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The Ultimate Guide to the Costs of Buying a New Home

Posted 21 February 2017 by Ben Salisbury

Whathouse? brings together all the costs involved in buying a new home from the deposit to removal costs, showing what you need to know and be prepared for

Moving home or buying your first property is one of the biggest decisions you ever make, and one of the most expensive. You need to be prepared by having all the knowledge you need to budget accurately, understand all the costs involved and have them covered.

There are many different fees and charges payable before you can finally get your hands on the keys to your new home.

Understanding the costs when you buy a new property and get a mortgage is vital because they are on top of the deposit required and affect the amount you can put towards your new home.

The costs involved in getting a mortgage and buying a new home can be split into four areas; deposit, costs before completion, mortgage specific costs and costs after completion.

1 - The deposit

Mortgage depositThe size of deposit needed depends on the value of the property you are buying. The more money you can raise to put down as a deposit, the less money will need to be borrowed through a mortgage.

Because a mortgage is a financial product, a loan, interest is charged on the amount lent to the borrower. Therefore the bigger the deposit, the less you need to borrow and the less interest is charged.

A deposit is the proportion of the cost of a property that a buyer pays upfront.

Before the credit crunch of 2008, some lenders were prepared to lend 100% or even more of the value of the property and let potential homeowners self-certify their finances so they could borrow what they needed for the home they were buying. However, irresponsible lending, to homeowners and businesses, where affordability checks were weak, was one of the causes of the financial crisis.

Following the credit crunch lenders tightened lending criteria and required larger deposits and self-certification mortgages were off the menu. This led to the publishing of the mortgage market review (MMR), which finally appeared in 2014 and contained guidance and instructions for lenders to more rigorously assess what homeowners could afford to borrow and comfortably repay, with a stronger focus on the outgoings of borrowers as well as their income.

This led to a fall in the number of mortgage products available that only required a small deposit of 5%-10%, particularly affecting first-time buyers and homeowners who found themselves in negative equity after the fall in house prices after the credit crunch.

Although lending is governed by stricter rules post-MMR, things have improved in the last two years, helped by the performance of the UK economy and by government schemes such as Help to Buy, there are now more mortgages available for buyers with deposits of 10% or less, and of course the Help to Buy scheme itself allows buyers to buy a new home with a deposit of just 5%, topped up by a government loan of 15%, interest-free for the first five years.

Typically, you will need to find a deposit of around 10% of the value of the property you want to buy, so for a £200,000 home, you will need to stump up £20,000.

This 10% deposit means the loan-to-value (LTV) ratio is 90%, if the deposit was £40,000, the buyer would need to borrow 80% of the value of the property.

This is important because the lower the LTV ratio, the better the mortgage interest rate a buyer can access from lenders. The best rates are reserved for borrowers with a 60% or better LTV, i.e. a 40% deposit.

Since the Bank of England cut base rate to 0.5% in March 2009, where it remained until it was cut even further to 0.25% in August 2016, mortgage rates have been low compared to historical norms.

This means rates for all LTV ratios are generally cheaper than they used to be, so it's a good time to have a mortgage, if you can get one by raising the necessary deposit. The rate you get will also depend on your credit score.

To illustrate this, research by Halifax in February 2017, found mortgage affordability, the proportion of take home income that homeowners spend on a mortgage has improved by 18% since its peak in 2007, at 30% of a households disposable income, down from 48% in 2007.

2 - Mortgage specific costs

When you take out a mortgage with a lender for the first time there are a variety of fees and costs you need to budget for. These include mortgage product fees, mortgage broker fees, valuation fees, arrangement fees and more. You will often get the option of paying these fees upfront or adding them to your mortgage. If you can it’s cheaper to pay them upfront because you may be charged interest on fees over the term of your mortgage if you don’t, which can make the fees much more expensive in the long run.

Most fees you have to pay before the mortgage starts should be in Section 8 of the Key Facts Illustration (KFI) that your lender gives you before applying.

Mortgage product fees

Mortgage costs​The cost of an actual mortgage product, such as a two-year tracker mortgage or a five-year fixed rate mortgage, usually depends on the length of the deal and the savings or benefits you get from that product.

