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Why A New-Build Mortgage Could Be For You

When looking for your first property, a new build home can seem like a natural fit. There are no reminders (good or otherwise) of the previous owners, and some developers even let you choose your furnishings. You get to start from scratch and make the place your own. 

Developers of new builds are known to work to strict deadlines, and will likely want to exchange within 30 days. They can sometimes be more organised than traditional property developers, which is compelling because buying a property can be stressful.

Suppose you get involved with a new build project early enough. In that case, there is the possibility of choosing your fixtures and fittings before you even move in. New build homes tend to be in better condition than older ones, naturally, because everything is new. You can move straight in without the fear of considerable upfront maintenance and repair costs. New build homes are often better insulated and energy-efficient, meaning that they cost less to heat and are less likely to bring unforeseen costs. 

There is no chain because you are buying it directly from the property developer. You are less likely to be disappointed by the common occurrence of breaks in the chain, leading to you losing out on a house you had set your heart on. 

The Help To Buy Scheme

The government’s Help To Buy scheme, exclusively for new-build homes, is designed to help first-time buyers get onto the property ladder. The scheme allows buyers to put down a lower deposit than generally required for a property. The government offers an ‘equity loan’, which will enable you to borrow 20% of the purchase price of a home under £600,000. 

The Rules of Help to Buy:

  1. You need a minimum deposit of 5% of the sale price of your new-build flat or house.
  2. The government lends you up to 20% of the sale price, or 40% if you live in London.
  3. You can borrow the rest, which is 55-75% depending on where you live, as is standard from a mortgage lender. 
  4. The loan is interest-free for five years. You pay a £1 monthly fee by direct debit. 
  5. The loan must be repaid after 25 years, or earlier if you sell the home. 

Drawbacks Of New-Build Mortgages

New-build properties are often much pricier than older homes in the same area. You are paying for all new appliances and property without many of the pitfalls that plague homeowners, like boiler issues and damp. Naturally, there is a premium for this peace of mind. 

If your new home is off-plan (not fully built yet), you are at risk of taking out a mortgage on a house that won’t be finished by your move-in date. Delays in building and construction are common, and your ‘dream home’ may be a building site for longer than promised.

Most mortgage offers from lenders only last for six months. Make sure that when you consider making an offer on a project that is under construction that you aren’t bidding on something that won’t be ready in time. If you run out of time, this can make your offer void, and you can lose out on your ideal home. 

Suppose you receive a mortgage offer while the project is still under construction, and your home falls in value for some reason. In that case, your mortgage offer will remain the same. To avoid overpaying would require re-applying and possibly losing the opportunity for the home you want. 

Securing a mortgage on a new-build is also not as straightforward as you might hope. Because property values of new-build homes can fall in the first few years, lenders often assign a higher interest rate for mortgages on new-build properties.

New-Build Final Thoughts

Knowing that you are the first person to live in your home is a great feeling. New-builds are built with the homeowner in mind and are often well-placed with modern fixtures and fitting. Buying from a property developer instead of an individual is usually smoother and better organised because they are handling many properties of the same kind. Leaving individuals out of the situations also means that you don’t have to worry about a chain, or someone changing their mind. The developers want to sell you the property and are more likely to make it easier for you. However, there are things to consider, like the high interest-rate put on new-build mortgages and the unpredictable factor of securing an off-plan home.

Friends Capital can help you get your first mortgage – contact us today.

Should I Overpay My Mortgage?

With savings at an all-time low, the natural choice is to pay off your mortgage early. For some, this is the right choice, with potential savings in the tens of thousands. However, it’s not exactly a no-brainer. There are plenty of things to consider, such as repayment penalties, paying off existing debts and holding on to your rainy day fund. 

Reasons To Overpay

The great thing about overpaying your mortgage is that it chips into the debt that you’ve built up as a result of interest. Every penny you pay back brings you closer to the day that you’re mortgage-free.

Because interest rates are so low at the moment, paying off your mortgage saves you more than you’d make putting the equivalent amount in a savings account. If you have a 3% mortgage, then you need your savings interest rate to be above 3% to make financial sense for you. By overpaying on your mortgage, you’ll reduce the amount of money that you can be charged interest on. 

Why Lenders Don’t Want You To Pay Off Your Mortgage Early

Seems strange right? Financial institutions love your money. The longer you take to pay it – the more money they make. Most lenders allow you to pay 10% of your mortgage balance per year if you’re still in your introductory (also known as fixed, track or discount) period. If you want to overpay during this period, there will likely be an Early Repayment Charge. There is a considerable variation in the flexibility of mortgage terms, so please check with your provider. 

