29 June 2022 ·
Key House Buying Terms Explained
The world of property is full of industry lingo, terms, numbers and percentages which can be hard to navigate and understand, particularly for anyone who hasn’t got their foot on the property ladder just yet - but it doesn’t have to be.
We’ve created a guide of key house-buying terms which will enhance your understanding and make finding and buying your dream first home a lot smoother and less mind boggling!
The government-backed Help to Buy scheme is designed to make it easier for prospective first-time buyers to get on to the property ladder. An equity loan is offered with a requirement of a reduced deposit of 5% of the total property purchase price. To qualify for this scheme, buyers must be over the age of 18 and be a first-time buyer. In London you can borrow 40% of the purchase price and outside of London you can borrow 20%, interest free for the first five years.
The property bought must also be a new build and sold by a registered Help to Buy homebuilder.
This is a loan that uses the value of a property (after the mortgage is paid) as a guarantee that money borrowed will be returned. Equity is the property’s current market value; it will fluctuate over time with interest rates and economical changes.
Loan-to-value (LTV)
The term loan-to-value is a ratio, and it measures the loaned monetary amount vs the market value of the property. To work out the LTV ration an assessment is carried out by banks, often with the mortgage provider, to assess what the risk of lending is before the mortgage (loan) is approved.
Some banks have a maximum LTV, where they will only loan a certain percentage of the property value, but in most cases, it ranges from a rate of 60-95% - the rest must be funded with a cash deposit.
A mortgage is a financial loan that is used to buy or maintain a home, type of real estate or land. The individual who borrows agrees to pay the lender back (usually a financial institution like a bank) over time. This is done usually through a series of regular payments that are divided into interest and principal. To secure this type of loan the property acts as collateral. These loans have an interest rate, so buyers shop around for the best rate on the market.
There are different types of mortgages. The most common type is a fixed-rate mortgage/traditional mortgage. For this mortgage type the interest rate stays the same for a pre-agreed term of the loan. The borrower’s monthly payments towards the mortgage also stay the same.
For this type of mortgage, the opposite applies. The interest rate of the loan is only fixed for an initial term. It will change periodically depending on current interest rates. The initial interest rate is usually below market rate to make the mortgage more affordable and attractive in the short-term. There are normally limits on how high the interest rate can increase.
Stamp duty is a tax that the government impose on legal documents that are used in the transfer of assets or property. The tax rate is dependent on the value of the house being purchased. For instance, if you were to buy a property for £295,000 the tax would be as follows:
0% on the first £125,000
2% on the next £125,000
5% on the final £45,000
The tax is used to fund government activities and projects.
The UK House Price Index is a measurement that captures the changes in value of property throughout the property market. The index measures changes in properties on both regional and national levels. This allows buyers to follow trends in their area and compare property prices across the country.
The index can be used to understand whether the market is currently weighted towards buyers or sellers. If the market is on a downward trend, then buyers benefit from falling prices. If the market is on an upward trend, then sellers are able to assess the value of their home and in some instances increase its value.
Freehold is a form of property ownership in which an individual or organisation has full ownership of a property and the land which it’s built on.
A leasehold is a form of property ownership that gives an individual the right to occupy land/ property for a fixed period of time. The buyer will have a legally binding agreement (a lease) with the landlord, which will stipulate the ownership of the property and when the lease will come to an end. A lease typically runs for 99 or 125 years, and ownership of the property returns to the landlord when the lease comes to an end.
The Property Chain
A property chain describes the buying process often associated with second-hand homes where more than one home buyer is involved in the process. Like a chain reaction, for a buyer to complete on their purchase, they must sell their existing home first, to another buyer, who may also have a home to sell. Often the longer the chain, the longer the buying and moving process can take.
Here’s a scenario…
A young couple are currently renting a one-bed flat but are due to have a baby and are therefore looking to buy a larger home. They would be at the start of the chain.
The young couple are wanting to buy a three-bed house from an elderly couple, as this couple want to downsize. The elderly couple have found a new build one-bedroom apartment, as it’s a new build, they don’t need to wait for someone else to move out – it’s ready and waiting for them – therefore they are the end of the chain. However, both couples can’t move into their new homes until their home buying offers are accepted, legal documents are signed and processed, and any mortgages required are approved. Many of these steps need to take place simultaneously.
This scenario is a two-person chain; there are two purchases that are dependent on each other.
This is a legal document that serves as an official record of someone owning a property or land.