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Home buyers guide

A document of this kind can do no more than provide a brief outline of the law. Every situation depends on its own facts and action should not be taken in reliance on this summary. As always it is desirable to take appropriate advice.

The Solicitors’ Job

The solicitor and his staff make a conveyancing transaction happen. This is why the choice of solicitor is so important. Nothing is guaranteed in a property transaction, and the effectiveness of the service which your solicitor offers can very often make a difference between moving into the house you really want and losing it.

Most people are either buying for the first time, or are buying one house and selling their old house at the same time.

The person who is buying and selling at the same time will usually want the sale and purchase to happen together. The first time buyer does not have this problem, but both can be involved in a long “chain” of transactions involving a number of other people all trying to do the same thing.

This is one area where the solicitor’s skill, experience and effectiveness are vital to ensure that your move goes as smoothly as possible.

Despite appearances, conveyancing is a complex process. Land law is complicated, full of traps for the unwary.

The solicitor must check that the property being bought has a good title. This means checking that there is nothing wrong with the property from a legal point of view. If these checks are not carried out properly, purchasers can find themselves with serious problems after they have bought. Sometimes, problems such as these only come to light when the property is next marketed for sale. Problems at that time can cause heartache and expense which can normally be avoided if proper care is taken before buying a property in the first place.

However, be aware that in most cases the solicitors will NOT visit the property. This means that if there is anything out of the ordinary which you feel your solicitor should know about you should mention it.

The solicitor handles all the money involved in the transaction, accounting to his client after the move has been completed. This can involve handling very large sums.

It is our aim to provide the high level of advice and efficiency which home buyers need.

Mortgages

There are two main types of mortgage, the repayment mortgage and the endowment mortgage. Here is an explanation of their main features.

Repayment Mortgage

With a repayment mortgage your monthly payment consists of one month’s interest on the loan and a small amount by way of repayment of the loan. The level of monthly payment is fixed by the lender so that at the end of the term (usually 25 years) the mortgage should have been paid off completely. The usual term of loan is twenty five years but sometimes lenders insist on a twenty year term.

The lender will increase the instalments if interest rates rise and reduce them if rates fall.

Endowment Mortgage

With an endowment mortgage you do not repay any of the loan during the mortgage term. All you pay is interest on the loan. If rates rise you pay more each month and if rates fall you pay less.

At the same time you pay premiums, each month, on an endowment life assurance policy.

An endowment policy is an insurance policy on your life which will pay out a sum of money either on your death before the end of the policy term, or at the end of the policy term if you live until then.

The idea is that the amount you will receive at the end of the policy term should be at least as much as the amount borrowed. The policy must be written so that if you die during the term, the benefit will be enough to pay off the mortgage.

The amount which becomes due on death or at the end of the policy term is not fixed at the time the policy is issued. Usually there is a guaranteed minimum benefit, and the rest of the amount payable depends on the insurance company declaring bonuses. This happens every so often during the policy term.

When the policy term ends (or on your death if you die before then) the amount paid under the policy is used to pay off the loan. Anything over and above that is yours.

Pros & Cons

The advantage of the endowment mortgage is that the amount which, all being well, will be paid out under the life policy is greater than the amount of the loan. You can expect a tax free lump sum once the policy matures. The size of this lump sum is not, of course, known in advance, but it could be substantial.

The endowment mortgage does of course provide automatic life cover during the term for the lives insured by the endowment policy. A repayment mortgage does not.

If you have a repayment mortgage there is no automatic life cover. If you die during the mortgage term the loan is not repaid automatically. It is wise, therefore, if arranging a repayment mortgage to take out what is called a “mortgage protection policy”. This type of policy is much cheaper than an endowment policy.

Anyone taking out an endowment policy must however be aware that there is a risk that the amount to be paid out under the policy at the end of the term could be less than the amount borrowed from the Building Society. If that happens, the borrower is liable to make up the deficiency.

