Finding a property that you fall in love with is incredibly exciting. However, the feeling is short-lived when you realise the serious business of actually making an offer looms. Working out exactly how much to offer is really tricky, particularly at the moment where factors like the stamp duty holiday and reintroduction of 95% LTV mortgages are fuelling a really frantic market. According to Nationwide, house price growth hit a 17 year high in April 2021 so the market really is very hot.
When you do come across a place that you want to make yours, this post will help you decide how much to offer and increase your chance of being successful.
I’ll caveat that I’m not qualified to advise on financial and mortgage matters, so this post is just a summary of how I’d go about the process of working out how much to offer. When it comes to making mortgage-related decisions, speak to a qualified mortgage adviser or broker.
How much can I borrow?
It’s a really good idea to address this before anything else. Otherwise, the risk is you’ll spend loads of time on Rightmove gushing over dreamy houses, maybe even do some viewings, only to later find out that you can’t get a mortgage anywhere near big enough to buy these homes. Finding out how big a mortgage you can get is incredibly quick and easy.
(In case you don’t feel overly comfortable with what a mortgage is, I did a post summarising the main stuff you should know.)
As a general rule, banks and building societies will offer a mortgage of up to around 4.5 times your gross annual pay. This will vary depending on the lender and your circumstances, but it’s a good indication. So, for example, if you’re earning £30K a year, you’ll probably be able to get a mortgage for around £135K. If you had a £15K deposit, your rough budget would be £150K. Of course, if you’re buying with somebody else who’s in work, these figures quickly multiply out.
While these estimates are helpful, the best thing you can do is get an approval in principle (sometimes called decision in principle or mortgage in principle or AIP or DIP!) This is basically an informal indication of how much a bank is willing to lend you, based on a few quick income & expenditure questions.
While this isn’t a binding agreement to give you a mortgage, it’s usually pretty close to the amount that you could borrow if you went through a full mortgage application. The main differences are that it’s super quick and easy to get an AIP and there’s no hard credit search so your credit rating won’t be impacted.
You can get an AIP by going direct onto a lender’s website or by speaking with a broker. You’ll then normally get the AIP in the form of an email which outlines how much you’ll be able to borrow based on how you’ve answered the questions. It’s a good idea to get multiple AIPs to see if there’s any variance between lenders as criteria and policies vary from bank to bank.
When budgeting, it’s reeeally important to factor in all the extra costs involved in buying a house and the fact that once you’ve moved in, you’ll probably want some cash leftover to make it your own. For this reason, it’s a good idea to set aside some cash and reflect this in the max house price you can afford.
Once you’ve worked out your final budget, you shouldn’t necessarily use this as the max house price figure to use when searching for properties online. That’s because, as in our case, you may be able to nab a house for less than the asking price and so opening up your search for houses that are listed for a few grand over your budget may be wise.
At this point, you should have a really good idea of what the maximum amount you’ll be able able borrow is. By adding this to your deposit, that’s your max house budget. A really important caveat here is that just because you can borrow that amount doesn’t mean you should borrow that amount. If you can fulfil your needs with a property that costs less than your max budget, this may be your best bet but it’s entirely down to personal preference.
What are the risks of paying more for a property than it’s worth?
Objectively working out how much a property is worth is tricky, but crucial. Here’s why.
Let’s imagine you’ve got an AIP and have done a few viewings which have been fine but unexciting. And then, it happens, you come across your dream home in your favourite area and it’s within budget – HALLELUJAH. You’ve fallen in love and the idea of another person setting foot in your home makes you physically sick. I know this feeling.
At this point, it’s tempting to just think that you’re happy to spend up to your max budget to make sure you get it. There are a few reasons why this is rarely a good idea.
Most obviously, the more you buy the house for the more your mortgage payments will be and/or the longer you’ll have a mortgage for. This can be easy to overlook as it’s ultimately ‘future you’ that has to deal with this, but do you really want to saddle yourself with extra debt that may mean working later in life? Is the worry about making ends meet at the end of the month worth it? Not questions I can answer, but certainly things that you should be considering.
Less obvious is the fact that if your offer gets accepted and then at a later date the survey you need to get a mortgage finds it’s not worth what you’re paying, this puts you in all sorts of bother. The mortgage lender is likely to reduce the amount they’re willing to lend to you, and so offering over the odds could screw your chances of getting your name on the deeds.
Another consideration is that if you put down a small deposit eg: 5% and property values slump after you move in, it may be that your home is worth less than the size of your mortgage. This is called ‘negative equity’ and effectively means that you won’t be able to sell your home until values come back up again. This could take years, as we saw after the 2008 financial crash. The market really would have to crash hard for this to happen again, but anything’s possible and the sharp rice in house prices over the last few months makes it more likely.
