There are various aspects of the mortgage application and house buying processes that we’re asked about fairly often. This guide is designed to answer as many questions as possible in those areas.
So if you’ve got questions about any of the following things, read on:
- Property chains: How they work and what happens when they collapse.
- Stamp duty: What it is, and whether you'll have to pay.
- Paying off mortgages early, and whether it's worth it,
- Mortgages in principle: What they are and how long they last.
- The different types of property ownership, and what each one means
What is a property chain and how does it work?
You’ll hear the word ‘chain’ thrown about a lot when buying a house, but what does it mean?
This section of the guide introduces and explains various chain terms, and gives an example of what a chain might look like.
In short, a chain is all the people buying and selling properties who are dependent on other people buying and selling before they can move out of their current home and into their new one.
A property chain begins with a buyer who is not selling a property, and ends with a seller who is not buying one. The longer a chain, the more layers of dependency there are.
The average chain length and how many houses are in a chain will vary: traditionally, the longer a chain, the more scope there is for delays and problems, because:
- Sellers may need money from their buyer before they can afford to pay for the house they are moving into.
- Someone in the chain may change their mind, although there are penalties in place to reduce the risk of this.
- Someone in the chain may fall ill or their circumstances may change, forcing them to pull out.
- Someone may be denied a mortgage, meaning they can no longer afford the property they want.
- A problem may be found with a property during or after a survey, meaning it is no longer fit for sale.
- A conveyancer may forget to file paperwork on time.
It is the responsibility of legal professionals to keep the chain moving, and to move toward an agreed completion date throughout the chain.
What does it mean when a house has no chain?
You may hear this referred to as a chain-free property.
In this situation, only one person is involved in the process. This could be a first-time buyer moving into a new build, or someone who owns multiple properties selling one to somebody who does not need to sell their property to afford the purchase.
In this case there are no other people in the chain who are dependent on the buyer or seller. It is relatively rare for a house to have no chain.
What does no upward chain mean?
You may hear this referred to as no onward chain. This term refers to the seller at the top of the chain who is not dependent on anyone above them.
If you are moving into a property with no upward chain, the suggestion is that you will have a smoother journey than moving into one further down the chain. This is because once you have paid for the house you are able to move in, without having to wait for the seller to do anything.
An example property chain
Here’s how it could look:
- You are selling your house to somebody, and they are selling their house to a first-time buyer.
- You are buying an empty property.
- The person below you can’t move into your house until you are out, but because you are buying an empty property, you don’t have to wait for anyone else to move out. You have no upward chain.
- Once you’ve moved out, the person below you can move into your house. This leaves theirs empty, meaning the first-time buyer can move in.
There are three people involved in this chain.
What to do if the housing chain collapses
A collapsed chain can put weeks, months, or even years of work to ruin in an instant.
It can lead to sunk costs, too, from things like surveys and fees.
It can all feel a bit hopeless in the immediate aftermath, but there are ways forward.
Remember that someone pulling out of the chain may not necessarily collapse it. Your buyer may decide to step out of the chain, but if another steps in to fill the gap quickly enough, things can proceed as planned.
Unfortunately though, there is always the risk that a housing chain will collapse completely. And with each additional link in the chain, this risk increases.
Here are some reasons a chain may collapse:
- Someone further up or down cannot get a mortgage, despite having an agreement in principle. The credit checks take place after an offer is made, so an agreement in principle can very quickly become a rejection.
- Circumstances change: someone may lose their job, or suffer a bereavement.
- Surveys may reveal issues with a property in the chain that make the buyer reconsider, or change the cost of their move.
- Gazumping or gazundering. The first is when someone makes a higher offer and a seller accepts; the second is when a buyer reduces their offer late in the process.
- They may just decide they don't want to move any more.
If your chain has collapsed, here's what to do
Don't take it to heart: it's likely not your fault. Sadly even doing things by the book doesn't protect you from mishaps further up or down the chain.
Dust yourself off. Put your house back on the market, and look to set up a new chain as quickly as possible. A collapsed chain is a major setback, but it does not stop you from moving.
Think about what appealed about the house you were planning on moving into, and try to find a property that matches. Don't think you have to give up on your ideal home just because one slipped away. Remember you'll find another home you like just as much.
Try to understand what happened, and whether you need to alter your price accordingly. The solicitors of other people in the chain aren't obliged to tell your solicitors or the estate agents, but they may do. You can also ask the buyer directly if you are in touch.
There may be the temptation to re-list your house at multiple estate agencies. While this will boost the chance of it being seen, observant buyers may consider this a red flag, as it can suggest desperation which they may attribute to a problem with the property, rather than your keenness to move as soon as possible.
See whether you can 'break the chain'. This is putting yourself in a position where you don't need a chain to move, and can be done by various means, including selling before you buy. This gives you a lump sum to work with. You need to find somewhere temporary to live which can incur extra costs, but the trade-off may be worth it.
