British Culture - Buying a House

With dictionary look up. Double click on any word for its definition.

This section is in advanced English and is only intended to be a guide, not to be taken too seriously!

An Englishman's home is his castle, well that's how the saying goes, but it's not so much a castle as a shed. It's official...

Buying a House

When buying a house, consumers have to deal with estate agents, solicitors, surveyors, builders, lenders and others. When they want to buy a property, the chances are people won't have tens of thousands of pounds stashed under the bed so they need to approach a mortgage lender to help with the purchase. Mortgage lenders are able to lend a great deal more money on the purchase of a house as opposed to a purchase for a car or a holiday because property tends to hold it's value or increases in value over time. This ensures that they will probably be able to recoup much of the loan if anything goes wrong. Needless to say, this doesn't mean that they don't make a great deal of money out of mortgages. Generally over the period of a mortgage the borrower will pay back nearly three times as much as they borrowed!

Until recently nearly all home buyers would have used a Building Society to provide them with a mortgage but the industry has undergone something of a shake-up in recent years with many Societies converting to or being taken over by Banks. Building Societies offered better interest rates on mortgages as they were owned by the people who saved or borrowed from them known as members. This meant that whereas Banks had to maximise their profits to allow for payments to be made to shareholders the Building Societies could be more competitive as they were not profit driven. Building Societies can still work out cheaper but many Banks now offer competitive rates and the market has been joined by other lenders such as Internet or telephone lenders who can compete by keeping down the overheads incurred by having a high street presence. Although many borrowers still like to visit a branch to discuss their requirements a significant amount are happy to conduct their business over the phone or on the web.

Mortgages

What is a mortgage? The legal definition is "in law a pledge of property as security for payment of a debt. If the borrower (mortgagor) fails to pay the debt, the lender (mortgagee) has the right to seek foreclosure. Any kind of property can be mortgaged. A simpler definition is "A mortgage is a loan on property, payable over a period of up to twenty-five years".

There are several types of mortgage on the market, many catering to specific requirements such as Buy To Let Mortgages, Self Build Mortgages or Pension Mortgages. There are, however, two main categories from which most borrowers will choose, repayment or endowment mortgages.

Repayment This is by far the most popular mortgage scheme and is available from all lenders. The monthly mortgage payments pay off both the interest on the loan and the loan itself or the capital sum. To begin with the amount put towards the interest may take up most of the repayment but by the end of the mortgage term all the money will have been repaid.

Endowment This type of mortgage involves paying off the interest on the loan only. The monthly repayments comprise of two sums. One is allocated towards the cost of the interest on the loan and the other is a contribution to an endowment policy. This policy will hopefully increase in value over time and provide a lump sum at the end of the mortgage term to pay off the capital sum and even allow a cash bonus on top. The money paid into the endowment policy will be invested in stocks and shares, unit trusts or ISA’s which should increase in line with inflation and the money markets. This type of mortgage is much less popular than it once was as many borrowers found that these investments failed to provide a sufficient return on the investment. This could mean that at the end of the mortgage term there were insufficient funds to pay off the amount outstanding on the property. In this situation the borrower has to make up the shortfall. In many ways it is a gamble which has paid off for most people as stocks and shares tend to increase in value but recent stock market crashes and a volatile world market means that this is by no means a water tight method of buying a home.

If you thought choosing between an endowment and repayment mortgage was confusing just wait until you see the options available when it comes to interest rates. They vary from lender to lender but here are some of the offers available.

Standard Variable Rate (SVR) Interest rates offered by lenders tend to rise and fall with the base rate as set by the Bank of England. If the Governor of the Bank of England decides that interest rates need to go up by half of one percent then the lenders usually follow suit. A variable rate mortgage reflects these changes. They can go up and down, usually only in small percentage points but these can build up to be a significant amount considering the sums most people borrow.

Fixed Interest Rates Should the borrower be uncertain about how interest rates will behave (as most of us are) then they may opt for a fixed rate mortgage. These are especially useful if they prefer to know exactly how much they will be spending each month. Most lenders offer these rates for an agreed period of time, two years for example after which time the interest rate will revert to the variable rate discussed above. The only downside to this arrangement is that should interest rates fall then the borrower will still be paying the higher rate but at least they know they can afford it.

Discounted Variable Rate Many lenders offer this incentive for an agreed period of time much like a fixed rate. The difference is, as the name implies that this rate too is variable in that it can go down as well as up. The benefit is that the lender will guarantee that the rate will be an agreed amount less than the SVR. Once the agreed period has ended then the mortgage reverts to the SVR offered by the lender. The advantage of this is clear but such offers must not blind the borrower to possible drawbacks such as a higher SVR in the first place which will be more expensive in the long run.

Cashback An increasingly popular incentive offered by lenders is the Cashback scheme. As the name suggests once the mortgage term commences the borrower will receive a lump sum corresponding to the size of the loan. However, if the property is sold or the mortgage terminated for any other reason there is often some form of financial penalty so that the lender can recoup the cost of the cash 'gift'.