This has hopefully painted a picture of how important it is that you have a good idea of how much the property you’re considering offering on is worth before making a move.
How can I work out how much a property is worth?
‘Asking’ prices ain’t much use in helping assess how much a house is worth because they’re exactly what they suggest – the price that is being asked for. While estate agents give sellers their view of how much to list their house for, it’s ultimately down to the sellers to set the asking price. For the purpose of objectively valuing a property, you need to ignore this figure and spend some time in Rightmove and Zoopla’s ‘sold prices’ section of the websites.
Alternatively, on Rightmove there’s a ‘Market Information’ section towards the bottom of each listing which shows you various bits of insight, including how much houses nearby have recently sold for which is super helpful. The goal is to work out how much the property you’re interested in is objectively worth, based on how much similar places have recently sold for.
You’re looking for properties as similar as possible to the one you’re assessing ie: same road, number of bedrooms, condition, square footage, garden etc. If you’re in luck, there’ll be multiple very similar houses on the same street that have sold in the last 6 or so months. However, it’s likely that it won’t be as clear cut as this, so you may have to consider nearby streets, slightly different properties (eg: with another bedroom, in worse condition), and looking back a little further in time.
It can seem a little overwhelming at first, but you’ll soon find yourself thinking ‘ahh okay, this one’s got a much bigger garden and so is probably worth around £20K more’. As you’ll have gathered, this isn’t an exact science, but it really is the best way to work out how much a property is worth and therefore the max you should aim to spend on a specific property.
How much should I offer?
By this point, you should know A) how much you can afford (mortgage + deposit) and B) roughly how much the property you’re interested in is actually worth. Simply put, your offer shouldn’t be more than either what you can afford or what it’s worth.
The one caveat I’d add here is that when demand is greater than supply, as we’re seeing at the moment, ‘bidding wars’ are fairly common and can lead to houses going for well over what they’re really worth. If you’re prepared to go down this route then do be aware of the risks I mentioned earlier.
If you’ve ever watched an episode of Location, Location, Location you’ll know that it’s very rare for a first offer to be expected – there’s usually some back and forth. This is why it’s often a good idea to go in with an initial offer that’s slightly below the max that you’d be prepared to pay. Bear in mind that putting in an offer much lower than the asking price is not likely to go down well and so unless you have a solid justification for this (eg: you know there’s significant structural work required), it’s best avoided.
One good tip is to put yourself in the shoes of the seller. If you’d listed your house for £200K and some anonymous human puts forward an offer of £175K, chances are you’re going to pretty miffed at the cheek of them and annoyed that they’re wasting your time. However, if you received this same offer of £175K along with some justification of why it’s £25K lower than the asking price, you’d probably view it in a different light. This approach doesn’t guarantee you getting a steal, but it does set the scene for a negotiation in which the seller is more likely to come down from their asking price.
How do I actually make an offer?
When it comes to making an offer, you’ll go through the estate agent. The simplest and easiest thing to do is to give them a quick call with your offer and see what happens. There’s nothing wrong with this and I’m sure it’s the most common way to make an offer. However, to my mind, there’s a far better way of approaching this that will increase your chances of being successful.
I won’t go into detail on the stuff I’ve written about in a post about how to make your offer irresistible, but it’s all about selling yourself and building rapport. So when you get in touch with the estate agent, make sure to reinforce why you’re a dream buyer eg: first time buyer so no property to sell, already have mortgage AIP in place, flexible date-wise. As mentioned above, if your offer is below the asking price, make sure you justify why this is.
Follow-up the phone call with an email to reiterate the key points of your offer and situation – this serves as a helpful reminder to the estate agent when they pass your offer onto the seller. It also means you’ll come across as a serious buyer which the estate agent will notice.
The only other thing I’d mention is that if you’re able to visit the estate agent in person to make the offer, do it. It may sound a little formal and old-fashioned, but any opportunity to make a good impression should be taken and there’s no substitute to speaking with people face-to-face.
What happens next?
The period of silence after you make an offer can be quite unnerving. It could be minutes, hours or days until you hear back from the estate agent and there’s nothing you can do but wait.
We were very fortunate in that our first offer was accepted. I’m convinced that this was largely down to the tips I mentioned above, especially as we got the house for £20K less than we were prepared to pay and well below the asking price. However, there will have been some luck in there too, and to have a first offer accepted is quite rare.
I’ve never been involved in a negotiation process so I don’t think I’m best-placed to give tips on how to deal with this. What I will say, however, is that you should stick to your guns and not go over either your max budget or how much you think the property is worth.
You may get the first place you offer on, you may get the 20th place you offer on, so there really is a decent chunk of luck involved. Once you do get that incredibly exciting call to say your offer has been accepted, the process of actually buying the house begins. To give you an idea of what this looks like, here’s a post about our house buying journey.