Your House Purchase
This factsheet is issued to clients of Fraser Dawbarns and are for your use only. It is one in a series of Factsheets and a list of these are appended
This summary contains important information. We recommend you read it carefully. It cannot be comprehensive, but it gives background information and may help you to be aware of some pitfalls that may occur in the process of buying a house. You should consult us if you have any doubts concerning the transaction.
You must not rely on a verbal agreement to purchase a house. Until formal contracts have been exchanged either side can withdraw from the deal. When negotiating terms for buying a house you must be careful not to make an offer in writing unless you express it to be “subject to contract”. It is wise when discussing the terms of an agreement with a seller to make any conversation subject to contract.
If during any discussions with the owner of the house or his agents, agreements are made regarding matters (like repairs or any kind of construction work on the property) you must tell us about this so that it can be put into the contract and remove the possibility of doubt later.
This also applies if you agree to buy carpets, kitchen fittings etc or if the owner of the house agrees to include these in the price.
Be sure to check that the installations such as central heating, hot and cold water, electricity supply etc, are connected and in working order.
We have prepared a checklist to help you recognise potential problems. We shall be happy to give you a copy. Take it with you when you visit the property and check each item.
RIGHTS OF WAY ETC
Often houses are sold together with or subject to certain rights. A typical example is in the case of a terraced house where the owners of the middle houses have a right to cross the gardens of the outside houses for access to the rear of the properties. Another example is a right to have drains leading into or across someone else’s property. If when you look at a property and anything of this nature is apparent let us know so that we can investigate.
It is not wise to make any moving arrangements until contracts are exchanged and the date is fixed for completion.
Except in the case of a new house you buy a house as it stands. This means that if on the first day of your ownership the roof falls in and the walls collapse you may have no remedy against the former owner. Therefore it is advisable to have an independent survey carried out such as a “house buyers report” which may result in a full structural survey, particularly if the property is old.
Houses less than 10 years old are usually covered by NHBC (National House Building Council) guarantee which gives some protection against structural defects.
However, this only covers defects which have not already become apparent. A survey is strongly advised even for houses with NHBC cover. If you fail to undertake a survey on a property which already has NHBC cover you could jeopardise any claim you may have under the NHBC guarantee.
Many people prefer to rely on their building society surveyor’s report. In practice a building society will not grant a mortgage on a house which does not meet the required valuation or which their surveyor finds to be suffering from a serious structural defect.
The survey carried out by the building society’ surveyor is fairly basic as the surveyor is really only concerned with the value of the property. There are disadvantages: you are seldom given any idea of what is in the report. You would also have difficulty in making a claim against the surveyor or building society if any defect appeared after you had bought the house. Therefore it is in your interest to have your own survey carried out.
Contracts for these usually contain a condition to the effect that “the house shall be completed in a good and workmanlike manner” and those that are covered by the NHBC guarantee are inspected by the Council’s inspectors. Nevertheless, people do have problems with new houses and whether or not the house is covered by a NHBC agreement, it is advisable to have a surveyor inspect it periodically as it is being built.
Please remember you need to apply to have the services (gas, electricity, etc) connected or transferred into your name.
A purchaser’s liability to insure runs from the date when the contracts are exchanged but usually runs from completion date. It is usually advisable to insure from the date of exchange. If you are obtaining a mortgage the lender may insure the property. If they do you must check with them when the insurance cover comes into effect. If you have any difficulties with this, we can help.
WARNING: It is essential always to keep a house fully insured. If it is insured for less than its replacement cost an insurance company may refuse to pay a claim in full even if the total claim is for less than the amount of the insured sum.
We maybe able to help with your mortgage arrangements.
When you take out a mortgage you charge the house to secure payment of the loan. This involves certain restrictions on your ownership of the house. For example you cannot let the house, make alterations or apply for a grant without permission of the lender. Obviously when you sell the house the mortgage has to be paid first. If you fall into arrears with your payments the lender has wide powers to take possession of the house and sell it.
As the majority of borrowers require a high percentage mortgage (90% or 95% of the purchase price) the building society or bank takes out a mortgage guarantee policy for which you, the borrower may have to pay the one-off premium this can run into hundreds of pounds. This premium can be added to your mortgage or paid up front. If you decide to add it to your mortgage loan do remember you will be paying interest on that additional sum. Also bear in mind that if the building society has reason to make a claim under the policy then the insurance company may decide to recoup their loss.
If you are offered a “cash back” deal by the seller (this is more usual on a new property) such as the developer paying 5% deposit, your legal and survey fees, or a discount if you exchange within a certain time limit, you must inform your building society or bank when applying for a mortgage.
If you go to a mortgage broker for a mortgage you may be invited to take out a life insurance policy. This is not always in your best interest. We can advise you if you have any doubts.
Unscrupulous financial brokers often ask for fees for finding you a mortgage. Be sure to consult us before paying anything: you can find yourself many pounds out of pocket with nothing to show for it. On the whole it should not be necessary to pay a fee to set up a mortgage. If in doubt it always pays to shop around.
Be wary of taking on a second mortgage. Frequently the rates of interest are excessive and it is sometimes possible to obtain a more favourable rate for example, by taking out a personal loan with your bank.
