Overview of topic 

Welcome to our property blog. We understand how complex the property purchasing process can seem at first glance, especially for those who are self-employed. In this series, we will break down how to buy a property in the UK. We will also touch on how self employed mortgages work.

This article will provide you an overview of the residential buying process. This includes what to look for, the difference between residential and buy to let mortgages, and how the rules differ for entrepreneurs and those that are self-employed. In this overview, we focus on England specifically as the rules do differ slightly for Scotland and Wales. If you want to discuss anything further, don’t hesitate to get in touch with us today. 

We run through: 

1. Introduction to Property
2. Mortgages: Key Terms & Concepts
3. Funding The Purchase
4. Costs & Taxes
5. The Property Search
6. The Mortgage Application & Mortgage Offer 
7. The Legal Bits

1 - Introduction to Property 

Property widely falls into 2 main use cases:

• Residential - Properties designed for people to live in
• Commercial - Properties or land that host companies and trade

Residential is broken down into 2 categories depending on the intended end user. 

• Buying the property to live in it - Owner Occupier / Residential 
• Buying a property to rent out - Buy to Let 

Mortgages are commonly taken to buy property, with over 80% of 16–54-year-olds using, or having used a mortgage to buy their home in 2023. Up to 80% of buy to let properties purchased in personal names also used mortgages.

The buying process is predominantly the same regardless of whether you are buying a property to live in or to rent it out. The main differences being: 

• The type of mortgage used
• How the mortgage size is calculated

When buying as an investment, you can buy the property in your company’s name or in your personal name. Get in touch with us if you’d like to discuss the benefits and drawbacks of each approach. 

2 - Mortgages: Key Terms & Concepts

What is a mortgage? 

A mortgage is a type of loan. 

Mortgages are secured loans. This means the lender will take a charge over an asset you own; in case you are unable to pay back the loan. The asset is a form of security for the lender. The most common security for a mortgage is a property.

Key Terms

• Mortgage Broker
  • This is a qualified professional that acts as an intermediary between you and a mortgage provider
  • You can submit your information to them, and they will help you find the best deal to suit your circumstance. 
  • A good one will be on hand to help guide you through your property purchase
• Decision in Principle
  • Also known as an agreement or mortgage in principle.
  • An indicative maximum loan amount based on a brief snapshot of your financial situation, known as a soft credit check
• Loan to Value (LTV)
  • The size of the loan compared to the value of the property.
  • A loan of £80,000 on a property valued at £100,000 would be at 80% LTV 
• Borrower / Mortgagor
  • The person that takes out the mortgage
• Lender / Mortgagee
  • The entity that provides the mortgage, typically a bank or building society
• Charge 
  • A legal interest registered against a property for the benefit of a third party, such as a lender.
• Term 
  • This is the length of the mortgage in total, which is often 25 to 40 years depending on the borrower’s age.
• Mortgage Product
  • This is the deal a borrower selects for a period of time.
  • Products include fixed, variable or discounted rates, and typically last 2 - 5 years.
• Fixed Rate
  • A mortgage product with a fixed interest rate for a set period of time
• Variable Rate
  • When the interest rate on the mortgage can vary.
  • It can go up or down.
  • You may choose this if you think rates are likely to decrease.
• Tracker Rate
  • This is a type of variable rate that is linked to the Bank of England (BoE) Base Rate.
  • It is usually a set percentage above the base rate.
• Standard Variable Rate (SVR)
  • Every lender has a standard variable rate, which is the rate that a mortgage will be charged at when the borrower has not chosen a mortgage product, or it has ended
• Discounted Rate
  • A mortgage product with a set discount below the lender’s standard variable rate for a fixed period of time, EG 3% discount on SVR for 3 years
• Default
  • When the borrower fails to make the agreed payments on their loan
  • This can lead to the lender repossessing the property, but usually only as a lat resort
• Repossession
  • When a lender takes over ownership of a property with the intention to sell it to repay the debt owed

Types of mortgages 

There are 2 main types that relate to the reasons for purchasing outlined above.  

• Repayment Mortgages
  • The loan is paid off by the end of the mortgage term
• Interest Only Mortgages
  • The loan balance remains constant throughout the mortgage term

Repayment Mortgages

These are typically used by those that are buying properties to live in - owner occupiers. 

By the end of the mortgage term, assuming no payments have been missed, the loan will be paid off. 

Monthly payments are composed of 2 elements: 

• Interest
  • Charged on the outstanding loan balance 
• Capital Repayments
  • ‍A sum reducing the loan balance 

Earlier in the term, the payments are predominantly interest, and later they are predominantly capital repayment, as seen below. 

