgage. The main reason people opt for this route is the certainty of knowing their mortgage payments will remain the same during the term of the special deal, usually for two, three or five years.
A tracker mortgage is a variable rate and offers cheaper interest repayments of about 0.2% compared to a fixed rate but you will pay more if interest rates increase as this mortgage tracks the Bank of England base rate.
The criteria for interest only mortgages have changed and lenders require homeowners to have enhanced incomes and equity before they can approve the application. There are fewer interest only mortgages available and these often requires equity in your property to be greater than 50% with household income exceeding £50,000.
For an interest only mortgage there is no guarantee that the original loan will be repaid as you are only paying the interest rather than any of the amount borrowed. At the end of the term you usually between 25 and 40 years, you would owe the original amount and would need some way of paying this amount.
Lenders would also expect you to provide proof you have a suitable capital repayment vehicle. You would need to save money such as using a tax efficient ISA invested over the long term to clear the debt and this would be a higher risk approach than a repayment mortgage.
A repayment mortgage combines both a capital and interest repayment and is calculated so at the end of the term the original loan is completely repaid.
For example, if you buy a property for £300,000 with a £50,000 deposit your mortgage will be £250,000. The most popular term is 25 years and if you pay an average interest rate of 1.95% the cost is £1,053.56 per month. This amount will stay the same as long as the interest rate remains the same but would increase if the interest rate rises.
From the payment of £1,053.56 per month initially £647.31 per month is the repayment of capital and £406.25 per month is interest. As each month passes the capital amount gradually increases and the interest amount decreases as you are reducing the size of the debt.
For an interest only mortgage there is no guarantee that the original loan will be repaid as you are only paying the interest rather than any of the amount borrowed. At the end of the term you usually between 25 and 40 years, you would owe the original amount and would need some way of paying this amount.
Lenders would also expect you to provide proof you have a suitable capital repayment vehicle. You would need to save money such as using a tax efficient ISA invested over the long term to clear the debt and this would be a higher risk approach than a repayment mortgage.
A repayment mortgage combines both a capital and interest repayment and is calculated so at the end of the term the original loan is completely repaid.
For example, if you buy a property for £300,000 with a £50,000 deposit your mortgage will be £250,000. The most popular term is 25 years and if you pay an average interest rate of 1.95% the cost is £1,053.56 per month. This amount will stay the same as long as the interest rate remains the same but would increase if the interest rate rises.
From the payment of £1,053.56 per month initially £647.31 per month is the repayment of capital and £406.25 per month is interest. As each month passes the capital amount gradually increases and the interest amount decreases as you are reducing the size of the debt.
A freehold property allows the owner to enjoy the land in perpetuity and is the most popular in England and Wales. It is usual for a house to be freehold and flats or apartments to be leasehold.
As the owner of a freehold property you can leave your land to your family or transfer by way of a gift. You also have the right to adapt the land according to your personal preferences although this is subject to national and local laws. Ultimately you are responsible for the upkeep of your land including maintenance or repairs.
In contrast leasehold gives you the right to occupy the land for a specified period of time in exchange for a nominal ground rent and this right can be transferred to subsequent buyers.
With many leases the duration is 99 to 999 years and provided the expiry date is a long time in the future leasehold is as good as freehold. If the lease on a property is less than 70 years it may it more difficult to arrange a mortgage from a lender. Once the lease expires the property rights revert to the owner of the freehold.
Apart from the nominal ground rent, to maintain the communal areas of the block you would pay a service charged. In addition if the block is old there may be expensive renovations required over and above other charges. Another potential cost for a property with a short lease remaining would be the cost to extend the lease and to do this there would be a charge from the freehold owner.
As the owner of a freehold property you can leave your land to your family or transfer by way of a gift. You also have the right to adapt the land according to your personal preferences although this is subject to national and local laws. Ultimately you are responsible for the upkeep of your land including maintenance or repairs.
In contrast leasehold gives you the right to occupy the land for a specified period of time in exchange for a nominal ground rent and this right can be transferred to subsequent buyers.
With many leases the duration is 99 to 999 years and provided the expiry date is a long time in the future leasehold is as good as freehold. If the lease on a property is less than 70 years it may it more difficult to arrange a mortgage from a lender. Once the lease expires the property rights revert to the owner of the freehold.
Apart from the nominal ground rent, to maintain the communal areas of the block you would pay a service charged. In addition if the block is old there may be expensive renovations required over and above other charges. Another potential cost for a property with a short lease remaining would be the cost to extend the lease and to do this there would be a charge from the freehold owner.