A slightly cynical analogy is that what you gain in benefits you lose in paying a premium fee. This is a good rule of thumb, but it is not always the case and there are bargains to be had if you search carefully and some lenders offer better value, cheaper deals than others. The mantra to follow is to “beware of low rates hiding big fees” and always compare the overall cost of a mortgage, including fees.

Lenders often advertise headline low rates so that they rise nearer the top of best-buy tables, but a low rate doesn't always mean it's a good deal.

The best way to assess the affordability of a mortgage is to ensure you factor in all costs. This means fees as well as rates. Some mortgage products offer a lower interest rate on repayments, meaning lower monthly repayments but when you factor in the fees, they can work out more expensive than products with higher interest rates.

Whether this is the case depends on how much you are borrowing and how long the mortgage deal is for.

Finding the best deal

The key point to remember is you need to compare and work out the whole cost of the mortgage with or without fees to find the best value deal.

  • Divide the total fee by the number of months of the mortgage deal
  • Add this number onto the monthly cost of the deal with a fee
  • See if its lower than the monthly repayment amount of a similar deal without a fee.

Detailed example of cost of fees

For example, the financial impact of a fee for a two-year term mortgage product is more significant than for a fee for a 10-year mortgage deal. Generally, the longer the product deal lasts, the more likely paying a fee will save you money because the fee tends to stay the same but there are more months for the monthly interest repayment savings to work their magic.

E.G. A two- year fixed rate deal for £85,000 for someone with a 40% deposit payable over 15 years is available from some lenders with or without a fee.

Without a fee the interest rate is 1.64% and the monthly repayment is £533. This means the total amount payable is £533 x 24 = £12,792 over two years.

With a fee of £1,450, the rate is significantly lower, 1.18%, which you might think means a big saving. However, the monthly repayment is £515, just £18 a month less, which means the saving on the repayments at that rate is just £18 x 24 = £432. Factor in the £1,450 fee and you will be paying just over £1,000 more over the two-year period.

If we flex these numbers we can see how if you borrow more, a fee can result in higher savings.

If in this example the borrower borrowed £200,000 on the same deal the monthly repayments without the fee would be £1,254 compared to £1,213 with the fee, a difference of £41 a month.

Over two years, this difference is £41 x 24 = £984. Again, not enough to make paying the fee worthwhile, but a lot closer.

However, if the deal is over five years, it's more likely that a fee will be worth paying for.

Again, borrowing £85,000 with a fee of £1,450, monthly repayments are charged at a rate of 1.84% and cost £541. Over 60 months, the term of the mortgage product deal, it costst £32,460 +£1,450 = £33,910.

Borrowing the same amount without a fee is charged at 2.19%, £554 a month x 60 = £33,240, an extra £780, but with the fee included, a saving of £670, so again in this example the fee is not worth paying.

But if we go back to the example of someone borrowing £200,000, it shows the fee is worth it.

Borrowing £200,000 with a £1,450 fee at 1.84% means a monthly repayment of £1,272 compared to £1,305 without a fee, a difference of £33 a month. £33 x 60 = £1,980 less over five years which means the overall cost is £530 cheaper with the fee.


Mortgage specific costs

Since March 2016, mortgage lenders have to include any extra fees such as redemption charges and valuation fees as part of the annual interest calculation or annual percentage rate of charge or APRC, often shown on mortgage comparison sites as 'overall cost for comparison'.

When agreeing a mortgage with a lender all mortgage product costs should be included in a key facts illustration.

Arrangement fee

This is the cost of the mortgage product fee, sometimes known as the product fee or completion fee. It covers the lenders administration costs. The cost varies but is usually between £500 and £2,000. It can be added to the cost of the mortgage but doing this means you pay extra interest so try and pay it in full, separately from your mortgage.

Booking fee

This is a charge for simply applying for a mortgage deal and is normally payable whether you are accepted or not. Some mortgage lenders will include it as part of the arrangement fee. It can also be called a booking fee or a reservation fee and costs between £99 - £250. This fee is payable at the time you submit your mortgage application and is non-refundable.

Valuation fee

Mortgage valuationAs part of the process of applying for a mortgage, the lender will value your property to ensure it's worth the amount you want to borrow to buy it. This lenders survey just covers the value of the property, not the potential problems and repairs that it may need. The normal cost is between £250 and £500. The rule of thumb is the more expensive the property, the higher the valuation fee, which is payable to the lender at the time of the mortgage application. You may also have to pay a valuation administration fee on top in the region of £50 - £100.