The problem with endowment mortgages is that there is always a risk that the policy will not produce enough money to pay off the loan. If that happens the borrower must still repay the whole loan.

Because investment returns have been less in the 1990’s than in the previous decade, it is now known that some policies are likely to fail to achieve sufficient value to pay of the mortgage debts for which they were written. Endowment mortgages are now very much less popular than they once were. Many major lenders have ceased actively promoting them.

Comparative Costs

Sometimes the monthly cost of a mortgage arranged on the endowment basis is just slightly less than the cost of a repayment mortgage plus a mortgage protection insurance policy. Sometimes, an endowment arrangement will cost more. The relative costs of one type as against the other can vary according to levels of interest rates applicable. If you are a person who does not need life cover, a repayment mortgage will normally be cheaper because you will not need the mortgage protection policy.

Lenders

Lenders have recognised that the housing market can be a lucrative one for them. As a result they compete for borrowers. While this is healthy, it has brought into the market a number of institutions who do not have the same commitment to home ownership as the more traditional building societies. Some of these lenders approach their customers in a much less sympathetic way, having unusual terms in their mortgage documentation which can be expensive for their customers. For example, some charge fees for granting the loan, and some make a heavy charge if the loan is repaid early when you move house. Some building societies nowadays also have terms of this kind written into their mortgage agreements.

Sometimes these terms are not made clear at the outset, and can come as a nasty shock.

You need to obtain careful advice from a solicitor when choosing your source of money to buy your new home.

Estate Agents

Agents act for the Seller

The estate agent is employed by the seller to act for him and arrange a sale of the property on the most advantageous terms. This usually means getting the highest price. The agent will advertise the property in his showroom and in newspapers, etc. and will arrange viewings.

It is important for buyers to realise exactly who the agent is working for. Many people are unaware that the agent owes the buyer no duty at all.

Naturally, the agent has to be something of a salesman. After all, he wants to sell the house – normally he only gets paid if a sale takes place. This means that buyers must be very wary of relying on any advice from an agent.

Once these limitations on the agent’s position are taken into account, a good agent can be very useful to a buyer. He should be able to show the buyer a selection of suitable properties, so that the buyer can get an idea of what is on the market.

Instructing an Agent

A seller instructing an agent should always be clear about how the agent’s fees will be calculated. Most agents charge a percentage, but some charge a fixed fee. Sometimes the agent will act on a “no sale – no fee” basis. You should always be clear as to whether this includes advertising.

Some agents charge the seller a fee if the property is withdrawn before sale. This is often described as “out of pocket expenses”.

An agent should always set out his fees in writing to the seller.

“Holding” Deposits

Agents will often ask the successful buyer to pay a deposit once the sale has been agreed in principal. This is sometimes, but misleadingly, called a “holding” deposit. The truth is that such a deposit does not hold anything, or bind the seller in any way. There really is no reason why anyone should pay a deposit to an agent, although it is sometimes seen as a sign of goodwill on the buyer’s part. If a deposit is paid to the agent, the buyer should check (and see that it is recorded in writing) that the deposit will be repaid if for any reason the transaction does not proceed.

A minority of agents try and get buyers to pay them a substantial deposit, say five or ten per cent of the price. Under no circumstances should a buyer agree to do this. It is not usual commercial practice, and carries serious risks for the buyer that he could lose his money.

Energy Performance Certificates

The seller, along with the seller’s agent, must obtain an EPC before the property can be marketed.

Stamp Duty Land Tax

Stamp duty is a tax payable by the buyer.

The amount of stamp duty is a percentage of the price and is as follows:

Purchase Price / Transfer Value	Duty
Up to £125,000	Nil
Over £125,000 but not exceeding £250,000	1%
Over £250,000 but not exceeding £500,000	3%
Over £500,000 but not exceeding £1,000,000	4%
Over £1,000,000 but not exceeding £2,000,000	5%
Over £2,000,000	7%
Over £2,000,000 (purchased by certain persons including corporate bodies)	15%

(There are special rules when a single transaction covers multiple properties but these are outside the scope of this publication).