In the UK first time buyers can generally obtain 3 times their income for a mortgage. This is based on a single income but if they are buying a property with someone else then the amount can be twice the combined income. This figure may well appear to be a large amount but there are other associated costs. For example, people will be expected to pay at least 5% of the total cost as a deposit, coupled with solicitors fees, removal fees and insurances not to mention the cost of furniture and home improvements this can all add up to be a significant drain on anyones financial resources.

House Hunting

The first step when looking for a property to buy is to think about which area to live in. This is obviously dictated to by how much a person can afford as certain areas are more expensive than others, it is relatively easy to change something on the inside of a property but almost impossible to change anything about the area in which the property is located.

Once a location has been decided on then estate agents in the area need to be contacted. A good way of finding an estate agent is by looking for For Sale boards in the area chosen. Local newspapers tend to be one of the best sources of new properties but if by are signing up with an estate agent they can call or send details of a property before they reach the papers. An increasing number of properties are also sold on the Internet as this can save on selling fees.

Once an interesting property has been found a surveyor has to be appointed to carry out an inspection of your chosen property before the mortgage lender will lend the money. Depending on the type of survey they will check the structure of the building to ensure that there are no major problems.

Making an Offer

Having found the property to buy an offer needs to be made to the estate agent appointed by the vendor. The British are not known for their haggling, but generally the asking price is what the seller would like to receive for the property, it does not necessarily mean that they will get it. If the property is in a sought after area, has just come on the market and appears to offer good value then it would probably be sold for the asking value. However if the property has been on the market for some time then an offer below the asking price is often made. It is a matter of judgement and will differ from property to property, vendor to vendor and can be affected by the condition of the housing market.

If a reduced offer is rejected then the estate agent will try to negotiate a price which is acceptable to both parties. Whatever the offer is it should always be made "subject to survey or contract". This means that neither party is legally bound to accept the offer and no penalty will be incurred if everything falls through. This process is slightly different in Scotland.

Once the offer is accepted the lender proceeds with more formal arrangements for a mortgage. They may have issued an agreement in principle to borrow a sum of money but once a specific property has been found a full application will need to be made. The lender will need to verify certain details and will need proof of earnings from the borrower which could be pay slips from an employer or yearly accounts for self employed people. They may also request references, possibly from a landlord or employer. At this point insurances will also be considered, the lender will recommend policies but people are free to choose their own insurer should they prefer. These will range from policies demanded by the lender such as building insurance to cover the structure of the property to optional but recommended contents insurance to cover belongings. Additional insurance can also be taken out to cover the cost of the mortgage in case the borrower is unable to pay the mortgage through unemployment or illness.

Once the mortgage lender is confident that the purchaser has the funds to repay the loan they will also want to ensure that the property is worth the money that they are lending. They will therefore instruct a valuer to carry out an inspection of the property in order to protect their investment. They are not obliged to share the findings of the valuation with despite the fact that the purchaser will probably have paid for it, and it is only a valuation and not a structural survey, appointing a surveyor to carry out a more detailed survey could reveal some potentially expensive problems.

There are several other legalities associated with buying a property and a solicitor or licensed conveyancer needs to be appointed to carry these out. They will check to ensure that there are no building plans lodged with the Local Council which may affect the value of the property. They will also check to ensure that all the legal documents associated with the property are in order to ensure a smooth selling process. If the property is leasehold they will ensure that there are no prohibitive restrictions on the lease. There will be several forms to fill in most importantly the contract, one copy of which will be signed by the purchaser and the other by the vendor which, when exchanged will ensure that the sale becomes legally binding.

Another form is the Fixtures, Fittings and Contents Form which details what the seller will leave and what they will take. This form is very detailed and ensures that all parties are aware of exactly what is included in the sale of the property. It lists such things as carpets, light fittings and door furniture which may well be expected to be a part of the sale but which the seller may well want to take with them.

There are other fees which are paid to your solicitor known as Stamp Duty and Land Registry Fees. If the land is unregistered then there will be a higher fee to cover the cost of registering the land.

Homebuyers Report This is the cheaper and less detailed of the two surveys, it is more thorough than a valuation and will contain information which the surveyor considers to be urgent or significant. It will describe the general condition and type of property on a standard form which should be relatively easy to understand.

Building Survey This is a more detailed survey and therefore more expensive than a Homebuyers Report this report is especially recommended for older properties or those which are in disrepair. Not only does it describe major faults with the property such as subsidence or rot but it will also detail less significant problems such as the condition of the wiring or with the design of the building. Recommendations may also be made as to the approximate cost of such repairs which could affect your lenders willingness to give you money. The lender could make a conditional offer which would state that a condition of the mortgage is that a new roof is installed or that the property is treated for damp.

Once the lender is satisfied that all the conditions have been met then the exchange of contracts can be made. It is at this point that the agreement becomes legally binding and a deposit (usually 10% of the value of the property) will be passed from the buyer's solicitor to the vendors. Should anything go wrong from this point on then the buyer stands to forfeit the deposit. They should also ensure that the property is properly insured as the risk becomes theirs at this stage. Unless there is a long chain, it usually takes about 1 month from exchange of contracts to completion.

