Purchasing a house is likely the most significant financial decision you will ever make. Along with the price of the property, there is a vast range of costs associated with the purchase of a house – both before and after completion.
We will show you what you need to budget for when buying a home. We can help you prepare for all the extra charges that come with being a homeowner. The costs can be split into two different stages; the upfront costs before completion of your property purchase and the post-completion costs.
The costs of buying a house
The total first cost of purchasing a home is the deposit. If you are a first-time buyer you will typically need to find 10% of the full price of the house, so £25,000 for a £250,000 property.
It is better if you have a higher deposit because it will reduce your loan-to-value ratio from 90% in the example given above and will also reduce your monthly payments. So, if you increase your deposit to £50,000 for the above example, you will be paying 20% of the final property price, which would leave a loan-to-value ratio of 80%. This gives you more options for better mortgage product deals that charge lower rates of interest on borrowing for your mortgage. It will also reduce the amount you have to pay until you own the property outright.
Moreover, if you are moving from a different home, funds from the sale should cover the deposit of a new mortgage for the new property. If you have acquired a lot of positive home equity from your previous home, it will help you borrow more to be able to afford a more expensive house.
When you buy a property, there is a range of associated legal, regulatory and tax costs
Stamp duty is one cost you would typically face. Between the dates of 8th July 2020 to 31st March 2021, buyers will not be required to pay the stamp duty on the first £500,000 of the house price. First-time property buyers in England and Northern Ireland are typically exempt from paying any stamp duty on property sales up to the value of £300,000.
If the property price is between £300,001 and £500,000, first-time property buyers would only need to pay the stamp duty on the amount over the value of £300,000. If the property value is more than £500,000, they will get no tax relief at all.
For non-first time buyers, the stamp duty rates in England and Northern Ireland are typically 2% of the purchase price of between £125,001 and £250,000. 5% of the purchase price between £250,001 and £925,000. 10% of the purchase price between £925,001 and £1,500,000. And finally 12% for the purchase price of £1,500,001+.
Mortgage fees generally mean there is a product arrangement fee and a booking fee. From 2016, mortgage lenders must include extra charges such as redemption fees and valuation fees as a part of the annual interest calculation. This is often referred to as “the overall cost for comparison”.
A booking fee
A booking fee is a fee for applying for the mortgage deal and is typically payable when you apply for a mortgage whether you are accepted or not. Occasionally it is included as part of the arrangement fee and is sometimes known as a reservation fee. The cost is typically between £75 to £250.
The arrangement fee
The arrangement fee, which is sometimes known as a completion fee, typically costs between £500 and £2,000, but it depends on the lender and the mortgage product. Mortgage lenders will often let you add this to the cost of the mortgage, but this usually means you will pay interest on it, so it is best if you try and pay it in full, separate from your mortgage.
You will also be required to pay an electronic transfer fee, which generally costs around £40. This fee covers the cost of transferring the mortgage amount from the mortgage lender to the solicitor.
Estate agent fees
The seller and not the buyer only pay estate agent fees. Estate agent fees are a payment to the estate agent for their services that you agree with the estate agent when the property is put on the market. The fee works out to be around 1 to 3% of the sale price with VAT on top of that. This can be a massive amount of money in the case of an expensive house.
A valuation fee is a fee you pay to get your potential new home valued. It is used to confirm to the mortgage lender that the property is worth the sale price so that they can feel secure in lending you a large amount of money. The cost of the valuation fee varies, this is usually up to a max of £350, and occasionally the lender will do the valuation for no cost.
The valuation only looks at the worth of a property. A property survey has to be completed to check for any problems with the property like structural issues or damp. A home buyer report looks at the standard of the property. It usually costs between around £300 and £1,000 depending on the value of the property. This takes a more in-depth look at the condition and structure of the property. This costs between around £500 and £1,250. A more detailed building survey is generally only required for buildings that are older than 50 years old, or if you would like as much information about your new home as possible.
