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Financing your home purchase (Part 1)
When thinking about buying your first home, or selling your existing one to move up the property ladder, you may be tempted to raise the money you need using what you believe to be the quickest and cheapest method. You may also be tempted by offers of shared ownership and the various schemes available which promise to help make things more affordable for you. What you may not realise is that how you choose to finance your home purchase can have a fundamental impact on how much say you have over what you can and cannot do with your property and, in some cases, could even mean that you do not actually own the home you buy.
In a two-part series of articles, Louis Mathers conveyancing lawyer with Parnalls in Launceston, explains how different ways to buy can affect your legal rights and highlights why it is vital that you talk to your solicitor about your plans before you commit to anything.
This article looks at self-funded options and government-backed schemes. The second article will look at private financing options, such as mortgages and personal loans.
Purchasing with a friend or relative
Most people cannot afford to buy a home outright, using their own funds, and so may consider buying with someone else. While this can be a great way to get a foot on the property ladder, you need to bear in mind that you will share ownership of the property with the person you are buying with and therefore decisions concerning the property will usually need to be made together.
You will need to give thought to whether you should own the property jointly or in defined shares: your decision will determine how the proceeds of any sale are dealt with in the future and whether, if one of you dies, the other will automatically inherit your share or whether it will be passed on in accordance with the terms of your will or the rules governing estates where no will exists. In very simple terms, if you decide to own the property as what is known as ‘joint tenants’, your share will automatically pass to the other co-owner on your death. If you decide to own the property as what is known as ‘tenants in common’, you will own a defined share of the property (maybe 40, 50 or 60 per cent, usually dependant on how much you have paid towards the purchase price) and your share will pass to those named in your will as entitled to receive it, or, if there is no will, according to set legal rules.
Your solicitor can explain the implications of owning property jointly in more detail, and prepare a declaration of trust which confirms your percentage share in the property.
The Bank of Mum and Dad
Asking your parents or grandparents for financial help might be an option if they can afford it, but this type of arrangement needs careful consideration. You need to agree whether any finance provided will be as a gift or a loan, and, if as a loan, whether any interest will be payable or share in the property expected. There are also potential tax implications that need to be considered.
Arrangements like this need to be documented to ensure there are no misunderstandings. It may also be necessary for your parents or grandparents to update their wills and to prepare a letter of wishes explaining the arrangement, particularly if your inheritance may be reduced as a result.
Government backed schemes
There are currently two government backed schemes to help home buyers:
- the Help to Buy ISA, which allows first-time buyers to save towards a new home, with the government topping up their savings by 25 per cent, up to a maximum of £3,000; and
- the Help to Buy equity loan, which allows buyers to benefit from a government-backed loan of up to 20 per cent of the purchase price (or 40 per cent in London).
It is important, however, to consider the detail of the schemes and how any restrictions could affect you. For example, a Help to Buy equity loan is limited to new build properties, which tend to be more expensive than comparable older properties.
Some of the most recent new build homes are also being sold as leasehold properties, which means that – unlike a freehold property – you will not actually own your new home outright and there may be restrictions on what you can do with it, together with additional costs that will need to be paid on an ongoing basis, such as a service charge to keep the property and its garden in good order and possibly also a ground rent charge to the person who owns the land on which your property sits. These charges can, in some cases, be significant and it is important that you appreciate this before you commit to the purchase.
Ground rent charges, in particular, need to be considered carefully because some new build properties sold as leasehold may start off with a ground rent charge of £100 a year, but there may be a provision in the lease that allows this to be doubled every year going forward, so that after just five years the charge may have risen to £1,600.
Your solicitor will be able to spot this type of provision and advise you on your total possible liability for future costs. They will also be familiar with the various government funding schemes available and can advise you on the best option for you. It may be, for example, that you would be better off buying an older property, in which case the Help to Buy ISA would possibly work better for you because there is no new-build condition attached; you do, however, need to ensure that the property you are buying costs less than £250,000, or £450,000 in London.
Shared ownership schemes
A shared ownership scheme could allow you to buy a share of your own home using whatever money you can raise. Typically, these schemes allow you to buy a 25 to 75 per cent share in a property, with the remainder being owned by the housing association which runs the scheme. You will need to repay any money you have borrowed to buy your share, for example by making repayments to a mortgage provider, and you will also need to pay rent (albeit at a discounted rate) to the housing association.
Most shared ownership properties will be leasehold, which means there will be restrictions on what you can do with the property. For example, you may not be able to sublet your home. There will also likely be additional costs in the form of a service charge to cover the maintenance of shared areas.
When you come to sell, you will also generally have to offer the housing association a right of first refusal, which could mean that selling your home takes longer than usual. Where the housing association decides that it does not want to buy your share of the property back, it may still insist that anyone else wanting to buy it has to meet certain criteria, set by the housing association, which could affect your ability to sell freely.
For advice on the implications of the various ways in which you can fund the purchase of your home, please contact Louis Mathers on 01566 772375 or email mathersl@www.parnalls.com It is also recommended that you speak to an independent financial adviser.
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