The London Interbank Offered Rates (Libor) is a benchmark interest rate that a number of the world’s leading banks charge each other for loans. It is set by market forces representing $450 trillion of deals and used to price financial contracts.
Every day the largest banks submit the interest rates they are willing to lend to other banks based on a number of currencies and other different periods of time. The highest and lowest quartiles are discounted and an average is calculated for the remainder.
One of the main sources of mortgage lending is borrowing from other banks so Libor has an important part in setting mortgage interest rates. Many commercial and buy-to-let mortgages directly track Libor although most residential mortgages track the Bank of England base rate.
Another important benchmark is the swap rates and these influence the fixed mortgage rates. Banks take deposits and pay a variable or floating interest rate while offering fixed rate mortgages.
This exposes the bank to a risk which they can hedge by swapping the funds raised through variable rates with fixed rate funds from other banks. These swap rates react to expectations of future interest rates and inflation, which affect the price of mortgages.
The attractiveness of fixed rate mortgages depends on how they compare to variable rates. When fixed rates are lower than variable rates demand is strong and when fixed rates are higher than variable rates demand is weaker.
Every day the largest banks submit the interest rates they are willing to lend to other banks based on a number of currencies and other different periods of time. The highest and lowest quartiles are discounted and an average is calculated for the remainder.
One of the main sources of mortgage lending is borrowing from other banks so Libor has an important part in setting mortgage interest rates. Many commercial and buy-to-let mortgages directly track Libor although most residential mortgages track the Bank of England base rate.
Another important benchmark is the swap rates and these influence the fixed mortgage rates. Banks take deposits and pay a variable or floating interest rate while offering fixed rate mortgages.
This exposes the bank to a risk which they can hedge by swapping the funds raised through variable rates with fixed rate funds from other banks. These swap rates react to expectations of future interest rates and inflation, which affect the price of mortgages.
The attractiveness of fixed rate mortgages depends on how they compare to variable rates. When fixed rates are lower than variable rates demand is strong and when fixed rates are higher than variable rates demand is weaker.
These types of mortgages offer different levels of risk and flexibility and may appeal to certain types of people or at times of different economic activity. At the end of the offer period both types will revert to the standard variable rate (SVR).
A fixed rate mortgage has an interest rate that remains fixed for the whole of the offer period, usually two, three or five years. Every month the amount of your repayments remains the same even if the Bank of England base rate increases or decreases or your lenders SVR changes.
If you want the peace of mind and know exactly how much your mortgage will cost each month the fixed rate mortgage is the suitable option. The Bank of England base rate reached 0.5% in March 2009 and if you expect this to rise in the future a fixed rate mortgage will ensure you will not have to pay more interest.
In contrast a tracker mortgage is a type of variable rate mortgage where the interest rate tracks the Bank of England base rate. This will be set at a percentage above the base rate such as 0.75% or 1.0% during the offer period such as two, three or five years or sometime for the lifetime of the mortgage.
As soon as the base rate changes either up or down, the lender will also change the interest charged on the tracker mortgage. In some cases where you pay a higher fee the tracker mortgage deal can include greater flexibility such as being able to exit the offer period without penalty.
If the Bank of England base rate is high you may feel you could benefit if the base rate falls and opt for a tracker mortgage. Tracker mortgages charge about 0.2% less than a fixed rate so you could save money in the short term. However, you must be able to afford an interest rate rise if due to economic activity there is a rise in the base rate.
A fixed rate mortgage has an interest rate that remains fixed for the whole of the offer period, usually two, three or five years. Every month the amount of your repayments remains the same even if the Bank of England base rate increases or decreases or your lenders SVR changes.
If you want the peace of mind and know exactly how much your mortgage will cost each month the fixed rate mortgage is the suitable option. The Bank of England base rate reached 0.5% in March 2009 and if you expect this to rise in the future a fixed rate mortgage will ensure you will not have to pay more interest.
In contrast a tracker mortgage is a type of variable rate mortgage where the interest rate tracks the Bank of England base rate. This will be set at a percentage above the base rate such as 0.75% or 1.0% during the offer period such as two, three or five years or sometime for the lifetime of the mortgage.
As soon as the base rate changes either up or down, the lender will also change the interest charged on the tracker mortgage. In some cases where you pay a higher fee the tracker mortgage deal can include greater flexibility such as being able to exit the offer period without penalty.
If the Bank of England base rate is high you may feel you could benefit if the base rate falls and opt for a tracker mortgage. Tracker mortgages charge about 0.2% less than a fixed rate so you could save money in the short term. However, you must be able to afford an interest rate rise if due to economic activity there is a rise in the base rate.