A building society mortgage is a loan calculated to be repaid over a long period of time many people are often distressed to find when they sell their house after one or two years that little if anything has been paid off the amount of the loan. If you are intending to borrow for a short time it might be better to take out a short term loan even though the cost may be higher. Another point to watch is that building societies may charge penalty interest if you pay off a mortgage early and do not take up another loan with them.
Some borrowers may receive a nasty shock when they have to repay their mortgage to discover they have not taken into account the additional amounts added to their mortgage. These may include interest on any insurance guarantee premium added to the account, building insurance premiums, any penalty for early payment and administration fees. Some building societies and banks calculate interest at the end of the year. If you have chosen to pay your building insurance, for instance, monthly, say, September to September by the end of the year you will have only paid four instalments and interest will be added to the outstanding eight premiums for the following year. We suggest if you are thinking of selling your property and therefore paying off your mortgage ask the building society or bank for a redemption statement so that you can budget for any new purchase. This will also avoid any unpleasant surprises later.
A number of borrowers are now deciding to arrange their own building insurance rather than take up the building society’s or bank’s insurance.
This can work out cheaper in premiums paid but be aware that the lender can charge an administration fee if you decide to do this.
Once you have arranged the insurance tell us as soon as possible. We have to confirm to the lender that everything is set up from completion of purchase (or exchange of contracts). Usually the lenders want their interest to be endorsed on the policy.
If you are married or about to be married you should consider having the house in joint names. This considerably reduces formalities and costs on the death of either partner: the house automatically owned by the survivor. It also reduces the possibility of any future disputes as to who owns what. In some cases it may help save on inheritance tax.
Some couples when embarking on house purchase treat it as a business transaction and as such you should carefully consider how you want to hold the property.
You may decide to have separate legal interests in it, for example if one of you is putting in the bulk of the money. You can do this by holding it as “tenants in common” with an appropriate share-holding being agreed through your solicitor. It is important to consider this very carefully and discuss it with your solicitor.
MORTGAGE PROTECTION INSURANCE
For a small premium it is possible to obtain a policy which will pay off the outstanding mortgage payments if you die before the mortgage is repaid. Generally a building society will provide details of this when you start your mortgage payments. There are big variations in the premiums for such insurance, so do shop around and consult us if you wish.
If you are paying more than £125,000 (this figure varies from time to time) for your house you will have to pay stamp duty. This is a government tax which is payable on completion of your purchase. Please ask us about this.
If leasehold property there is additional registration fee payable on the rent.
There are two main types of searches: Local Searches and Land Registry (or Land Charges) Searches. Local Searches are enquiries directed to the local authority to find out if anything is registered against the property which might adversely affect your enjoyment of it (like compulsory purchase, closing order etc.) and also to obtain additional information on matters such as ownership of roads, orders affecting the property (such as control of advertisement or smoke control, before planning, drainage and a number of other matters). These searches are made before contracts are exchanged. Land Registry (or Land Charges) searches are in effect searches against the people in the transaction to find out about such things as second mortgages, matrimonial homes problems, bankruptcy and agreements affecting the land. These are made after contracts have been exchanged.
NOTE: (1) A local search applies only to the property searched against. It generally will not give details of proposals for adjoining or nearby land. If you suspect any land (such as an innocent looking field opposite) may run the risk of development, let us know so we can also make a search against the land.
NOTE: (2) Even a “clear” local search is no guarantee against future development. It can only give details of present plans.
If you are buying an old house which lacks basic amenities (such as a bathroom) it may be possible for you to obtain a local authority grant to help you modernise it. We can obtain more information if you require.
What will it all cost you?
To help you plan your financial arrangements we can give you a quote of what our fees will be and what other expenses you may incur.
Conveyancing is a technical matter which involves words which may not be familiar to you. These are a few of the expressions which you may come across and which may help you to follow the progress of your purchase.
The date fixed for the completion of your transaction is the date when money is paid to the owner’s solicitors and in return they hand over the title deed to the house and the keys. On this date the owner of the house should move out and you are entitled to move in.
“CONTRACT AND EXCHANGE OF CONTRACTS”
A contract is a legally binding document which you enter into when purchasing a property. Normally you pay a deposit (usually 10% of the price) when you sign the contract. The contract and deposit are sent to the sellers solicitors who in exchange will send you a copy of the contract in identical terms signed by the seller.
When contracts have been exchanged the transaction becomes legally binding on both sides and neither can withdraw without legal consequences. When contracts are exchanged a date is fixed for completion.
“CONVEYANCE OR TRANSFER”
This is the deed which transfers ownership of the house from its present owner to the purchaser. It is prepared after exchange of contracts and examination of the title.
“MORTGAGE OR LEGAL CHARGE”
When you borrow money to purchase a house the loan is secured by means of a charge on the property. The mortgage is the document giving effect of this charge.
In the contract you will often see a clause giving a percentage of what is called “the prescribed rate”.
If you take possession of the property before completion or when the date arrives for completion you are not able to pay over the purchase money, then you have to pay the owner of the house interest at the prescribed rate shown in the contract until completion takes place.
The purpose of this summary is to draw your attention to some of the more common problems of buying a house and to give you general information. A house is likely to be the most valuable asset you will ever own. A lot is at stake, so as a general rule you should take nothing for granted.