Property:
Buying your home

What can you afford?

How do you know what you can afford to buy? It may seem obvious. Most banks and building societies will lend you about 4 times your earnings to buy a home. But some will lend more. And it is usually possible to take into account the income of your spouse or partner. Some lenders may require a smaller deposit. Some will allow a period in which you do not repay any capital. If you need to stretch, Cassons can advise you and help you.

Then again, what can you really afford? If your income is level, or falling, it may not be wise to stretch yourself. Conversely, if it is rising, it may be quite sensible to start off with borrowing that is initially uncomfortably high. Cassons even have relationships with some lenders who are prepared to lend based on your prospective high income rather than just on your historically modest income. You can benefit from Cassons� knowledge and experience.

If you own a business, it may be possible to release funds from your business to put towards the house purchase. Cassons can advise how to do this tax-effectively.

Mortgages

There are literally hundreds of mortgage loans available from banks and building societies. You do need professional advice and you must bear in mind that your home may be repossessed if you do not keep up repayments on your mortgage. Cassons can provide mortgage advice, for which our typical fee is �500. Here are some general pointers.

Repayment mortgage

The traditional structure is the repayment mortgage. With this, you will generally pay equal monthly instalments throughout the term of the loan. Each instalment is a mixture of interest and capital repayment. In the early years you pay mainly interest, plus a modest amount of capital. In later years, as the outstanding capital reduces, you pay less interest, plus a greater amount of capital. By the end of the term, typically 25 years, all the capital has been repaid.

Endowment mortgages, pension, PEP and ISA

Endowment mortgages used to be popular when tax relief was available for interest paid. When tax relief was abolished a number of years ago, the main reason for endowment mortgages disappeared. But, because they are long term plans, there are still many around. With an endowment mortgage, you pay the lender only interest, with no capital. In parallel, you pay the premiums on an endowment policy. That is a savings plan with a life assurance company. The policy matures at the end of the specified term, typically 25 years. Provided the policy�s investment performance has been adequate, the proceeds should be enough to pay off the loan and hopefully provide a surplus.

There are three variations on the endowment mortgage theme. With a pension mortgage, the premiums are paid into a pension policy, attracting tax relief. At a specified age, typically age 60, the tax-free lump sum from the maturity of the pension policy is used to repay the loan and hopefully provide a surplus. The problem is that you will typically have used up to 25% of your retirement fund to pay off the loan rather than provide financial security in retirement. For this reason, Cassons do not normally recommend pension mortgages. The other two variations on the endowment mortgage theme are PEP mortgages (no longer available) and ISA mortgages. With these, you use a Personal Equity Plan or an Individual Savings Account as a savings mechanism. In due course, the accumulated savings are used to repay the loan. Cassons can advise whether an ISA mortgage will suit you.

Interest-only mortgages

Finally, there are also interest-only mortgages. These are exactly as you would expect. You pay the lender only interest, with no capital. No provision is made for repaying the capital. The loan is repaid typically when the property is sold later in life.

Interest rates

Interest rates are confusing and you do need professional advice. All lenders have a standard variable rate, which goes up and down in line with market rates. Almost all lenders also offer a plethora of other rates. There are rates fixed for a number of years, or capped rates which can go up but not beyond a set limit. You get certainty, but you pay for it. There are also many discounts on offer, in order to attract your business. There may be some bargains, but discount offers are not always what they seem. For example, discounted rates for first time buyers are often more expensive than other rates generally available. And discounted rates for the first year or two may be followed by 23 or 24 years of expensive rates. In all cases, there may be strings attached. These range from penalties for early redemption of the loan to compulsory (expensive) insurance. You have to read the small print. Of course, Cassons� mortgage advisers can do that for you!

Tax relief

It is well known that interest paid on a loan to buy a house does not qualify for tax relief. But you may be able to achieve a similar objective by other means. If you have capital tied up in a sole trade or partnership, or if you have loan capital invested in your company (perhaps on a director�s loan account), there may be a solution. It may be possible to re-engineer your finances so that you borrow for business purposes, with tax relief, rather than for house purchase, without.

This is a tried and trusted solution; but it requires careful timing and great attention to detail. It also needs lenders able to do what is required and solicitors who understand the planning in detail. Cassons can advise you and put the whole thing together.

Stamp duty land tax

When you buy a house you expect to pay stamp duty land tax. There are four rates:


From	To	%


Up to	�125,000	Nil
�125,001	�250,000	1%
�250,001	�500,000	3%
�500,001	and over	4%

These rates apply to the whole price. So, for example, a �150,000 house will attract stamp duty land tax of �1,500. But there is no stamp duty land tax on houses up to �150,000 in disadvantaged areas (see the Jargon buster box below).

Jargon buster: Disadvantaged areas

Disadvantaged areas comprise the most disadvantaged 5% of the country, which have been selected for various fiscal incentives to stimulate economic activity. They are defined by reference to electoral wards; but, where a postcode straddles a ward boundary, the whole postcode is included.

You may not think of your new home as being in a disadvantaged area, but there are some surprising anomalies. Not all solicitors are aware of these anomalies, so do check by following this link.