A standard variable rate (SVR) is the most common type variable rate mortgage available from lenders. When mortgage deals come to the end of the offer period they revert to the SVR until you select another deal.
The lenders standard variable rate can be much higher than other fixed, discount or tracker mortgage deals and it is always worth remortgaging to reducing the cost of interest you pay on the SVR. Lenders can change the SVR at any time and are the rate is sensitive to movements in the Bank of England base rate.
One way to reduce the cost of the SVR is to remortgage to a discount deal which is also a type of variable rate mortgage. The offer period is typically for two, three or five years at a specified discount so if the standard variable rate is 4.5% and the discount is 2% you would pay 2.5%.
If the lender decides to change the SVR the discount rate will also change by the same amount, up or down. If you are concerned about the rising cost of interest and want to know your repayments will remain the same, you should consider a fixed rate rather than a discount mortgage.
The lenders standard variable rate can be much higher than other fixed, discount or tracker mortgage deals and it is always worth remortgaging to reducing the cost of interest you pay on the SVR. Lenders can change the SVR at any time and are the rate is sensitive to movements in the Bank of England base rate.
One way to reduce the cost of the SVR is to remortgage to a discount deal which is also a type of variable rate mortgage. The offer period is typically for two, three or five years at a specified discount so if the standard variable rate is 4.5% and the discount is 2% you would pay 2.5%.
If the lender decides to change the SVR the discount rate will also change by the same amount, up or down. If you are concerned about the rising cost of interest and want to know your repayments will remain the same, you should consider a fixed rate rather than a discount mortgage.
An offset mortgage combines a mortgage account, savings and current account with one provider. Each account has a different interest rate which is calculated daily and the idea is to offset the mortgage loan with the positive balances in the savings and current accounts reducing the interest cost.
If you have large amounts of savings and not earning much interest an offset mortgage would allow you to reduce your loan and potentially save thousands of pounds over the lifetime of the mortgage.
Some lenders may also allow you to include personal loans and credit cards to be included applying the lower interest rate of the mortgage rather than the higher levels of more expensive debt. Although this would reduce the interest cost, it can convert short term debt to long term debt unless your repayments are maintain at their normal levels.
An offset mortgage may not be suitable to everyone as some lenders would allow you to draw down in excess of your repayments so your mortgage balance could exceed the original loan. Therefore you would need a degree of discipline to manage your money to ensure you do not get into financial difficulty.
Some people would prefer to keep their savings separate from their mortgage debt so they know they have a fund to access in the event of an emergency or for holidays or a large purchase.
If you do have spare savings, you may prefer to reduce your mortgage with a lump sum payment as most lenders allow you to overpay 10% of the loan each year without penalty. This way you can access more deals in the market and select a low cost tracker discount or fixed rate.
If you have large amounts of savings and not earning much interest an offset mortgage would allow you to reduce your loan and potentially save thousands of pounds over the lifetime of the mortgage.
Some lenders may also allow you to include personal loans and credit cards to be included applying the lower interest rate of the mortgage rather than the higher levels of more expensive debt. Although this would reduce the interest cost, it can convert short term debt to long term debt unless your repayments are maintain at their normal levels.
An offset mortgage may not be suitable to everyone as some lenders would allow you to draw down in excess of your repayments so your mortgage balance could exceed the original loan. Therefore you would need a degree of discipline to manage your money to ensure you do not get into financial difficulty.
Some people would prefer to keep their savings separate from their mortgage debt so they know they have a fund to access in the event of an emergency or for holidays or a large purchase.
If you do have spare savings, you may prefer to reduce your mortgage with a lump sum payment as most lenders allow you to overpay 10% of the loan each year without penalty. This way you can access more deals in the market and select a low cost tracker discount or fixed rate.
Conveyancing is the legal process involving the transfer of property ownership titles from one person to another and this service is provided by a solicitor or licensed conveyance.
The conveyancing process begins after your offer on a property has been accepted and ends when the parties have exchanged signed contracts and the funds have been transferred completing the purchase.
Although all solicitors are qualified to work on conveyencing you may wish to appoint one that is a specialist in residential property or a licensed conveyancer that only conducts these transactions.
In many cases you may be required to select the conveyancers approved by the mortgage lender if the legal fees are free with your mortgage deal otherwise you would have to pay for your own solicitor or conveyancer.
The cost of a conveyancer will vary depending on the complexity of the property transaction although this is likely to be from £500 to £1,500. The typical services provided are as follows:
The local authority searches will reveal if there are any building plans in your area or if there is a floor risk as well as any financial liabilities associated with the property.