Understanding the Jargon

Every profession makes use of unfamiliar words to express itself. The legal profession is the best known in this respect but by no means the worst offender. Anyone who doubts this should look at one or two medical publications.

Conveyancing is a technical subject, and a good solicitor will always explain what he means in ordinary language.

Here are some of the terms used, with a brief explanation of each:

• Completion: This is when the buyer pays for the house and the seller transfers legal ownership. Normally, the money passes between the solicitors. Completion should occur on the date fixed by the contract between buyer and seller. If completion is delayed because one party is at fault, he will normally have to compensate the other party for any loss. This is the date on which the seller hands the keys over to the buyer.
• Exchange of Contracts: This is when the transaction ceases to be “subject to contract” and becomes binding on both parties. What actually happens is that the solicitors for each party exchange signed copies of the contract. At this stage, the purchaser will pay a deposit. The deposit is normally ten percent, but a lower figure is often agreed.
• Gazumping: If, after the property has been sold “subject to contract”, the seller accepts a higher offer from someone else, this is gazumping.
• Land Registry Searches: There are various types of search made in the Land Registry and the Land Charges Registry. These searches are rarely a cause of delay. Certain of them need to be made in every case. Land registry searches are made just before completion of a purchase. They show whether anything has recently been registered against the property at the Land Registry.
• Local Search: This is a search made by the solicitor in the records of the local council. It should show up certain types of record which may be detrimental to the property. It would be extremely rare to buy a house without making a local search.
• Mining Search: If the property is in a coal mining area, the solicitor will often make a search in the records maintained by British Coal. This search should show whether there has been mining under the property in the past, and if so how likely it is that there will be future subsidence. It will also indicate whether there may be mining in the future.
• Mortgage: The mortgage is the document which gives security to the bank or building society which has lent money to buy the property. The document gives the lender very wide rights over the property if the borrower does not keep up the loan repayments. In the last resort the lender can take the borrower to court and obtain an order giving it possession of the property. The lender then has power to sell the property in order to obtain repayment of the loan.
• Subject to Contract: A transaction is said to be subject to contract until the time a written legal agreement to sell the property has been made. Until a formal agreement exists, either buyer or seller can withdraw.
• Title: The seller has to show that he has a good and marketable title to the property. This means more than his showing that he is the owner. He must also show that there is nothing wrong with the property from a legal point of view.
• Transfer Deed: This is a legal document which transfers ownership of the property from the seller to the buyer.

Mortgage Ready Reckoner

To work out what you can afford to borrow you need to know what the likely repayments will be. It is easy to work out the approximate cost. See the Mortgage Calculator below. Unfortunately, lenders work out their repayments in different ways and precise repayment figures vary slightly depending upon the Building Society or other lender chosen. All lenders will provide a written quotation on request.

Monthly repayments: You can use the table below to calculate roughly how much a proposed mortgage would cost.

Monthly repayments per £1,000 borrowed for a 25 Year Repayment Mortgage.

Interest Rate	Gross Monthly Payment
5%	£5.91
6%	£6.52
7%	£7.15
8%	£7.81
9%	£8.48
10%	£9.18
11%	£9.90
12%	£10.62
13%	£11.37
14%	£12.12
15%	£12.89

What can you borrow?

Lenders normally calculate their maximum loan by reference to a multiple of the borrower’s earnings. All lenders have different methods. Commonly lenders will advance two and a half or three times the borrower’s income. In the case of joint borrowers, the loan could be, say, two and a half times the main income, plus the secondary income. Rarely will a lender advance more than the value of the property. A valuation will be carried out. Some lenders will lend a maximum of 95% of their valuation. When deciding how much you can borrow, it is vital to work out what repayments you can afford. We feel that there are some borrowers who will lend people more than they can afford to repay. This can attract criticism, but it does go on.