In most cases, if you’re beyond your introductory period, then you can probably overpay by as much as you like, as long as you are at your lender’s standard variable rate (SVR). The SVR is the standard mortgage rate you’ll be charged at (as long as you don’t remortgage). 

However, some SVRs are expensive. It can change, and your monthly payment rate will be higher. And, you’ll be paying off more of the interest – not the capital of the mortgage. If your SVR increases then remortgaging could be a better option than overpaying.

Some lenders will serve a penalty if you try to overpay on your mortgage. The chance of a penalty can vary greatly depending on the terms of your mortgage. Some impose a flat-rate fee of 5% to all overpayments; others charge you more for a higher overpayment. The extra amount you’ll have to pay also depends on how many years there are outstanding on your loan.

These rules are in place to mitigate the loss of profit for your mortgage provider. Your mortgage was agreed based on the amount of interest that the bank or building society was likely to collect. By allowing you to overpay without a charge, your mortgage becomes less worthwhile for your mortgage provider. By regulating your ability to overpay, the mortgage provider can control their profits. This doesn’t contribute to making overpaying your mortgage a compelling prospect. 

First Pay The Debts That Keep You Up At Night

The golden rule of debt repayment is to pay your most expensive or highest-interest debts first. So, before getting too excited about pulling your home from the claws of the bank – start paying off your most pressing debts. The most notable of these are high-interest credit cards and personal loans

Save For A Rainy Day

For those with existing credit card or loan debts, all sources correctly point to paying those off as soon as possible. However, for those without financial strain, having an emergency fund is the next most crucial thing for financial security. A rainy day fund is a more practical option for when unexpected circumstances strike than overpaying on your mortgage. 

After all, if you are struggling in the future, your mortgage provider won’t be lenient just because you overpaid in the past. Especially taking into consideration the ways that mortgage providers put in provisions to ensure that you carry on paying interest. These are both predatory and irritating, but making early repayment unattractive in many ways. In the majority of cases, making a mortgage overpayment is not as wise a decision as having 3-6 months of money for the times when you most need it. 

If you’re otherwise debt-free, have a considerable emergency fund and have checked the penalties in your mortgage terms, then mortgage overpayment could be an option for you. The answer of whether overpaying your mortgage is worth it will depend on your mortgage and terms. Additionally, the real impacts of housing and mortgages as a result of COVID-19 are yet to be seen. 

Guide to Equity Release

Additional sources of income as you enter later life can be desirable or essential. One way to get some liquidity is to use your home’s value to release money that is locked up in brick and mortar, as you continue to live there.

This is a big financial decision to make. You should get unbiased financial advice before you decide if an equity release scheme is the right option for you.

Here we answer the questions people ask most often about equity release and discuss the advantages, disadvantages, and risks.

Equity release – what is it?

The equity of your home is its gross market value, less any mortgage that still remains. This calculation gives you the net amount that your residence would give you if you sold it for cash today.

However, suppose you do not want to sell your home or downsize to release capital. In that case, an equity release will allow you to access a significant portion of your home’s value. If your mortgage is paid off and you own the home outright, then you can apply for an equity release scheme.

An equity release scheme will allow you to access a significant amount of money and permit you to continue living in the property. It is a financial solution that many people choose in later life.

How equity release schemes work

When you opt for an equity release scheme, you will exchange a portion of your home’s value with an equity release provider. The equity release will give you a regular income, or it will provide you with a lump sum of money, as you prefer.

There are several mechanisms for achieving this, including selling a portion of your home to the equity release provider and the right to continue living there. The alternative option is a special kind of mortgage.

These products are called:

  • A home reversion
  • A lifetime mortgage
  • An enhanced lifetime mortgage

What is a home reversion equity release scheme?

A home reversion equity release scheme will allow you to sell part of your home and retain a legal right to continue living there. This right of occupation extends until you die or move into long-term care. The equity is paid as a regular salary or as a lump sum.

The later in life you are, the more money you can typically access. You may need to be aged 60 or over to access this type of equity release scheme. Furthermore, the state of your health (being in poor health) can help you leverage a larger share of the value of your property.

What is a lifetime mortgage equity release scheme?

More popular than a home reversion, a lifetime mortgage equity release scheme allows you to borrow a lump sum of money through a unique form of a mortgage. The mortgage is only repaid once you move into long-term care or when you pass away.

Typically you can borrow between 18% and 50% of the total property value. The later in life you are, the more equity you can release.

The debt continues to grow with the addition of interest. However, you can pay the interest as you go, to avoid compound interest. This type of mortgage is called an interest-paying mortgage. If you do not wish to pay the interest as it accrues, you will be taking out an interest roll-up mortgage.

You can find equity release schemes that offer a no-negative equity guarantee to give you peace of mind and ensure your debt never exceeds the property’s value. If your debt equals your home’s value, then its entire amount will be used to pay off the mortgage when you die or move into long-term care.