Stamp duty usually applies for a property purchase and the conveyancer will advise you of the cost and can receive the funds from you and pay this on your behalf. The conveyancer will check the contracts from the other side and give you relevant advice about the property boundaries.
It can often be an advantage to use a local solicitor or conveyancer as they will have local knowledge of the area where you are buying. If you need to sign legal documents many will insist you do so in person so if they are local to you it will be more convenient.
The conveyancing process begins after your offer on a property has been accepted and ends when the parties have exchanged signed contracts and the funds have been transferred completing the purchase.
Although all solicitors are qualified to work on conveyencing you may wish to appoint one that is a specialist in residential property or a licensed conveyancer that only conducts these transactions.
In many cases you may be required to select the conveyancers approved by the mortgage lender if the legal fees are free with your mortgage deal otherwise you would have to pay for your own solicitor or conveyancer.
The cost of a conveyancer will vary depending on the complexity of the property transaction although this is likely to be from £500 to £1,500. The typical services provided are as follows:
| Typical services provided by a conveyancer |
|---|
| Local authority searches |
| Advising you of stamp duty charges |
| Drawing up contracts |
| Give you relevant legal advice |
| Collecting and transferring funds |
| Updating the Land Registry |
Stamp duty usually applies for a property purchase and the conveyancer will advise you of the cost and can receive the funds from you and pay this on your behalf. The conveyancer will check the contracts from the other side and give you relevant advice about the property boundaries.
It can often be an advantage to use a local solicitor or conveyancer as they will have local knowledge of the area where you are buying. If you need to sign legal documents many will insist you do so in person so if they are local to you it will be more convenient.
An agreement in principle (AIP) or also known as a decision in principle (DIP) is the mortgage amount a lender is likely to offer after conducting a credit search and credit score based on a limited amount of information provided by you.
It is not requirement of a lender to have an AIP before your application and you could also speak to a mortgage broker initially to look at your income and expenditure figures to see how much you can borrow. The following are some of the benefits and risks of an agreement in principle:
The benefit of an AIP is that it can give you a certain peace of mind that your finances are sufficient to secure a mortgage and can be conducted at any stage before making your mortgage application. The AIP is not a guarantee that you will receive a mortgage or the amount that can be offered.
Even so when you are looking for a property to buy an estate agent would appreciate you having an AIP as it shows you can obtain a mortgage when you make an offer and more likely to proceed to completion.
If you make an AIP with one lender as they offered an attractive mortgage deal at the time, you may find it takes two or three months before you make an offer on a property and there are now other better deals on the market forcing you to change.
When you make a full application the lender will require more information about your income and expenses and this could lead to a different decision. Every time you make an AIP it leaves a record of the credit search on your credit history and if you have too many of these could count against you.
If you are a first time buyer and borrowing close to your income multiple limit, have concerns about your credit history or have a short credit history you may wish to have an agreement in principle before you start your property search.
It is not requirement of a lender to have an AIP before your application and you could also speak to a mortgage broker initially to look at your income and expenditure figures to see how much you can borrow. The following are some of the benefits and risks of an agreement in principle:
| Benefits of an agreement in principle |
|---|
| Gives you the confidence of a mortgage offer before starting your property search |
| It demonstrates to an estate agent you can obtain a mortgage |
| If you have had credit issues it shows you can secure a loan from a lender |
| Too many lender AIPs could damage your credit rating |
| An AIP is not a guarantee that a full application will be accepted |
| After securing the AIP other lenders may subsequently offer better deals |
Even so when you are looking for a property to buy an estate agent would appreciate you having an AIP as it shows you can obtain a mortgage when you make an offer and more likely to proceed to completion.
If you make an AIP with one lender as they offered an attractive mortgage deal at the time, you may find it takes two or three months before you make an offer on a property and there are now other better deals on the market forcing you to change.
When you make a full application the lender will require more information about your income and expenses and this could lead to a different decision. Every time you make an AIP it leaves a record of the credit search on your credit history and if you have too many of these could count against you.
If you are a first time buyer and borrowing close to your income multiple limit, have concerns about your credit history or have a short credit history you may wish to have an agreement in principle before you start your property search.
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Equity Release may involve a Lifetime Mortgage or a Home Reversion Scheme. To understand the features and risks, please ask for a personalised illustration. Equity Release may affect your entitlement to means tested state benefits and will impact on the size of your estate. For Equity Release London City Mortgages charge a fixed fee upon completion of £695. For Mortgages a fixed fee is charged on application. Typically this is from £295 up to £495 for the services selected.
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