Key issues on home loans and buying a property
As a first time buyer, or home mover, there are some key things you need to consider when arranging your home loan.
We always recommend that you deal with an independent mortgage broker so you can get professional advice and recommendation of a suitable product for your needs.
Since your home loan will be secured against your property, you need to be confident that you can manage the payments long term, as failure to keep up your payments may result in repossession of your home.
There are many types of products and mortgage rate available for home loans, and many of these are covered in pages on this website.
If you have any queries please call us on 020 8979 9684
Freehold or Leasehold?
The ‘Title’ (ownership) of property in England and Wales comes in two main forms known as Freehold, and Leasehold.
The Freehold interest in a property, (which is sometimes called The Fee Simple Absolute in Possession) is the most complete ownership under the Law in England and Wales. It means, in simple terms , that the Freeholder owns the land and property outright for an unlimited period. Freehold is the basis on which most houses are bought and sold.
A leasehold interest is the temporary right to occupy land or property.
Normally, a party that owns the Freehold to a property will grant a lease to another to occupy it. This creates a Landlord and Tenant arrangement where one is the ‘Lessor’ and one the ‘Lessee’. The lease is a written document under property law which outlines the rights of the Lessor and Lessee. The majority of flats in England and Wales are held on a leasehold arrangement.
The term of a newly issued lease used to be 99 years, although recently, 125 years has become more common, but 999 years can also be used.
Under a lease, the landlord or ‘lessor’ has to allow the Tenant ‘quiet enjoyment’ of the property provided the duties of the lease are adhered to. The main duty is payment of ground rent which is normally a modest £50 to £250 per annum. The lessee is also responsible for maintenance of the property.
Although a lease is a temporary right to occupy land, the right lasts for beyond the likely lifespan of the lessee in most cases. There will still however, come a point where the term of the lease is running down and this has to be considered by both the tenant and any prospective buyer and mortgage lender.
Usually the process of extending the lease for a consideration (payment) starts well before the lease is nearing its end. Sometimes the ‘lessee’ will acquire the freehold to obtain permanent ownership.
If the term of the lease is too short, the value of the property reduces. A leasehold flat with a 50 year term remaining may only be worth 70% of a similar property with a 99 year lease.
Although the buyer pays a considerable amount to buy a leasehold property initially, extending the lease is a lot less expensive as the value of the property has already been accounted for in the original purchase.
In short, a freehold property is a better bet than a leasehold property, but buyers of flats, apartments and maisonettes, should expect these to be on a leasehold basis and this is quite usual. Leases with under 75 years remaining can be a problem for mortgage lenders and you should discuss this with your mortgage broker before making an offer.
In Scotland, the equivalent permanent ownership of the land and property is known as Feuhold.
Stamp Duty Land Tax
Stamp Duty Land Tax is tax payable on property purchases in the UK. The rate of stamp duty land tax due is currently set on a rising scale between 0% and 15% of the purchase price.
The vast majority of private homes fall into the 1% or 0% bands for stamp duty land tax. Buyers paying above £250,000 will incur a 3% bill on their purchase, and above £500,000 purchasers can incur stamp duty land tax bills of 4% and above.