Completion

Some four hectic weeks after the exchange date should come the big day when the transaction is completed. The solicitor will arrange for the mortgage funds to be paid to the vendor, the title deeds for the property will be passed to the lender for security and the buyer picks up the keys to move in.

---

Glossary

Arrangement fee - The lender or person who has arranged your mortgage will charge you a fee.

Bedsit - This is the kind of accommodation many students live in when they cannot afford anything else. It is basically a single room with a bed, cooker, table and sofa. You would normally share the bathroom.

Bridging loan - A short-term bank loan at a higher rate of interest than normal. Sometimes it is necessary to take out a short-term loan to bridge the gap between buying and selling houses. This is a useful but expensive option when you need money quickly to buy a house, but your own money is still tied up in your previous property. Bear in mind that bridging loans are meant as short-term, stop-gap loans.

Broker Fee - Amount of money charged to you by the financial advisor or Mortgage broker. It is the fee payable for arranging the mortgage.

Building insurance - This is a requirement to cover you in the unfortunate event of serious damage to your home.

Building Society - An organisation set up to lend money to people who wish to buy there own property.

Bungalow - A house with no upstairs. A single storey house. Not popular with anyone but the old.

Buy to let - This is where a property can be bought with a view to letting to tenants. Property is bought as an investment.

Caravan - Everyone in the UK hates caravans - except caravan owners, that is. They are the trailer houses that people attach to their cars every summer, people who live in the north travel south and the people who live in the south travel north, the same for the east and west. The result is all the little British roads become blocked and bring everyone to a complete standstill.

Chain - This means you are waiting to complete on a sale in order to buy, and the person you are selling to is waiting to complete his or her sale to buy a property, and so on and so on. All it takes is for one link in the chain to break and everybody is affected.

Collateral - Property or other asset used as a guarantee for a loan.

Completion - When the transfer of ownership is signed, sealed and delivered, and you get to pick up the keys. This is the best part of the home buying procedure isn't it?

Conveyancing fee - This is the amount charged by the Solicitor for all the legal work associated with buying your property.

Council house - A council house is a government built house to help people on lower incomes have a home. They all used to be rented from the government but since Mrs Thatcher, who was against government ownership of anything, most tenants have the option to buy relatively cheaply to help them get on the house ownership ladder. Most council houses are fairly large, for families, but not terribly attractive.

Council estate - A council estate is a neighbourhood of council houses.

Estate - This is short for a housing estate.

Equity - the value of the property which is not mortgaged nor has any other loans against it i.e. the part that belongs to you. For example, you bought your house and you owe the Bank or Building Society £40,000, but the house is valued at £70,000, the difference between the two amounts is £30,000.( this is the equity of the property). Income multiplier - This is used to calculate how much money you can borrow to buy your new home. A single homebuyer can borrow up to three times their annual salary. A couple can borrow up to two and a half times their joint salary. For example, a joint salary of £40,000 X 2.5=£100,000. (This is the amount that can be borrowed).

Flat - This is the British word for an apartment.

Foreclosure - A procedure through which property that is mortgaged is sold to satisfy the lenders claim.

For sale - You will see millions of these signs all around the country with the name and telephone number of an estate agent. Of course, it means that the property is for sale.

Gazumping - When you buy a new house in the UK, you hope that you won't be gazumped. It's frowned on but it still goes on. When you make an offer on a house and the seller accepts it, they are not allowed to then accept a higher offer from another potential buyer. That would be gazumping. There are moves afoot to make it illegal.

Housing estate - Basically this is a bunch of similar houses built far too close together and described as "highly desirable" by estate agents!

Land Registry fees - When you buy a property in the UK you need to register with the local Land Registry so your rights as legal owner are recognised. This is paid to the Land Registry.

Mobile home - These are like large caravans, but they don't get moved around the country as much. They are an alternative for those who cannot afford to buy a house.

Stamp duty - A 1% tax on the purchase of a property costing more than £60,000; 2% on purchases over £250,000; and 3% on properties worth more than £500,000.

Subject to contract - A gentleman's agreement that the property is sold. However both the buyer and the seller may pull out of this position without any legal penalty.

Survey - The surveyor checks the property you are interested in to make sure there are no major problems.

Vendor - the person selling the property.

Thatch - There are still many houses in England that have thatch for their roof material, they look very quaint and tend to be called 'Thatched Cottages'. Thatch basically straw and is very picturesque. Amazingly it keeps the rain out pretty well, but is often covered in a fine wire mesh to keep the birds and mice out since they like it too.

To let - You'll see signs around England with "To Let" on them, outside properties, this means that the property is for rent. But too many "To let" signs might mean the area is run down.

Valuation fee - This is payable in advance. The mortgagee needs to be sure the property is worth the amount of money you are borrowing, they will arrange for a valuer to look at the property, but you have to pay for the privilege. A valuation is not a survey.

---

Interesting Links

Port Sunlight - One of the first and finest examples of social housing in the UK.

Up my street - If you are going to visit the UK find out about the area here. You only need the postcode.

Property Finder - Find a property to buy in the UK. Or just be nosey and have a look.

The Royal Residences - An on-line guide to the most sumptuous places in the UK.