Many buyers underestimate the total costs of buying a house. To help understand the main expenses you will face, here is a guide.
For many, especially first-time buyers, this is the most significant of the costs of buying a house. In the past, some lenders would consider lending the entire purchase price with a 100% mortgage. Others would offer up to 95% of the value of a home and then a further 30% of the value as an unsecured loan (believe it or not!). This level of lending proved risky for lenders when house prices fell during the credit crunch. As a result of significant changes to mortgage lending introduced in April 2014, these products no longer exist.
It is still possible to obtain a 95% mortgage from some lenders including large High Street lenders and smaller Building Societies, but their criteria and underwriting (assessment of you and your circumstances) is strict. Borrowing a large proportion of the value of your house presents the lenders with a higher risk of losing money if you default. To reflect this added risk, the interest rates on these schemes can be higher than with lower loan-to-value mortgages. The higher the total deposit, then generally the lower the interest rates available.
Home buyers ideally need a deposit of at least 10% of the price in order to attract lower interest rates. Larger deposits may be needed for new build flats and apartments.
TEMPORARY CHANGES TO STAMP DUTY:
On 8th July 2020 in his summer statement the Chancellor Rishi Sunak announced a temporary change to the lower limit at which stamp duty charges become payable for some property buyers. The changes were in response to the Coronavirus and its impact on house buying. The changes will apply only until 31st March 2021.
– First Time Buyers – No stamp duty to pay up to a purchase price of £500,000 (up to £10,000 saving)
– Home Movers – No stamp duty to pay up to £500,000 (up to £15,000 saving)
– Buy to Let & Second Homes – 3% stamp duty to pay up to £500,000 (up to £15,000 saving)
Stamp Duty Land Tax is a tax payable on any residential property costing more than £125,000. It is paid to HM Revenue & Customs by your Solicitor upon completion of the purchase. It is charged at different rates depending on the portion of the purchase price that falls into each rate band:
- Up to £125,000 = nil
- £125,000 – £250,000 = 2% (i.e. up to £2,500)
- £250,000 – £925,000 = 5% (i.e. up to £33,750)
- £925,000 – £1.5 million = 10% (i.e. up to £57,500)
- Over £1.5 million = 12% (uncapped)
The total charge is found by adding the sums within each band up to the purchase price. So for example a purchase at £325,000 would incur a stamp duty charge of £2,500 + £3,750 = £6,250.
For First-Time Buyers the starting point for stamp duty tax was revised upwards to £300,000 in the 2017 Autumn budget. Therefore, nothing is payable up to this point after which the rates above kick in. For first time buyers purchasing London properties, the starting threshold was raised to £500,000. To qualify, all buyers must never have owned a property before. These concessions can markedly reduce the costs of buying a house for first time buyers.
A Solicitor will need to act for you in the purchase. They will make all of the necessary legal requirements to transfer ownership of the property to you. Depending on the property value you should budget for fees of £600 – £1500. On top of this you will have to pay ‘disbursements’ which are paid to other organisations for local, environmental and water searches. Depending on your local council the range of these costs is £250 – £300. A registration fee is also payable to the Land Registry who record your new ownership of the property. This fee varies according to the purchase price.
Survey / Valuation Fees
All mortgaged property needs to be valued by an independent valuer. A basic report is needed by the lender, but a more detailed survey known as a Homebuyers Report is often recommended for the buyer. This is especially true where the property is older or has unusual features. Fees are usually on a sliding scale based on the valuation, starting at around £200 for a basic report on property valued at up to £100,000, to approximately £375 for a £300,000 property. Some lenders offer a basic report free of charge, but you may not receive a copy of the report.
Homebuyer Report fees are around double the basic report costs but a much more detailed survey is produced, giving information and reassurance. They can often be arranged through the lender, which sometimes results in a cost saving. This is because the basic mortgage valuation can be created from the Homebuyer Report details.
A full structural survey will cost you more although this is designed for properties with specific areas of concern regarding its construction or structure. These types of report are rarely needed for straightforward home purchases.
Product fees are often charged by the lender for specific deals, such as fixed and tracker rates. These vary between £300 to £1,500 or more. Often the fee can be added to the loan and repaid over the life of the mortgage. However, the fee must be factored in to the overall costs of the loan to compare whether the deal is attractive or not in relation to others with smaller or no fees.
Higher Lending Charge
This is a largely historical charge which lenders used to pass on to borrowers. Where a lender grants a mortgage above a certain amount, often 75% of the valuation of the property, they are required to arrange for their own protection some ‘additional security’. This was usually an insurance policy which would make good any losses they suffered in the event of a repossession and sale, where the sale price does not cover the mortgage debt. Historically, this could add a significant amount to the costs of buying a house, especially for those with smaller deposits.
Practically all lenders currently meet the cost of this insurance policy but in the past they did not. You will rarely see them nowadays.
Mortgage Adviser Fees
The process of searching and applying for the most suitable mortgage is now longer, more involved and more difficult than it used to be. Consequently, many mortgage advisers now make a charge for their professional services. Mortgage brokers may also receive commission from the lender.
Typical fees can be £250 – £750 where commission is received from the lender as well, or £1,000 – £1,500 where it isn’t.
The total costs of buying a house will therefore vary depending on the value of the house you buy but you need to understand all of them, and when they are payable, before committing yourself.