The true cost of your new home
Buying a home is considered one of life's most stressful events, but arming yourself with the basic financial facts can at least avoid any nasty bill shocks along the path to picking up the keys.
There is a range of additional one-off costs on top of a property's price tag, which can amount to an eye-watering sum if you're not prepared.
As Craig McKinlay, mortgage director at Halifax, warns: "The cost of the property may be the main expense, but homebuyers should pay close attention to the other costs. These include stamp duty, survey fees, conveyancing costs, and removal fees, and they all add up - not to mention how much you may need to spend on your home once you move in."
Fortunately, as a personal finance journalist, I was clued-up when it came to buying a two-bedroom flat in Battersea, south-west London, and made a list of all the extra costs before making an offer to ensure I could afford to go ahead.
So how much does it cost?
First things first, the mortgage. Whichever loan you go for, it will cost you a lot more than the amount you actually borrow. For example, a mortgage of £150,000 to buy a £200,000 property at a 4% rate over a 25-year term on a repayment basis has a total repayment cost of £238,526.
And when dealing with such big numbers, it's easy to lose track of the associated fees when a few hundred pounds here and there renders them seemingly insignificant. But they do vary greatly and can really stack up.
Ray Boulger, senior technical director at broker John Charcol, says: "Arrangement fees are given various names by different lenders, as they may be called a booking fee, reservation fee, mortgage fee, completion fee or product fee."
Typically, the lower the mortgage rate, the bigger the fees and vice versa. However, lenders tend to offer a choice of rate and fee combinations.
Mark Harris, chief executive of mortgage broker SPF Private Clients, says: "Some of the cheapest mortgage rates come with fees of up to £2,000, so it's important to work out the total cost - rate plus fees - when comparing products to ensure you are getting a good deal."
Check whether the fee is payable on application or can be added to the mortgage on completion.
"You may be able to add some fees on to the loan if you don't have the cash to pay upfront but bear in mind that you will pay interest for the convenience," adds Harris.
"There may also be a non-refundable booking fee which might be a couple of hundred pounds, which is paid upfront upon reservation."
Boulger warns: "Any part of the fee, or all of it in the case of HSBC, that has to be paid on application is likely to be non-refundable if the mortgage does not complete, whereas fees payable on completion are not payable if the mortgage does not complete."
If you have a small deposit, your mortgage application may be subject to a higher lending charge, typically charged at up to 8% of the amount of your loan over, say, 90% loan-to-value (LTV). It is rarely applied on LTVs below 90%. Watch out for other fees applicable further down the line, as some mortgage providers have a clause in their terms and conditions regarding an early repayment charge (ERC). This comes into effect if you want to close your mortgage before the end of the product term. With some lenders it is a flat rate, typically 3 to 5%, throughout the period of the initial rate; in other cases, it can be more complicated.
There is also the exit fee, which is a flat rate at usually between £50 and £295, specified at the beginning of the mortgage but charged on redemption, although a few lenders waive it if the mortgage runs full term.
Bank of Scotland and Halifax, for example, include administration costs such as the exit fee in their £265 arrangement fee.
After taking advice, I opted for a flexible fee-free First Direct offset tracker, at 2.29% above the Bank of England base rate, giving a pay rate of 2.79% for my mortgage.
The legal process
This can be complicated, and it isn't something that you can do yourself, so you'll need to instruct a solicitor or conveyancer. If you don't already know one, ask friends or your estate agent for a recommendation.
Fees vary, as while some charge a flat-rate sum of, for example, £600 plus VAT (£720 total), for others it's a percentage of the purchase price. However, any legal complications with the house purchase, such as a lease extension or further enquiries, can push the price higher.
I chose Leesa Glenwright at Ambrose Appelbe in London, who quoted £845 plus VAT (£1,014 total).
Where possible, agree a fixed fee for the transaction, and for there to be no abortive fees if the purchase fails to complete through no fault of your own.
Alongside your solicitor's fee, there will be other legal sums to pay, including stamp duty, Land Registry and search fees, and a fee for Chaps payments or telegraphic transfer, which offer same-day clearance of your funds.
Any relevant local, environmental and water searches that need to be done will typically amount to between £200 and £300.
You will also have to pay a fee for an amendment of the Land Registry entry into your name as the new owner. This is payable on a sliding scale depending on the purchase price of the property, and ranges between £120 and £540 for properties sold for £100,000 to £1 million, or £910 for more than £1 million.
Whatever you do, don't forget to calculate the stamp duty, as this is likely to be your biggest extra cost. If you buy a property worth more than £125,000, you have to pay stamp duty tax on the purchase price. It's applied on a sliding scale. Homes costing up to £125,000 pay no stamp duty, those between £125,001 and £250,000 attract 1% stamp duty, and homes from £250,001 to £500,000 attract 3%. Finally, those costing £500,001 or more will incur a hefty 4% stamp duty.
