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Step on or step up the property ladder

Members in practice, financial advisory, business and all of us in our private lives are impacted by decisions around mortgages. Jatin Patel (JP), Founding Partner in Kinnison Limited, unwraps the property market.

For anyone considering taking their first step on or their next step up the property ladder it is likely to be their single largest financial transaction. It is therefore critical that careful thought and research is undertaken to ensure the right mortgage product and lender is selected to meet your personal circumstances. If you’re a “first time buyer” or “second stepper” you may have spent the past few years saving for a deposit. The next step is to find the mortgage which meets your circumstances.

Insights: Apart from the deposit, what are the Stamp Duty Land Tax obligations?

JP In addition to the deposit you may need towards the purchase of your first home, there will be further costs – stamp duty land tax (SDLT), property search/survey, legal fees for the purchase, home building/contents insurance etc.

SDLT is the lump sum tax that you pay when purchasing a property. The rate which applies is based on the purchase price of the property.

Property value / purchase price SDLT rate
Up to £125,000 0%
The next £125,000 (the portion from £125,001 to £250,000) 2%
The next £675,000 (the portion from £250,001 to £925,000) 5%
The next £575,000 (the portion from £925,001 to £1.5m) 10%
The remaining amount (the portion above £1.5m) 12%

Buyers of additional residential properties, such as second homes and buy-to-let properties, will have to pay an extra 3% in Stamp Duty on top of current rates for each band (see table below “SDLT rate 2nd home”).

If you buy a new main residence but there’s a delay in selling your previous main residence, you’ll have to pay the higher Stamp Duty rates as you’ll now own two properties. However, if you sell your previous main home within three years of buying your new home you can apply for a refund of the extra 3% paid.

In the 2018 budget the chancellor announced that first time buyers are exempt from paying SDLT on properties (including shared ownership) worth up to £300,000. As a first time buyer you could save up to £5,000. For properties costing over £300,000 you will pay stamp duty on the remaining amount.

Property value / purchase price SDLT rate (first time buyers only)*
£0 to £300,000 0%
£300,000 to £925,000 5%
£925,001 to £1.5m 10%
Over £1.5m 12%

*HMRC has a very strict definition of ‘first time buyer’

Insights: When should you or your clients apply for a mortgage?

JP Before you start viewing properties it may be advisable to ascertain the size of mortgage lenders would be potentially willing to lend to you – ‘mortgage in principle’. Some lenders may carry out a credit check for an agreement in principle.

You should also understand the maximum loan to value (LTV) the lender is willing to provide. LTV is the amount of mortgage expressed as a percentage of the property value. For example, if your mortgage amount was £85,000 and your property is valued at £100,000, your loan to value is 85%. Armed with this information and coupled with the size of your deposit you will be able to establish the value of properties to view. It is important to understand that such a “mortgage in principle” is an indication and not a formal offer. The actual amount a lender is willing to lend may differ from the ‘mortgage in principle’ amount.

Once you have found your first home and your offer has been accepted, this is the time to make a formal application for the mortgage which meets your personal circumstances. It is critical that you receive a formal mortgage offer from the lender before your “exchange” contracts.

Insights: What should you look out for as a second stepper?

JP As a “second stepper” taking your next step up the property ladder, you have the advantage over first time buyers as you would most likely have already been through the mortgage process. However, your personal circumstances may have changed significantly from the time you applied for your first mortgage, e.g. family circumstances, income, expenses etc.

Additionally the mortgage industry has experienced a significant tightening of regulations over the last decade with a particular focus on how lenders are required to assess your affordability.

The initial critical decision is whether you keep you existing property or sell it as part of a chain or prior to buying your next home. If you decide to keep your existing property (as a rental property), your stamp duty liability will increase significantly as you will have to pay an extra 3% stamp duty. For example, on a 2nd home worth £600,000 this is an extra £18,000 in stamp duty.

Property value / purchase price SDLT rate (2nd home)
Up to £125,000 3%
The next £125,000 (the portion from £125,001 to £250,000) 5%
The next £675,000 (the portion from £250,001 to £925,000) 8%
The next £575,000 (the portion from £925,001 to £1.5 million) 13%
The remaining amount (the portion above £1.5 million) 15%

Insights: What other considerations are there as a second stepper?

JP If you decide to keep you existing property you will need to discuss your current mortgage with your existing lender and potentially transfer it from a residential mortgage to a buy to let mortgage. This may require you to re-mortgage to a different lender. Irrespective of what you decide, it is highly likely that your new home will cost more than your existing home and potentially require a higher mortgage amount. Like first time buyers you will need to establish the size of your deposit and potentially agree a “mortgage in principle” before you start viewing properties.

Other questions that will arise relate to:

  • how much you can borrow;
  • the different types of mortgages available;
  • how to select the right type of mortgage for your personal circumstances;
  • government initiatives to assist first time buyers;
  • innovative products introduced by lenders to assist first time buyers;
  • the bank of mum and dad;
  • how you can improve your chances of getting the best mortgage for your personal circumstances; and
    how to prepare for the mortgage application process.