Can I afford it? - What buying a home costs
Everyone knows buying a home costs money. Sometimes a great deal of money. But affordable homes, in other words those bought through the HomeBuy schemes or a private shared equity deal, can work out considerably cheaper than buying on the open market.
We all know that 100% mortgages are no more. Some lenders, however, are prepared to accept the 30% equity loan as part of a deposit for a home bought through HomeBuy Direct. And if you're lucky enough to secure a Rent to HomeBuy property, some of the housing providers are offering part of your rent back as a deposit. In other words, as well as paying at least 20% lower than open market rent, you're also saving up to get a foot on the property ladder.
Affordable homes are just that - considerably more affordable than buying on the open market, and often costing less than renting. But that said, you still have to take into consideration the financial implications of what buying a home actually costs - from paying legal and financial fees, to moving costs etc. It all adds up.
Here at homefocus, we want to help you jump onto the affordable homes bandwagon. We don't want you to think it's too complicated or too expensive. But we do want you to be realistic in what you can afford, what buying a home will set you back, and whether it's for you. So here's our guide, written by some of the best financial brains in the affordable homes industry...
What buying a home costs
How to they work out how much I can afford?
Adding up the price of buying your home…
It’s been a roller coaster year in the financial world but recent reports from mortgage lenders would suggest that house prices are finally starting to stabilise. As for those who specialise in the first time buyer market, they have noticed an upturn in the number of new enquiries. So perhaps, just perhaps, confidence is starting to return.
An increasingly popular way to enter the world of home ownership is with the assistance of a shared ownership scheme. This is largely due to the need to keep monthly costs as low as possible, but the popularity of low cost home ownership has also been increased because the combination of deposit and upfront costs work out considerably less than for outright purchase.
For example, let’s take a property with an open market value of £200,000 and compare the costs of outright purchase with the same costs for a 25% shared ownership deal.
Mortgage lenders are currently looking for an absolute minimum deposit of 10% - 15% of the purchase price, and more where possible to get the best mortgage deal. For example, you would need to come up with a deposit of £20,000 to £30,000 in order to proceed with a traditional outright house purchase – and that’s just for starters. On top of this you still have to fund the purchase fees and costs. On a 25% shared ownership scheme, however, the required deposit (if youre lender requires 15%) reduces to just £7,500, a saving of £22,500!
So what exactly do we mean by fees and costs? Well, let’s look at a more detailed breakdown of what buying a home costs:
Lenders fees – The two principal costs due to a mortgage lender are (this can vary so please check):
- Valuation or survey fee. If the property is new a valuation report will be sufficient. This is the case for most shared ownership properties. The precise fee will depend on the lender used and the price of the property but will generally be in the region of £350 - £550. For second hand (resale) properties a more detailed survey will be required which naturally carries a higher charge.
- Product booking fee or arrangement fee. This relates directly to the mortgage product selected and will typically be between £399 and £999. The products with larger fees generally have lower interest rates. To calculate the best product speak to your financial adviser
Legal costs – To simplify matters this section is broken down into two broad headings but please note all the costs are collected via your solicitor:
- Solicitor’s fees. This is the amount payable to your solicitor to cover the cost of their services. The amount will vary but anticipate between £500 - £750 plus vat
- Legal costs / disbursements. This heading covers a multitude of items including land registry fees, bankruptcy searches, bank transfer fees, lenders legal fees and son on. Land registry fees depend on the value of the share you are buying and can be from £50 to over £200. You can anticipate a figure of between £100 and £200 for the other legal costs.
Stamp duty – This is a government tax on house purchase. Your solicitor will calculate the sum due and the mechanism for payment. Most shared ownership properties don’t attract stamp duty – you can read more about this complicated business in our article on page 41.
As a rule of thumb your total purchase costs for a shared ownership property will generally be between £3,000 and £4,000 although they might occasionally fall outside of this range. Your financial advisor and solicitor will be able to give you a more exact figure once you have a property in mind.
Contributor – Richard Stone, SPF Sherwins
How much can you afford?
So, you're interested in buying a home - but what about the finances? After all, it's no good having your heart set on a particular property if you can't find the funds, is it? So how does your independent financial advisor work out your affordability analysis?
With any mortgage request, lenders will take your whole financial position into account as part of their decision about the amount you can borrow. It is not as simple as a straightforward multiple of your annual income. An income of £20,000 does not automatically give £80,000 of mortgage finance.
The lender will take the following factors into account:
First, what percentage of the property you want to buy, and how much do you have as a deposit to put towards it. In the current market there are no lenders giving 100% mortgages to cover the full amount of the share price that you are looking to purchase. Deposits could range from 10% to 25% of the share price of the property that you are hoping to buy.
The monthly rental that you will pay on the remaining portion of the property will also be deducted from your income as it can’t be used to pay both the mortgage and rent. As well as this any existing monthly credit commitments for loans or credit cards that you have will be deducted from your income.
Once the deductions have been made, this will give a net figure that the lender can use to calculate the amount that they will lend to you. Some lenders will then use a multiple of this figure and arrive at a maximum loan available; others use an affordability calculation based on their own internal model for amounts that they view as ‘responsible lending’. This would give a different amount for a single person than for a couple with children as the monthly cost of living would be different in each circumstance.
Each individual’s credit history will have a bearing on the amount that a lender will advance. Obviously, the better your credit rating, the more likely it is that the lender will feel safe advancing you further credit.
So you can see that there’s no simple way to calculate the figure. For this reason most housing providers will point prospective clients in the direction of a qualified financial advisor. It’s worth using this service to gain an understanding of your position – once you know how much you can borrow, you can then decide whether to use the advisor to apply for your mortgage or not.
Tim Eagles, financial advisor at The Simple Group