Considering all of the above, you'll soon be racking up thousands of pounds aside from the property price. In total, I faced a bill of around £14,000 for the legal fees - of which stamp duty accounted for £12,600 - on a property costing £420,000.
Carrying out a survey
Surveys are typically done a few weeks after an offer is accepted and range from a basic lender's valuation, which you will be required to get, to a full structural survey.
However, while a lender will often throw in a free valuation, which can cost anything between £150 and £300, as part of the mortgage deal, opting for this basic survey could prove a false economy in the long run.
Kevin Webb, technical director at Legal & General Surveying Services, says: "These are prepared to enable the lender to work out if it's wise to provide a mortgage on the property, but they do not contain the sort of detail on the property's condition that the average homebuyer would find useful.
"In some cases the mortgage valuation report will be based purely on an external inspection, or possibly just a computerised valuation, with no inspection at all."
Buyers have several options available to them, depending on the level of detail they want, the type of property they are looking at, and how much they are prepared to pay. These include a homebuyer's report, costing typically around £470, a general survey or full structural survey at around £1,000.
Shop around for the best deal. I chose Albright Surveyors' general survey, at a cost of £483, and reckon it was money well spent. I visited the property with the surveyor and left feeling happy that it was a good buy, given there were no serious defects.
While the pricier surveys may seem like a hefty cost, if major problems are uncovered, renegotiating the price is a possibility, or even rethinking the house purchase entirely to avoid forking out for major repairs.
With so many costs involved, it's no wonder buying a house can be stressful. But doing some homework before you start house-hunting will smoothe the process.
What other costs might there be?
When you've exchanged contracts, there will be further costs to consider, such as removals. There are different levels of service to choose from when it comes to removals. For example, Ward Thomas charges from £1,200 for a full day, which includes insurance that covers any breakages during packing, unpacking or in transit.
Alternatively you can hire a van and do it yourself, but this can be back-breaking. I opted for a man and a van, as I didn't have many large items to move, at a cheap rate of £150 a day plus petrol, to shift minimal furniture and possessions from Brighton to London.
And don't forget the little things that all add up, such as service charges on leasehold properties, end of tenancy cleaning if you're leaving a rented property, and redirecting your post (which costs £19 per person for three months).
The right to hold or use assets (generally property, but also vehicles) for a fixed period of time at a given price, without transfer of ownership, on the basis of a lease contract. Leasehold ownership of a residential property is simply a long tenancy, the right to occupation and use of the flat for a specified period – the ‘term’ of the lease, which is fixed at the beginning and so decreases in length year by year and the property can be bought and sold during that term. When new, leases are for 99 or 125 years until its eventual expiry, whereupon ownership of the property reverts to the landlord.
A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.
Invented by a Frenchman in 1954 and ironically introduced in the UK on 1 April 1973, VAT is an indirect tax levied on the value added in the production of goods and services, from primary production to final consumption and is paid by the buyer. Its levying is complex, with a number of exemptions and exclusions. For example, in the UK, VAT is payable on chocolate-covered biscuits, but not on chocolate-covered cakes and the non-VAT status of McVitie’s Jaffa Cakes was challenged in a UK court case to determine whether Jaffa Cake was a cake or a biscuit. The judge ruled that the Jaffa Cake is a cake, McVitie’s won the case and VAT is not paid on Jaffa Cakes in the UK.
Not to be confused with an early repayment charge (ERC). Exit fees are levied on top of ERCs, which are a method of clawing back lost interest on a loan repaid early. By contrast, exit fees are charged for the administrative work this entails. They are charged as flat fees, from £150 to £300. However, in January 2007, following mortgage lenders surreptitiously raising fees sometimes by fivefold, the Financial Services Authority (FSA) intervened and most mortgage lenders removed exit fees from new mortgages. If you paid exit fees on your mortgage before January 2007, you may be able to claim them back.
A catch-all phrase that can range from assessing the price of a property or vehicle before offering it for sale or the net worth of assets in an investment portfolio to the prices of shares on a stock exchange.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.
The Clearing House Automated Payment System processes and settles time-dependent payments through its two payment schemes: CHAPS Sterling and Faster Payments. Faster Payments is similar to BACS but boasts much speedier transaction times (hours rather than days). The system processes in excess of £70trn annually.
The branch of law concerned with the preparation of documents for the buying and selling of property (or remortgaging), always handled by a qualified solicitor. The conveyancing process covers many of the legal aspects of the sale/purchase/remortgage such as land registry, local authority searches, freehold and leasehold status, title deeds and much more.
A charge some brokers (and, increasingly, lenders) make for arranging your loan or mortgage, either as a flat fee or a percentage of the amount you wish to borrow. In order to look ultra-competitive in the best-buy tables, some mortgage lenders will offer mortgages with an attractive low rate and recoup any losses with a hefty arrangement fee.