Keep your head up and keep moving forward, the majority of chains do not collapse!
All about stamp duty
Stamp duty can seem confusing, but it’s a part of most property transactions so it’s worth understanding!
After reading this section of the guide you’ll understand what stamp duty is, whether you’ll have to pay, and how much.
What is stamp duty?
The term is wrapped in history, harking back to the times where vellum contracts were physically stamped to prove their legitimacy.
Now a physical stamp is no longer required, and the stamp duty associated with properties isn’t technically a stamp duty in the historical sense. But we’ll save the legal history lesson for elsewhere.
The stamp duty you may have to pay is the short name for Stamp Duty Land Tax, which was introduced in UK law in 2003. It is a transfer tax, paid to HMRC when ownership of property is passed to someone else.
Will you have to pay stamp duty?
Everyone has to pay stamp duty on residential property or land valued over £125,000, or £40,000 if it is their second home.
First-time buyers are exempt on properties up to £300,000, and pay reduced rates above that. The government definition of a first-time buyer is “(an) individual(s) who have never owned an interest in a residential property in the United Kingdom or anywhere else in the world and who intends to occupy the property as their main residence”.
If you are exempt from stamp duty you are still required by law to submit a return, even though you will not be required to pay.
Stamp duty must be paid whether buying outright or using a mortgage, on freehold and leasehold properties.
When is stamp duty paid?
Your solicitor or conveyancer will usually be responsible for organising payment, and money must be transferred within 30 days of buying a property. Penalty charges are payable if late payment is made.
How much is stamp duty?
Percentage tables can be a bit boring, so we’ve put together a few real-world examples:
First-time buyer, house value £250,000
Stamp duty = £0
- 0% of home value in £0 - £300,000 bracket, which includes the whole value
Non first-time buyer, house value £250,000
Stamp duty = £2500
- 0% of home value in £0 - £125,000 bracket
- 2% of the £125,000 value in the £125,001 - £250,000 bracket = £2500
Non first-time buyer, house value £2m
Stamp duty = £153,750
- 0% of home value in £0 - £125,000 bracket
- 2% of the £125,000 value in the £125,001 - £250,000 bracket = £2500
- 5% of the £675,000 value in the £250,001 - £925,000 bracket = £33,750
- 10% of the £575,000 value in the £925,001 - £1,500,000 bracket = £57,500
- 12% of the £500,000 value in the £1,500,000 + bracket = £60,000
Paying off your mortgage early: when is it worth it?
If you’ve got a bit of spare cash it can be tempting to chip away at your mortgage with early repayments, but is this worthwhile?
This section of the guide outlines the pros and cons of overpaying your mortgage.
(You may hear this referred to as overpaying your mortgage, or making overpayments, so keep your eyes peeled for those terms.)
At its simplest, it may be worth making overpayments to pay off your mortgage early if your mortgage rate is higher than your savings rate. In this case you will be saving more in interest than you would make by putting the money in a savings account.
However, there are other considerations.
- Paying back early may incur fees.
- Paying back early may not reduce the mortgage term.
- You may save more money by paying off other, more expensive debt first.
Will overpayments reduce the mortgage term?
If you are considering making overpayments, speak to your lender to find out whether this will reduce the next monthly payment but keep the overall mortgage term the same, or whether it will reduce the mortgage term. The latter is preferable.
The biggest savings are made when overpayments chip away at the term of the mortgage, as there is an incrementally shorter amount of time you will have to pay interest.
The lender is aware of this, however, and there are often things in place to protect their earning capacity. Remember: the profit they make on the mortgage comes primarily from the interest payments.
The benefits of overpaying your mortgage
Because of the low interest rates on savings accounts at the moment, you stand to make savings on mortgage interest that will be greater than interest you would earn if you put the equivalent amount into a savings account.
Paying off early means you are less restricted by debt. You are also reducing your Loan to Value (LTV) ratio, meaning remortgaging will be easier.
You will have the option to switch back to regular repayments if your circumstances change and you are no longer able to afford overpaying.
The drawbacks of overpaying your mortgage
Early repayment often incurs charges, usually 1-5% of the amount repaid. This amount will likely reduce as you reach the end of your mortgage term: this is the lender trying to protect their earning potential from your mortgage.
You risk losing an emergency fund if you plug all extra cash into your mortgage. Avoid the situation where you are forced to take out a high interest personal loan in an emergency; in this case overpayments may be counterproductive.
If your circumstances change, overpayments now don’t protect you against charges for going into arrears further down the line.
How to decide whether it is worth overpaying your mortgage
Be aware of when the interest is calculated on your mortgage, and make repayments as close as possible before this date. This will give your overpayment maximum effectiveness. On newer mortgages this is less relevant, as interest is often calculated in real time, or daily. On older mortgages however, this may be quarterly or even annually, and can make a real impact.
