Buying a home for the first time can be a minefield, so over the next five issues we hope to guide you through the key features of a property purchase >>
Buying your first home should be a happy experience and, for the most part, it is just that. Despite the economic gloom and doom that is being thrust upon us from the media and other sources, we are as keen as ever to own our own homes. With this, the demand for property is only tempered by the constraints put upon us by the lending institutions.
When you are buying a home, there are many people involved, from the first viewing of the property to picking up the keys. Over the next few weeks we will explain these roles, in the hope of giving you a clearer insight into how the legal process works.
First things first: what we buy is generally governed by what we can afford. This may sound obvious, but buyers often overextend themselves by borrowing the maximum that can be lent, often forgetting that the cost of running a home does not just involve keeping up the mortgage payments.
Therefore, anybody contemplating buying a property should also consider the following:
>> The level of council tax
>> The costs of heating and lighting
>> The costs of ground rent and/or service charges (in the case of a leasehold property or a leasehold flat)
>> General repairs
>> Buildings and contents insurance
The information on the first three can easily be obtained from the estate agent handling the sale, but it is worth looking at all aspects of these potential expenses so that you can budget properly. While beans on toast is delicious, we don’t think you would want to be eating it every night of the week!
The Right Financial Advice
Most people who contemplate taking on a mortgage will have surfed the net and have been confronted by a myriad of mortgage products. Fixed interest rates, standard variable rate, tracker, setting up fees, exit fees, early redemption penalties – you can feel the headache coming on already, can’t you? There is no doubt that as you embark upon acquiring your most expensive asset, you will need to obtain the best professional financial advice and employ the services of an independent financial adviser (IFA). The mortgage industry is a minefield and requires someone with knowledge and experience of the industry to find the products best suited to your needs.
An IFA will give you working examples of the mortgage repayments and will also calculate the effect of interest rate rises upon those payments.
The Difference Between a Survey and a Valuation
There is a clear distinction between the two, and it is important to understand the difference. If things go wrong, you may find that you have no recourse to the person who carried out the inspection of the property and who you thought had a duty to act on your behalf.
When you seek to borrow money from a lending institution (be it a bank or a building society), the lender will be concerned about three things in particular: firstly, whether you are a suitable person to be borrowing money (simply put – your creditworthiness); secondly, whether you have sufficient income and job security to service the loan; and thirdly, whether the property that you are giving as security for the loan is suitable. This third condition will mean that the lender will wish to have a professional valuer (usually a qualified surveyor) to inspect the property and confirm it is suitable for lending purposes.
However, the basic valuation carried out on behalf of the lender to assess a property’s suitability as a security does not necessarily mean that you will have the benefit of seeing the report. The surveyor’s duty is to the lender and not to you, even though you paid for the valuation of the property when you made your mortgage application. In most cases, you will be given a copy of the report, but it is important to note its limitation, which is quite clearly stated in the report itself. The legal relationship exists only between the valuer and the lender client, not you. Therefore, you would be well advised to consider obtaining an independent report for your own benefit.
The most common of these reports is called a homebuyers report and, although not a full structural report, it is comprehensive and is, generally speaking, good value for money. It is particularly important to consider one of these reports when buying an older property. Most surveyors operate this scheme and will be pleased to give you a quotation before taking out your instructions to carry out the report. The results of the report may create a bargaining tool for you to negotiate the price, should works be required on the property.
A full structural report is expensive but tends to leave ‘no stone unturned’ and is particularly sensible if you are buying an older property.
Choosing your Legal Representative
In England and Wales a person cannot carry out the business of conveyancing property unless they are suitably qualified and have the appropriate professional indemnity insurance to cover them against negligence or malpractice. This means you will need to appoint a solicitor or licensed conveyancer who holds these qualifications and the appropriate insurance.
One thing that often influences a buyer in deciding which conveyancer they will use is the cost. The vast majority of conveyancers will be prepared to give a quotation for their services and to put that in writing. If instructed by you to act on your behalf, they will be obliged to confirm their costs and how they are calculated.
Most conveyancers will, in relation to the purchase of a domestic purchase, be prepared to give a fixed price quotation and this will include the costs of their services, the VAT and also the costs of the disbursements.
Disbursements is the expression given to those payments that a legal representative has to make on your behalf, and they tend to be fairly standard. They will include the cost of searches required against the property, Land Registry fees and stamp duty land tax. We will discuss these disbursements in more detail in a later issue.
The most variable legal cost is the actual conveyancing fee, but you should always be aware of the following:
>> Cheapness and value for money are not the same thing
>> Get your quotation in writing before you instruct your legal representative
>> Check that the fees that you are quoted include the legal work on behalf of the lender
>> Ask if you will be charged anything upfront. Most firms will ask you to pay the search fees upfront
>> Ask what your legal representative will charge if your purchase falls through
Remember, however, cost is not everything. If you’re looking for a high level of service, it is also a good idea to ask your friends or family if they can recommend somebody that they have used recently and were happy with.
When asking for a quote for conveyancing fees, ask the conveyancers to confirm whether they can also act for your lender. This requires the conveyancers to be on a lender’s panel – a list of lenders who are prepared to carry out their part of the legal work. Separate representation can be costly.
Finally, there are a number of stages through which the transaction will proceed, and we will explain these in detail in future issues:
You have chosen the house/apartment you wish to purchase.
You make an offer (subject to survey), and it is accepted by the seller.
The estate agent confirms (by way of a memorandum of sale) the details of the sale
and sends these to both the buyer’s and seller’s legal representative.
You make your mortgage application.
The property is valued/surveyed by the lender’s valuer (and possibly your own independent surveyor).
Subject to the valuation/survey not revealing any adverse matters, you instruct your legal representative to proceed. In practice, you may well have already appointed your legal representative. The preliminaries of the transaction may have already been undertaken – namely your lender having sent you their terms of business and sought from you your proof of identification and address.
Your conveyancer applies for the searches against the property and also receives the contract paperwork from the seller’s solicitors. The solicitor then investigates the title to the property and the information that the seller has provided about the property.
Your lender issues you a written mortgage offer.
Provided that all the searches have been completed satisfactorily and that all enquiries as to title and other matters have been concluded, you are in a position to sign your contract, pay your deposit and agree a date for the change of ownership with the seller (known as the completion date).
Once both parties have agreed a completion date, contracts become binding. This process is known as ‘exchange of contracts’ and is undertaken between the seller’s and buyer’s solicitors.
On the day of completion, your conveyancer pays the seller’s conveyancer the monies to complete the transaction. These monies are derived from your lender, plus any balance monies that you have to pay (bearing in mind that you will normally have paid a 10% deposit when exchange of contracts took place).
You open a bottle of champagne to celebrate your newest acquisition, while your legal representative gets on with registering your title to the property with the Land Registry.