You should pay conveyancing fees to a licensed conveyancer. A conveyancer looks after the legal aspects of buying a property. They will either charge a flat fee for their services or a percentage of the property’s value. This usually comes to between £500 to £1,500. This is dependent on the location and the type of property. You may be required to pay £250 to £450 more for local searches.
Land Registry fee
The Land Registry has records of all of the registered properties in England and Wales, and they charge a fee for registering a property with a new owner. The cost is dependent on the property price, but it is usually between £90 to £150.
You can cut the cost of removals by doing it yourself. It can sometimes be more affordable to hire a van and do it yourself rather than hiring a removal company in some cases. Otherwise, removal company prices start at around £100 for a local move but can go up to £1,000 if you need to move many items over a long distance.
These are not necessarily linked to the home-buying process, but they are a huge part of owning a home cannot be avoided. Your total household bills will typically cost at least £200 per month plus any building or content insurance you may take on your new property.
Furnishing a property can become quite costly. It is possible to furnish a house on a tight budget; for example, charity shops sometimes sell furniture, Facebook Marketplace and Gumtree are also good places to look for second-hand furniture. Upcycling has become quite popular in recent years. This means you do not have to pay for new furniture and can create new looking furniture yourself.
Alterations and extensions
You may want to alter your new living space. You could decide to get a garden office or convert a garage or loft into an extra room, building a conservatory. Take note that it can be much more convenient to get a bit of messy and dusty building work done before you properly move into a new home. It may also be required to get planning permission approved before creating an extension.
Mortgage repayments and associated charges
The highest ongoing cost of owning your property for the majority of people is mortgage repayments. The only way to avoid paying these is if you pay for your home outright – that very rarely happens, unless you are downsizing massively or you have received a large lump of cash from an inheritance for example.
Typically, the smaller the mortgage in relation to the total property cost, the lower your interest rates will be. If the property’s purchase price is £300,000 and your mortgage is £180,000, you already own 40% of the property. With an LTV of 60% or more, lenders can offer you the very best interest rates available.
Most mortgages these days are repayment mortgages. This is where part of every monthly payment goes towards paying off the total debt – and after a certain number of years, you will have paid off the loan, and you will own the property outright.
The other mortgage payment option available is an interest-only mortgage; this is where you only pay the monthly interest accrued on loan. This means that the monthly repayments are much lower. You will have to prove to the lender that you have a way of paying off the total amount at the end of the mortgage term.
Other mortgage costs
There are further costs linked to having a mortgage, but this is dependent on your circumstances and how you choose to manage your mortgage.
If you miss a mortgage repayment, your lender can charge you a fee, and if you miss multiple repayments, your home is at risk of being repossessed by debt collectors. Missed mortgage payments will also impact your credit rating hugely.
Some lenders may give you a higher lending charge if you have a smaller deposit, for example, less than 10% of the property’s value. A higher lending charge is a form of insurance for the lender: it is an additional payment of money that offers protection to the lender from losing money if they have to repossess and sell your house at a loss.
The lender can also apply overpayment and early repayment charges, if you pay too much on your mortgage by a certain amount, or if you pay off your mortgage entirely. Each lender will have their own rules but do check because some of the penalties can be severe, especially on fixed-rate and discounted rate mortgages.
Lenders make their money on the interest and fees that are attached to a mortgage. If you can afford to do so, overpayments on your mortgage is a good thing, and it can save loads of money, but you must do this within the agreed limits of your mortgage. This is usually up to 10% per year, but check this with your lender beforehand.
The last potential cost of a mortgage is an exit fee that can be charged once you have repaid your mortgage, even if you have not repaid the whole mortgage earlier than expected.
Leasehold not freehold
One last thing to consider, if you are buying a leasehold property, especially if it is a flat or apartment in an urban area. There could be extra recurring costs, for example, ground rent, service charges and maintenance charges for repairs of the building, in communal areas of the building. This will differ a lot from property to property. However, it could add up to much money per year.
It is said that buying a house is one of the most stressful things you can go through in life. From the outset, you should ensure that you choose a reputable residential conveyancing solicitor. Your solicitor should keep your best interests at the forefront and walk you through the process in a trustworthy and thorough way.
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