Changes in Interest Rates

Usually the lender has the right to vary the interest rate payable. Sometimes mortgages are arranged with a rate which is fixed for a certain period. Whether this is good or bad for the borrower depends on how rates generally perform. When you budget remember that you ought to take into account the fact that rates might increase and set your sights so that you can in fact cope with an increase. Rates do of course go down as well as up depending upon the economic situation and other considerations.

Home Buyers & Contaminated Land

The Problem

Anyone buying a home (or indeed vacant land) should be aware of the problems which can arise if it is found that the property is contaminated. Property can be contaminated by many substances, for example asbestos, arsenic, hydrocarbons, methane gas produced by buried waste to name only a few. Property owners should be aware that their land may in the past have been used for purposes which may have contaminated it, especially these days when old industrial land is frequently re-used for other purposes. Also, land can become contaminated because of the way other land near it has been used.

Ordering a Clean-up

Local authorities are under a duty to take steps to identify contaminated land. If land is found to be contaminated the local authority is under a duty to decide whether action should be taken to remove the contamination. If a clean-up is necessary, it will then serve notice (called a “remediation notice”) requiring reasonable steps to be taken to clean up the land.

Who Pays?

Normally a remediation notice will be served on the person who caused the contamination. This may well be the present occupier but it could be someone who used the land in the past. This is the “polluter pays” principle. Often however it will not be possible to identify the actual polluter – it could be a company which has gone out of business or it may be impossible to say who caused the contamination. In this situation, the remediation notice will be issued against the present owner or occupier. Thus a home owner might well find himself liable to clean up land even though he did not contaminate it and did not know it was contaminated when he bought it. There are rights of appeal against a remediation notice. Failure to comply with a remediation notice is an offence. Additionally if a person responsible for complying with a notice fails to do so, the local authority can carry out the work itself and to recover the cost of the work from that person.

The Risk

The risk for a house buyer is that they may inadvertently buy land which is contaminated and be saddled with the cost of the clean-up.

Neither the usual form of house survey nor the usual conveyancing investigation will reveal whether land is contaminated.

It is possible at modest cost to obtain an environmental report to ascertain whether there are factors which indicate that land may be contaminated. If a report is obtained, a solicitor is not qualified to interpret the results. There is no guarantee that an environmental report will detect any actual contamination which may exist. Preparing the report will not involve an actual inspection of the site.

If you are buying a property and you feel that you would like to obtain an environmental report, you MUST ask for one. Obtaining these reports is not a routine step.

Please bear in mind that if a buyer obtains a report and is having a mortgage, an adverse report may have to be disclosed to the lender and that this could affect the lender’s decision to lend.

Radon Gas

Finally a note on radon gas. This is a naturally occluding but radioactive substance which is harmful to health. The number of properties affected varies according to the locality. In Nottinghamshire, for example, it is thought that a very proportion of properties are affected. In other areas, Cornwall for example, local geological factors mean that a higher proportion of properties are affected.

Once again, neither the normal conveyancing process nor a survey will reveal that a house is affected. It is possible to test properties for radon but the test takes some weeks to carry out. This test is not a routine part of the conveyancing process even in affected areas. Local searches may reveal the possibility of radon gas levels being above action levels in the area but will not tell us anything about individual properties. If a property were found to have radon gas above action level, remedial work would be required. The cost of this would fall on the buyer of the property.

Buying a house is not risk free and purchasers should be aware of this problem.

Surveys

Unless you buy a new house from a builder, you have no come-back against the seller if there is something wrong with the property. A proper survey by a good surveyor is vital in nearly every case. Everyone buying a house is spending a large sum of money and the cost of repairs can be high. It is therefore sensible to obtain a survey of the property before you commit yourself by exchanging contracts. Very roughly, there are three levels of survey.

Lender’s Valuation

This is a very basic survey of the property and is normally carried out by a lender to check that the property is worth the amount of the proposed loan. The surveyor will inspect the building, inside and out, but the report will not be particularly detailed. The surveyor should report on the age and type of the property, its general state of repair and advise on any serious apparent defects. However, he will not make detailed examinations such as checking the roof from above, lifting floor boards and so forth. One problem with this type of survey is that you may have no claim against the surveyor if he negligently fails to point out defects in the property.

