After you have done all of your research and you have an idea of the sort of property you feel able to take on, you must then make sure you can finance the project.
The general rule is that you can relatively easily secure a mortgage of at least up to three-and-a-half times your annual income and up to 70% of the value of the property.
First Time Buyers
There are three ways for first-time buyers to get onto the property ladder without too much difficulty.
- To find the right mortgage for the particular property you have in mind or choose a smaller property
- To split the cost of the mortgage with another party, say a friend or partner or a member of your family
- Or to apply for a government or council scheme.
Prepare to do your homework as there are a confusing number of mortgage options available. Watch out as mortgage companies can make their offers sound much more generous than they actually are and may well imply your income can cope with higher payments than it actually can in a bid to lure you to their deal.
Take time to study the whole business of mortgages and borrowing money.
Make sure you understand the technical terms and are aware of the implications that each deal could have for you if interest rates rise, for example.
Approach several different mortgage lenders, or an independent mortgage broker, to see what loans and what types of mortgage are available.
Don’t jump at the first deal you are offered and don’t be tempted to stretch yourself too far.
Once you have decided on your lender, ask for a written ‘offer in principle’ to confirm the terms and conditions.
- f) Wise developers will buy at a price that assures them a 20% gross return of their total investment. Though you may develop with a slightly lower percentage profit rate, err on the side of caution.
Finding The Right Mortgage
In recent years interest rates have been at their lowest for 30 years and although they have risen slightly are still a competitive business for lenders. In general there are two types of mortgages: interest only and repayment mortgages, with variants of both on the market.
Interest Only Mortgages
With an interest only mortgage your monthly payments will only cover the interest on the loan taken out. The full amount borrowed needs to be repaid by the end of the loan term. Most people with an interest only mortgage invest additional money each month into a savings fund with the expectation that it will grow at least enough to enable them to repay the loan at the end of the term. An endowment is one of these means of saving. Your lender may also insist on life insurance to cover the repayment of the loan in the unlikely event of you dying before the mortgage is paid off.
With a repayment mortgage your monthly payments repay some of the capital along with the interest on the loan. No other way of repaying the mortgage is needed although, as with interest only mortgages, your lender may also insist on life insurance in case you die.
If you prefer not to work alone or cannot afford to invest in a property on your own, you might consider buying jointly. Getting a joint mortgage will increase your borrowing power.
Theoretically you can apply for a joint mortgage for up to four people although most lenders base their calculations for a loan on the incomes of two people.
As with a single borrower, the amount is generally based on three-and-a-half times the main income, but with a second borrower add one of the secondary incomes to the equation. Just remember, though, that whilst more people in your new enterprise can provide the comfort of more brains to tackle problems, not to mention more money, the more people in the equation the more difficult it can be to reach decisions.
Other Ways Of Splitting The Cost
A parent or family member may be willing to act as guarantor on your loan. If so, it is important that all parties fully appreciate the implications of this arrangement, that the guarantor becomes liable for the loan in its entirety should your payments fall behind.
If you do buy with a partner (or partners) you must have an agreement drawn up by a lawyer. This should state how much each party is contributing in terms of the down-payment and who is going to be responsible for the mortgage repayments (though legally you are jointly and severally liable).
It will also state what percentage of the profit is to belong to each of the parties, and the course of action to be taken if one owner wishes to sell the property early. Such an agreement will make things clear from the beginning and hopefully avoid a disagreement from occurring.
Key Points For Joint Purchase
If you are buying jointly do the following:
Spend time discussing how the partnership will work.
Make sure your solicitor draws up a contract between you, even if you are sure you will never fall out.
Decide between yourselves who will be responsible for what aspects of the project and exactly what your plans are for your development.
Don’t leave anything to chance, its easy to assume you are both thinking along the same lines and then find out later that each have something quite different in mind for your development.
Make sure you set aside an official time weekly to discuss any issues either of you are concerned about.