The total payment amount remains constant, but the composition changes over time. 

As capital repayments are being made, the balance reduces over time, reaching 0 by the end of the term.

Interest Only Mortgages 

Unlike repayment mortgages, interest only mortgages do not have capital repayments built into them. The sum borrowed remains constant throughout the mortgage term.

Monthly payments are made up entirely of interest. 

At the end of the term, you will still owe the full mortgage balance unless you’ve made any additional payments. The full loan balance will be due to the lender.   

3 - Funding The Purchase 

The funding of a purchase has 3 main components.  

• The Deposit  
  • Your funds that cover the shortfall between the purchase price and the mortgage.
  • Typically 10% of the purchase price for residential and 25% for buy to let. 

• The Mortgage
  • Often 75-90% of the purchase price. 

• Disbursements, Fees & Taxes
  • Funds to pay for conveyancing, surveys, searches and stamp duty. 

Owner Occupiers - How Much Can I Borrow?

How much you can borrow is impacted by how you’re paid.

Salaried Workers 

PAYE employees can broadly expect to receive 4 to 5 times their annual salary with an LTV of up to 90%. 

Self Employed & Entrepreneurs 

Business owners with shareholding of 20% or more are likely to be classified as self-employed by lenders.  

Lenders consider your net income rather than declared salary when assessing affordability. 

They can obtain this by averaging the declared sums on your latest 2 to 3 tax returns.

Buy to Let - How much can I borrow? 

The size of the loan is contingent on the rent the property can achieve, with higher rent increasing borrowing potential.

The maximum loan size will be capped by the maximum LTV allowed by the product chosen.

If the mortgage product chosen runs for less than 5 years, a stressed interest rate is applied to ensure the property’s income would be sufficient to cover the mortgage payments should the rates increase at renewal. 

4 - Costs & Taxes 

In addition to the purchase price, there are several other costs incurred in a purchase. These include: 

• Stamp Duty Land Tax (SDLT)  
• Legal Fees 
• Searches 
• Land Registry Fees 
• Surveys 
• Insurance 

Stamp Duty Land Tax (SDLT) 

SDLT is a tax paid on the transfer of property in England and Northern Ireland. 

It has stepped tax banding, with all of one band to be used before moving into the next.  Learn more about the bands on the HMRC website.

SDLT exemptions 

When There are, however, some exceptions to the rule. You don’t pay SDLT if you’re purchasing a property: 

• Worth less than £250,000 and don’t own any other property.  
• As a first-time buyer and are paying up to a price of £425,000. 

Generally, when buying a property for over £250,000, stamp duty is payable. It can be quite hefty, so it’s imperative you’ve factored it into your budget. 

You can learn everything you need to know about stamp duty here. 

Legal fees 

Legal fees are typically linked to property type and location.

They range from £500 - £2,000 depending on the complexity of the transaction.

Searches 

Searches typically cost £500 - £750. 

More details on these are provided in the 'legal bits' section below.   

Land Registry Fees 

These are the fees paid to update the land registry and usually amount to £50 - £150.  

Survey fees

Surveys vary depending on the level of detail you require, if you want one done at all. They start around £250 for a level 1 survey and go up to £1,000+ for a level 3 structural survey. 

Insurance

Insurance is imperative and is required when taking out a mortgage.

The cost is dependent on property type, size, location and claims history.  

So, in addition to the purchase price and SDLT, you can expect to pay £1,500 - £3,000 in fees and costs when buying a property. 

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We would also recommend keeping 1% of the purchase price in a contingency fund for any unforeseen maintenance issues that could crop up.

5 - The Property Search  

What to look for when buying a property 

We set out 5 key considerations when buying. Whether it’s you or a prospective tenant, always keep in mind who the end user of the property will be. You want to consider:

• Necessities - What does the property have to have? 
• Desires - What would you like the property to have? 
• Timing - When do I want to buy? 
• Property Use - Now and in the future 
• Length of Ownership - How long do I intend to own it? 

Necessities

These usually depend on who the end user will be. These are the non-negotiables such as: 

• Minimum number of bedrooms 
• Proximity to transport & schools
• Parking  
• Outside space

Desires

These are the features you’d like to have. Usually your budget means they’re not all possible so you have to select those which are most important.These could include 

• Type of outside space 
• Type of parking  
• Proximity to amenities  

Timing 

Timing is key. 

You may want to wait until you file your accounts to show a higher level of net profit. 

You may need to move at a particular time such as during school holidays, or at the end of your rental contract.

