Getting on the property ladder is no easy feat, and buying a house will likely be one of the most significant financial purchases of your lifetime. However, there are several ways that you can get help to find your property purchase, from mortgages to Lifetime ISAs. In this blog, we’ll explore how you can fund your property purchase.
One of the most common ways to fund a property purchase is through a mortgage. When using a mortgage, the buyer can contribute a percentage of the total purchase price, usually 10%, and use a mortgage lender to loan the difference with a ‘charge’ on the property. The charge means that if you were to miss your payments and not pay back the loan under the agreed terms, the bank can apply to the courts to take the property in place of the payments that should have been made.
Depending on the circumstances of the buyer, a mortgage can last for 25-30 years, with the cost of the loan spread out over the years. This gives people the opportunity to leverage their money and purchase properties that they wouldn’t be able to if they were buying with cash.
The amount that you’re able to lend with a mortgage will depend on your personal circumstances, including your annual income, spending habits, and outgoings. Each mortgage lender will have different criteria, therefore it’s helpful to speak with a mortgage broker who can tell you which lenders are best suited for you and how you can get the best deal.
For more information about mortgages and mortgage rates, check out our blog post – Mortgage interest rates explained – (you-convey.co.uk)
A guarantor mortgage may be an option for buyers who have no deposit or bad credit history. In this situation, a mortgage guarantor, usually a parent or close relative, will agree to cover the mortgage repayments if for any reason the buyer is not able to. The guarantor’s name will be on the legal documents, however, they won’t be on the property deeds and won’t own any share of it. If neither the buyer nor the guarantor can keep up with the repayments, the lender can forcibly sell the property of the guarantor.
Not anyone can be a guarantor, and some lenders will have specific requirements on who this can be. For example, some may insist the guarantor has fully paid off their own mortgage, or that they have enough income to be able to cover the borrower’s mortgage if needs be. The guarantor must be a homeowner and have a healthy credit report so that the lender is confident in their ability to manage finances.
A guarantor may not necessarily need to be on the mortgage for the entire time, for example, if the borrower has paid off a certain amount of the mortgagor their personal circumstances have changed, it may be possible to change the mortgage terms.
Buying a property with cash is one of the simplest ways to fund the purchase, with research showing the number of people buying a property without a mortgage has reached an eight-year high. Analysis from estate agency Hamptons shows that nearly 40% of sales agreed earlier in 2023 came from cash buyers, and higher interest rates are likely driving more people to use cash to purchase property if they can do so, rather than take out a loan.
Buyers using cash to fund a property purchase must show where the money has come from to satisfy the Money Laundering Regulations, whether that’s from releasing equity from another property, downsizing, savings, or inheritance.
If buying with cash is a possibility, it has many advantages over using a mortgage to finance the purchase. Not only will the buyer own the property outright and not have to pay monthly repayments which are susceptible to interest rate increases, but it will also make the buying process quicker as there are less parties involved in the transaction.
It’s common for the ‘bank of mum and dad’ to help their children get on the property ladder, by assisting with a deposit contribution. This could also come from another family member or even close friend, and whilst this is often worked through on a trust basis, there are some things to consider.
Firstly, if the buyer has been given money as a deposit contribution, this will need to be explained to the solicitor with details of where it has come from and the necessary proof. This is to satisfy the money laundering regulations. The buyer will also need to clarify with the contributor whether the money is being gifted or will need to be paid back at some later date, and if so, will there be an interest charge applied. Additionally, it’s important to have a written agreement in place to confirm the arrangement that’s been agreed.
When more than one person buys a property together this is called co-buying, for example with a partner, friends or a sibling. This can be a great way to get on the property ladder if it’s not financially viable for you to do alone, splitting a deposit three ways is much more doable!
Although this can work well in many scenarious, similar to deposit contributions it’s important to have a written agreement of what’s been agreed. The co-buyers should think about the logistics involved, such as if the deposit is split equally, will the mortgage repayments and bills be paid equally too? It’s important to have an exit plan in place too so everyone is aware of what will happen if one person wants to sell, and it will need to be agreed if the co-buyers are tenants in common or joint tenants.
If the co-buyers are joint tenants and one of them passes away, the share of the property will automatically pass to the other owners. Whereas, if they are tenants in common, the share will pass to the estate and not necessarily to the other owners.
Having a professional draw up a Deed of Trust is imperative, outlining who owns what and and what will happen in different situations.
The Lifestime ISA (Individual Savings Account) is a government scheme to help people save up to buy their first home, or simply to put money away for later on in life. If you can save up to £4,000 per year, the government will add a further 25% of the amount you have paid as an annual bonus. For example, if you put away £4,000, you’ll receive a tax free bonus of £1,000.
The £4,000 is included as part of your overall annual ISA allowance, which for the year ‘23-’24 is £20,000. Anyone between the ages of 18-39 can use the scheme, as long as you open the account before you’re 40, and you can keep contributing money until you’re 50 years old.
The money can be withdrawn without penalty in the following circumstances:
- To help you buy your first home worth up to £450,000 at any time from 12 months after you first save into the account
- If you become terminally ill with less than 12 months to live
- From the age of 60
If you withdraw the money for any other reason, you’ll have to pay a charge of 25% which covers the government bonus you received on your original savings.
We hope this blog post has given you some helpful information about the different ways you can fund your property purchase, and if you’d like any further information about buying a home, get in touch for a friendly no obligation chat.