I’m looking to get on the property ladder. I earn £36,000 a year and after moving back in with my parents, I’ve managed to save just over £40,000 in a Lifetime Isa.
I found a one-bed flat in my area for £180,000, which I am told by online mortgage calculators I will be able to afford.
It is leasehold, but has plenty of time left on the lease. However, I’m slightly worried by the service charge, which is £2,200 per year with a £250 ground rent.
The service charge includes buildings insurance, concierge and a gym, so it seems like not bad value and I can afford it as it stands.
My worry is that this service charge will increase over time and if the property doesn’t rise in value, it could make hard to sell or remortgage in future.
Is there a level of service charge that will put mortgage lenders off?
Mortgage help: Our Navigate the Mortgage Maze column sees broker David Hollingworth answering readers’ burning home loan questions
David Hollingworth replies: We often talk about the need for borrowers to meet their mortgage lender’s criteria, whether that means having a good enough credit score or a salary which will cover the mortgage every month.
Looking at you as a borrower, it seems your lender should have little to worry about.
With the help of the Lifetime Isa and your hard saving you’ve amassed a solid deposit that should allow you to access keener rates.
With lenders offering more flexibility in what they can lend to first time buyers at the moment, the mortgage amount you need should be in reach.
However, it’s easy to forget that the property itself will need to get the lender’s approval, too.
Lenders are always looking to reduce the risk of a borrower failing to make their monthly payments.
However, if the worst does happen and they have to repossess the home, they want to be sure that they can make back all the money they loaned out by selling the property for a solid price.
What do lenders look for in a property?
First of all, a lender will want to be sure that the property is worth what you plan to pay for it.
It’s therefore important to factor in all the costs associated with the home, and you’ve clearly been delving into the conditions attached to this flat.
Elements that can impact the ability to sell could stem from the location of a property to the type or size of the home or its construction.
For example, some lenders may shy away from high-rise flats or those of non-standard construction as they could appeal to a more limited pool of buyers.
For example, a property above a fast food takeaway won’t appeal to as wide an audience, so although it may look like a bargain it will be harder to mortgage.
Be careful when buying certain homes: Some lenders may shy away from high rise flats or those of non-traditional construction, according to Hollingworth (stock image)
Will a ground rent be a problem?
It is also important to examine the conditions of the lease. Ground rent has been an area that has hit the headlines in recent years.
Properties with ground rent clauses that saw the cost double every few years would ramp up at such a rate that the cost would become prohibitive for prospective buyers in years to come.
On the face of it the ground rent in your situation should be fine at £250 per year, but it’s worth looking at any escalation clauses that may apply.
Lenders have become clearer on the parameters that they would typically deem as being acceptable.
They can accept a ground rent rising, but short review periods or a high amount as a proportion of the property value will be likely to affect their decision.
I’ve also seen lenders questioning relatively small ground rents, as low as £300, and although the majority of lenders will accept them it is better to flag the terms upfront.
Tricky: Hollingworth says that some lenders will question relatively small ground rents of £300
What about a service charge?
Service charges are not likely to be set with the same parameters or as strictly as those that apply to ground rent.
However, there is the possibility that a service charge could have an impact on how easily a lender can sell the property.
Service charges are levied to pay for maintenance and upkeep of a building and any communal areas, as well as covering things like buildings insurance. In your case there are additional services including the gym and concierge service.
Understanding exactly what the charges will cover should help to give a better view of whether they are reasonable or not.
There may also be a reserve fund that leaseholders pay into, where they put aside money each year to cover big or unexpected costs.
Lenders will certainly factor in the service charges when deciding how much you can borrow, as these will form part of your monthly or yearly budget. Whether the cost will affect your suitability for a mortgage will depend on what is a normal service charge in the local market, and what the charges pay for.
From a property value point of view, lenders will expect their valuer to consider any service charges and decide whether it they negatively affect the ability to sell the home if necessary.
Some lenders have a policy that charges equating to more than 1 per cent of the property value would be referred to the valuer.
The fact that you feel it’s good value suggests you would make use of the facilities on offer, and if the insurance and maintenance are well covered it may not concern the valuer at all.
Of course, charges can change over time but should be reasonable. If you go ahead, speak to your conveyancer who will look to ensure the terms of the lease look acceptable.
What we also can’t be sure about is what will happen to mortgage rates over time.
The base rate is expected to reduce in the shorter term but it’s important that you have some headroom to deal with variation in cost.
That’s where having some savings to fall back on will help. You’ll need to consider how comfortable you feel, but your track record in saving suggests you will want to build that rainy day fund as soon as you can.
NAVIGATE THE MORTGAGE MAZE
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