There are also seasonal effects on the property market to keep in mind.

Property Use 

Think about who will be using the property, and if this is likely to change over time. If it’s likely to change, you should ensure the property will suit both types of user.

Length of Ownership  

If you’re thinking of moving in the next 5 years, you should consider if the property (and any alterations you potentially make) will appeal to buyers when you’re ready to sell.

Viewings and Offers

We recommend using a combination of online portals and local estate agents to ensure nothing gets past you.  

Set up alerts to learn about the areas you’re looking in. Register with local agents, too. 

Book in and attend viewings. If it works, make an offer. Don’t be afraid to haggle!

Get in touch with us if you’d like to chat about the search and how best to negotiate when making an offer.

6 - The Mortgage Application & Mortgage Offer

Once an offer is accepted, you must instruct a solicitor. 

The Mortgage Application

The process has 2 main parts. 

• Assessing the borrower(s) 
• Assessing the property 

This decision to lend is made by an underwriter - a person that evaluates the risk to the lender.

Assessing the Individual

You must supply your ID and proof of your financial situation to your mortgage broker or lender. They will check your regular income and expenditure to determine if you can support the mortgage payments. 

They will conduct a hard credit search, which will show them your financial history, including payment history and presence of any County Court Judgments (CCJs).

Assessing the property

The lender checks that the property is sufficient security for the loan. 

This is done via a valuation, which can be done in person by a surveyor, or from a desktop using an AVM (automated valuation model). 

Associated Fees and Surveys 

During this period, you’d instruct any surveys. These could be done as part of the valuation process, or you can choose an independent surveyor.  

There can be fees charged for the application and valuation, which differ per lender. 

The Mortgage Offer

If all goes well, you will receive a mortgage offer. 

The mortgage offer specifies an exact amount to be lent on a specific property.

It is binding on the lender and valid for 3-6 months. 

The lender can typically only withdraw the offer in exceptional circumstances, such as misrepresentations made on the application. 

The borrower does not have to use the mortgage offer.

Mortgage offers are often issued with conditions.

Simple conditions may include the need to have insurance from the day of exchange.

Complex conditions can be more cumbersome, such as when a property is in disrepair. In such cases, conditions may include:

• An Undertaking
  • The lender may obligate the borrower to improve the property 
• Retention
  • The lender may retain a portion of the loan until works are done 

7 - The Legal Bits

At this point, your solicitor will begin the conveyancing process. This is the legal process of changing the ownership of a property. 

The buyer’s solicitor receives a contract pack from the vendor's (seller’s) solicitor. This sets out key information about the property sale, including details about the property and what is included in the sale. 

Your solicitor will raise enquiries against the pack, seeking confirmation on a variety of matters. 

They will apply for searches, which provide current and historical information on the property and land it lies on. The main 4 are: 

• Local authority search 
• Environmental search 
• Water and drainage search  
• Land registry search.  

These can take up to 4 weeks depending on your area but are usually ordered early in the process and other items are dealt with during the lead time. 

Exchange

When the searches are in, the mortgage offer has been received and enquiries have been satisfied, an exchange date is set.  

Exchange is the first legal commitment both parties make to the transaction

Signed contracts are exchanged and the buyer pays a 10% deposit to their solicitor to be held in escrow.

A completion date is set, too.

Completion

Your solicitor will inform your lender of the expected date and request funds around 5 days beforehand.  

Your solicitor will issue you a completion statement, setting out the funds needed to complete. This shows: 

Once received, funds are sent to the seller’s solicitor, and the transaction is completed. 

The seller’s solicitor submits documents to change the legal ownership of the property to the Land Registry.

Keys will be released to you, and you can check out your new house!

You just bought a property! 

Time to celebrate. Dance, shout, whatever you fancy. It’s a pretty big deal so treat it as such! 

Summary & TLDR 

The process of buying a property can seem daunting. In most cases it follows an established sequence and there is help available along the way. A good mortgage broker can be worth their weight in gold, not only finding you the best mortgage for your circumstance, but also helping guide you through the process. 

Self-employed and business owners are treated differently to salaried workers, so showing strong income becomes more important than being the most tax efficient possible when it comes to buying a place to live in. 

There is no legal commitment until exchange, so ensure you keep on top of the agents and your solicitor to keep the process moving forward. 

This series will dive into how to buy a property in the UK in much more detail and from multiple angles, with next blog will be dissecting the funding of the purchase, with a focus on mortgages. We explore the different types and give detail on what entrepreneurs can do to boost their mortgageability. 

If you have any questions, please do get in touch with us today.