We recommend speaking to your lender, and asking them how it will work. If you get a positive number when you subtract any fees and charges from the amount you stand to save, it may be worth overpaying. Obviously the decision is ultimately in your hands, but the advice in this guide should go some way to clarifying the situation.
What is a mortgage in principle and how long does it last?
You’ll hear the term 'mortgage in principle' fairly often during the homebuying process. If you’re wondering what it means and how it will affect you, read on.
This section of the guide answers questions about the duration of a mortgage in principle, what one allows you to do, and what happens if time runs out.
A mortgage in principle is a statement from a lender that they will consider lending you the stated amount. It is not a legally binding agreement, but in most cases, a mortgage in principle will lead to a loan being made if the next steps are completed within the stated time frame.
You may also see the terms 'decision in principle', or 'agreement in principle' (AIP).
How long does one last?
A mortgage in principle usually lasts around six months from Northern Irish banks, or between 60 and 90 days from lenders in Great Britain.
Here are some lengths of mortgages in principle from well-known high street lenders in the UK:
What can I do while I have a mortgage in principle?
The mortgage in principle gives you an idea of how much a lender would be happy to lend, rather than a commitment that you will definitely be able to borrow. Receiving one gives you the peace of mind to look at properties in a price range you can demonstrably afford, which in turn allows you to initiate the next steps of the house-buying process.
A mortgage in principle also demonstrates to estate agents that you are serious about buying a property, which will hopefully encourage them to move the process along.
What happens if the time runs out?
If you reach the end of the time frame for which your mortgage in principle is valid without being ready to move ahead in the mortgage application process, you will have to request a new one.
Some lenders will reissue the same one, while others may require you to restart the application to determine whether your circumstances have changed.
It is worth trying to get everything done within the initial time frame, as lenders can change their criteria and potentially reduce the amount they are willing to lend if your circumstances do change between applications.
Can I re-apply for an AIP?
You can re-apply. However, be aware that lenders check your credit when preparing an AIP, meaning that repeated applications could have a negative impact on your credit score.
While applying again isn’t ideal, it may be a necessary step in your mortgage application.
What are the different types of property ownership?
Understanding property ownership is vital when moving house, to make sure you are aware of your rights and responsibilities.
After reading this section of the guide you’ll know this difference between freehold and leasehold, as well as their respective advantages and disadvantages.
In the UK, there are three main types of property ownership: freehold, leasehold, and commonhold.
Property ownership is recorded on the property’s title deeds in the HM Land Registry database, or the Land and Property Services agency in Northern Ireland. Ownership of freehold and commonhold properties are recorded, along with leaseholds with a term of over 7 years.
What are the pros and cons of freehold ownership?
As a freeholder, you own the property and the land it is built on outright, in perpetuity.
You do not have to pay rent, service charges or landlord charges.
You are responsible for the maintenance of both: this means you are not answerable to a landlord, but that you take on the role of landlord and responsibility for upkeep if you lease the property.
What are the pros and cons of leasehold ownership?
As a leaseholder, you own the property and the land it is built on for the length of time outlined in a lease agreement.
At the end of the lease, ownership returns to the freeholder. The freeholder is referred to as the landlord for the duration of the lease.
The landlord is responsible for the upkeep of the property and grounds. You enjoy certain protections: a landlord cannot undertake work without your consent if it costs more than £250, or will be ongoing for more than a year, or cost above £100 monthly.
To ensure you are not being taken advantage of financially, a landlord is obliged to provide quotes and receipts when asking for money toward upkeep of parts of the property.
It is widely understood that the value of a property decreases in real terms as the end of the lease approaches. If you move into a property with 10 years left on the lease, ownership reverts to the freeholder even though you have been paying the cost of living there for this period of time. For this reason it is advised to check the remaining lease term carefully before agreeing to enter into a leasehold agreement.
What is commonhold ownership?
Commonhold is relatively new, only passing into law in 2002 and being introduced in 2004. Consultations are still ongoing to refine this type of property ownership, and to increase its popularity.
In commonhold, a group of people come together to form a company and take joint ownership of a building - for example a block of flats.
A half or more of leaseholders have to agree to form a commonhold. They are then responsible for the upkeep of all parts of the building, including residential areas, shared corridors, stairwells, elevators and more.
What should I look out for when buying a property?
The length of a lease affects ease of resale: the preference is for properties with a lease of 30 years or more after the mortgage term.
A lease can be extended if you’ve owned the property for 2 years, and the original lease was over 21 years when you took ownership.
Extending a lease will incur fees, which are negotiable between you and the landlord. The Leasehold Valuation Tribunal can adjudicate if no agreement can be reached.
There we have it: answers to the questions we get asked fairly often about various aspects of the house-buying process.
Hopefully the information is useful and gives you greater understanding of what you’ll be up against throughout the process. Knowledge is power, after all!
If you have any other questions about buying a house, get in touch with our team of experts. We’ll be happy to help.