R.I.C.S. House Buyer’s Report

This is a more thorough examination of the property under a scheme promoted by the R.I.C.S. designed to give house buyers good value for money and some security when buying. The surveyor will spend more time at the property, inspecting the main structure, including the roof space if accessible, and the drainage. A reasonably thorough report will be presented in writing.

Full Structural Survey

Here the surveyor will examine the property fairly thoroughly and report on everything that is visible. He should examine the outside of the roof and take up sample floorboards where practicable. His survey should cover the structure of the building, outbuildings, nearby trees that may cause damage, services and drainage.

Obviously the more work the surveyor is asked to do, the greater the cost of the survey. A quotation should be obtained in advance.

It is fair to say that most people opt only for the first level of survey. If asked to advise, we would suggest that you should have at least the R.I.C.S. survey. If you are buying an old property a full structural survey is advisable. Everyone buying a house is spending what to them is a lot of money whether buying a mansion or a cottage.

Surveyors

Not all estate agents are surveyors and not all surveyors are building surveyors. It is important to choose your surveyor wisely. Please feel free to ask us for a recommendation as there are some very good firms we can suggest.

Saving Costs

It is obviously a waste of money for your lender to have one surveyor and you to have another. Unfortunately, not all lenders will accept every surveyor and it is necessary to check whether a preferred surveyor is on the lender’s panel. Otherwise, you can end up paying two people to do the same job. Before paying survey fees to a building society or an estate agent, we strongly advise you to check with us first. That way you can avoid unnecessary cost. This is one of the reasons why it is advisable to make an appointment to see us to discuss your general arrangements as early as possible.

The main organisations for surveyors are The Royal Institution of Chartered Surveyors and The Incorporated Society of Valuers and Auctioneers. Estate agents and surveyors are not the same thing. An estate agent does not have to be a surveyor but many surveyors also operate as estate agents.

N.H.B.C. Guarantee

New homes less than ten years old should be covered by a Guarantee issued by the N.H.B.C. This covers major structural defects only but the benefit of the guarantee can be transferred to subsequent owners of the property. Defects which are apparent before you buy cannot normally however be the subject of a claim under the guarantee.

Insurance

Life Insurance

Life insurance is essential for most home owners. This is a brief explanation of the main types of policy.

Term Policies

A term policy is a basic insurance policy pure and simple. If you die during the policy term, the benefit is payable; and if you survive, nothing is payable. The premiums are very low and this is a cheap way of obtaining a large amount of insurance cover. Term policies can be obtained for varying periods, say 5, 10 or even 20 years. The death benefit is usually a guaranteed sum.

Endowment Policies

The benefit under an endowment policy will be payable either on your death while the policy is in force, or at the end of the policy term if you survive. There will normally be a guaranteed minimum amount payable on death, and also a (lower) guaranteed minimum payable at the end of the term. Such policies are usually “with profits”, so that “bonuses” are added to them as time passes. This increases the amount payable at the end of the term. The final amount payable depends largely on how well the life company’s investments perform. For this reason it is important to take out a policy with a good insurance company. The difference in final benefit between a top performing company and a poor one can be enormous. Endowment policies are normally taken out for long terms, say 25 or 20 years, and nearly always over 10 years.

Mortgage Protection Policies

This is really a special type of term policy where the benefit on death is linked to the mortgage debt. If you die, the policy should pay off your mortgage debt. However, it would not necessarily pay off any arrears. Like an ordinary term policy, if you survive the policy term, no benefit is payable.