Enhanced lifetime mortgage

If you have a serious health condition, and in some cases, if you are a heavy smoker, you may have access to an enhanced lifetime mortgage equity release scheme. With this type of scheme, you pay a lower rate of interest, or you can borrow more money instead.

The advantages of equity release

The most significant advantage of equity release is that you will receive money that you can spend right now. You will be able to capitalise on the rise of your house price that has occurred over time.

You can enjoy the money or a portion of the money you have earned over your lifetime, rather than leaving it all to your relatives or beneficiaries. You can also use the equity to relieve your family’s burden of funding your long term care.

The disadvantages of equity release

The most significant disadvantage of equity release is that you cannot release your home’s full market value. You are only accessing a portion of the value of your home (usually between 18% and 50%). However, if you sold your home to turn its full value into cash, you would still need to find somewhere to live.

Another disadvantage is that your relatives or beneficiaries will receive a smaller inheritance. You may also have fewer rights to benefits if your bank account is full of cash.

A third disadvantage is that you will owe more than you borrowed, due to compound interest. At five percent interest, for example, the amount you owe could double in fifteen years. The effect of compound interest is a major reason why people opt for an interest-paying mortgage.

However, suppose you do not wish or can’t pay the interest as you go. In that case, you can reduce the effects of compound interest by taking several smaller releases of equity, and only when you need/want them.

Under the terms of home reversion equity release schemes, your home might need to be vacated quickly, following your passing, which can burden your relatives.

Contact Friends Capital

Friends Capital are experts in equity release and can advise you on the best option based on your circumstances. Contact Friends Capital today for help. 

New Stamp Duty Guidelines

The chancellor has announced new stamp duty guidelines that form a stamp duty holiday on the first £500,000 value of all property sales in England and Northern Ireland. The new guidelines take immediate effect, giving a temporary increase on the tax threshold until March 2021.

The chancellor’s intentions are to boost the property market during the coronavirus pandemic. Raising the tax threshold will help buyers who are hit financially by the COVID-19 crisis. According to Halifax, the crisis has severely hit the UK’s property market, resulting in house prices falling for four months in a row.

Chancellor of the Exchequer, Rishi Sunak, says that nine out of ten people buying their main home will now pay no stamp duty.

What is Stamp Duty?

People and companies pay stamp duty when they purchase a residential property in the UK. The amount of tax varies slightly across the four countries of the UK and is calculated against the property’s price.

In England and Northern Ireland you pay Stamp Duty Land Tax (SDLT), in Wales, this is called Land Transaction Tax, and in Scotland, you pay Land and Buildings Transaction Tax. The temporary holiday announced by the chancellor only applies to buyers in England and Northern Ireland.

Stamp duty usually generates the government revenue of £12bn, which is equivalent to 2% of the total tax taken by the Treasury. The nine-month temporary holiday is predicted to cost the government approximately £3.8bn.

The new threshold of £500,000 applies to property sales that complete up until March 31st, 2021. The new guidelines apply to main residence completions that take place between July 8th, 2020, and March 31st 2021, inclusive. These rates apply whether you are buying your first home or have owned property before.

Properties costing more than £500,000 will pay only on the portion of the property value that goes over this cap. Homebuyers in England and Northern Ireland, buying properties valued at up to £500,000 or more, will save up to £15,000. The average fee for home buyers during this period of tax relief will fall to approximately £4,500. 

Calculating your Stamp Duty

Your stamp duty is paid on the property completion date. This means that if you have already exchanged contracts, but the sale is yet to go through, you will qualify for the new rules.

The taxation brackets now look like this:

  • £500,000 or less – nothing is due
  • The next £425,000 (£500,001 to £925,000) – 5% 
  • The next £575,000 (£925,001 to £1.5 million) – 10% 
  • Above £1.5 million – 12% 

You can use the government’s Stamp Duty Land Tax calculator to calculate how much stamp duty you will need to pay.

Companies and people purchasing properties up until March 2021 will make huge savings against the old threshold, which was set at £125,000. The previous limit for first-time buyers of £300,000, also moves in line with the new threshold of £500,000.

Second-home buyers and landlords are also given a tax cut. However, they still need to pay the extra 3% of stamp duty they usually incur under the previous stamp duty rules.

Critics of the new guidelines predict there will be a slump in the property market during April 2021. People will rush to take advantage of the temporary reduction in tax before the period ends.

You can read the government’s Stamp Duty Land Tax: temporary reduced rates announcement here.

Friends Capital Can Help

If you have any questions about the new guidelines and how best to take advantage of the temporary relief contact Friends Capital we’d love to help.

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