Obtaining Insurance Advice

Insurance advisers fall into two categories:

1. Independent Intermediaries: Can sell policies from any life company, and by Law are obliged to give you “best advice”. This means that they must review the market and advise you which policy would best suit your needs. They are not permitted to have any tie with any particular life company.
2. Tied Agents: Advisers who are tied to a single company. They cannot offer policies written by any other company. In our view this means that they cannot offer a complete range of products. In theory they must offer “best advice”. However we think that in practice most tied agents would be unlikely to advise you to go elsewhere if another company’s policy would in fact be best for you. Many estate agents sell life policies, but most are tied agents. Some of the building societies are still independent intermediaries, but many are now tied agents. You will not get independent advice if the organisation advising you is a tied agent. This applies to advice given by most estate agents and many of the building societies. One of the reasons why these organisations have gone “tied” is that it is easier to sell policies in this way. We think though that it is not better for the customer.

We recommend that everyone should take independent advice. It does not take any imagination at all to realise that if the best policy for you is one issued by X Assurance Company but you go to Y Assurance Company’s agent, he is not going to sell you the best policy. This is why you should take independent advice.

We do not sell life insurance and so we have no axe to grind.

A word of Warning

Life policies are long term investments. It is not unknown for some salesmen to be so keen to arrange a new policy for you that they will advise you to surrender an existing life policy and take out one of theirs instead. Reputable advisers will not do this. To surrender an existing policy is almost always a mistake. We recommend that you seek our help before taking this step.

Buildings & Contents Insurance

It is essential to insure both the structure and contents of your house. If you have a mortgage, the lender will normally insure the house itself as a matter of course. Some lenders offer package policies covering both contents and the building. You must be sure that you know what insurance you have taken out. If you do not have a mortgage, you will need to take out a policy yourself. If you wish, we can arrange this.

When to Insure

It is an unexpected rule of law that a buyer of land bears the risk of it being damaged from the date he agrees legally to buy it, and not, as you would expect, from the date it becomes his. This means that as soon as you have exchanged contracts, you should insure the property. If you do not, and the property is damaged, you could still be forced to complete the purchase. Often however, contracts are arranged so that it is not necessary for the Buyer to insure until completion of the purchase. Legal advice on this point is essential.

Beware of under Insurance

In the case of the building itself, you must insure for the “full reinstatement value” of the house. This is what it would cost to demolish the house and rebuild it, allowing for site clearance costs and architects fees. If you insure for less than the right sum and have a claim, the insurance company would be entitled to refuse to meet the claim in full. In the case of contents, there are two options, basic cover and “new for old”. With the first, if, say a carpet, is damaged, the company will pay only the actual value of the carpet. With “new for old”, they would pay for a new carpet without making a deduction for the age of the old one. Again, if you do not insure for the right amount, the company may refuse to pay claims in full.

Full Disclosure

With all insurance, it is vital to disclose on the application form everything which might be relevant.

Obviously this means that with life policies, it is essential to be honest about your health.

The reason is that if you have misled the insurance company on the proposal form in any way at all, they will be entitled to refuse to pay out on a claim. Unfortunately, the law says that you should disclose everything even if the insurance company has not asked about it. We think that this is unfair, but it is the law.

Joint Ownership

If you are buying a property jointly, it is important to consider how you will own it. There are two different ways:

Joint Tenancy

On the sale of the property, the proceeds of the sale will belong to the owners in equal shares. On the death of any one owner, the surviving joint owner(s) will automatically be entitled to the whole property, whatever the will of the deceased joint owner may say.

Tenants in Common

On the sale of the property, the proceeds will belong to the owners in the shares which they have agreed. If the split is other than equal shares, the arrangement should be written down as a declaration of trust. We can prepare this for you if you need us to.

If one of the owners dies, their share will pass to the person(s) who benefit under their will, or if no will, under the rules of intestacy. This may be someone other than the joint owner.

Which one do you choose?

A joint tenancy is the more usual arrangement between couples. A tenancy in common will be appropriate if you have contributed unequally to the purchase price or you wish someone other than your co-owner(s) to inherit your share of the property. If this is the case, it is important to make a will.

We will discuss you specific requirements with you.

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