The lender charges this particular fee so that if you fail to repay, they can repossess the property and prove it was of a certain value when purchased to help sell it if required.

Mortgage broker fee

This is for the services of a mortgage broker if you choose to use one to source, provide advice and arrange your mortgage. Some brokers won't charge a fee but instead receive commission from mortgage providers. This usually costs around £500 but depends on the value of the mortgage.

Mortgage account fee

This fee is for the lenders' administration costs in setting up, managing and finally closing your mortgage. This can be instead of an exit fee and normally costs between £100 and £300.

Telegraphic transfer/Chaps payment fee

This is a fee for paying the mortgage lender to send the funds to your solicitor. It's normally non-refundable, so if your purchase falls through for any reason, you probably won't get it back.

Fee for independent buildings insurance

Some lenders don't charge for this now, but some will still levy a fee for making your own arrangements for your own buildings insurance rather than agree to the one offered by your mortgage lender. The charge, if applied, is usually £25.

Higher lending charge

Again this won't apply to many borrowers but it could be a factor if you only have a small deposit. It is a kind of insurance for the mortgage lender in the event that you can't meet the mortgage repayments and the lender has to sell the property at a loss.

It is normally charged if you have a high loan-to-value (LTV) ratio and is designed to cover the increased risk of the lender.

The fees can be high depending on how the lender assesses the risk, but can be up to 1.5% of the amount borrowed.

Missed mortgage payments

As well as being in trouble with your bank, if you miss a mortgage repayment your lender may charge a fee if your mortgage account ends up in arrears. Each lender will have its own policy on when charges might apply, but for all of them if you miss multiple payments your home could be repossessed.

Early repayment charges

You can be charged for not paying when you should, you can also be charged for trying to pay too much! Lenders make money on interest and fees charged over the course of the mortgage product term or the entire term of the mortgage. They want the opportunity to make this money so you can only pay extra amounts at specific times and there are limits on this.

Not all lenders levy this charge but many do. Find out what you are allowed to overpay because doing this can significantly reduce the amount you pay overall as part of your mortgage. This information should usually be on your key facts illustration.

You are normally allowed to overpay by 10% of the remaining mortgage amount per year, but check with your lender as penalties can be severe. Typically the charges range from 1% to 5% of the early repayment.

The charge can also apply if you come out of a mortgage deal early or want to remortgage to a new lender before the end of the mortgage deal.

The charge will depend on how early you want to come out of a deal, the size of your mortgage and how much you want to overpay.

Exit/closure fees

When you have finally repaid your mortgage, a closure fee can apply, but this may also be included in the mortgage account fee. Check to see if a closure fee applies or if it's in your mortgage account fee. As a separate fee, it would normally cost between £75 and £300.

This is also known as the redemption administration fee and is charged by your lender for closing the mortgage account. If you are repaying your mortgage early this could be paid alongside any early repayment charges.

3 - Costs before completion

There are many fees associated with buying a new home but competition between providers of the wide range of professional services linked to buying a home has had some effect in cutting these costs.

It's also important to note that although you should be aware of all potential costs, not all will apply to everyone.

Legal fees

You will have to pay your solicitor for all of the legal work that comes with buying a new home.

This includes conveyancing, checking paperwork is completed correctly and ensuring all other legal aspects of the sale are completed in the right way.

They will also do local searches for around £250, to check whether there are any local plans or other issues that could affect your move.

Surveyor costs

This is different to the valuation fee, which is just for the lender to confirm the property actually exists and is valued at a level that matches the loan.

A survey is carried out by a chartered surveyor and is an inspection of the property for your benefit and to warn of any potential problems, such as damp, structural problems, dangerous trees, flood risk and more. If there are issues it may affect whether you decide to buy the property or not and can be a good negotiating tool on price.

This cost is not mandatory but when buying a new home it is highly recommended because if there are problems that surface at a later date you will have limited options for recourse.

You can do this yourself or at the application stage ask the lender to upgrade the valuation report to a full survey as this may work out better value.

There are three different types of survey.

The home condition survey is the cheapest and most basic and is suitable for new build homes. The homebuyer’s report is a fuller survey that looks extensively at the inside and outside of the property and includes a valuation. The third and most extensive type is a building or structural survey and is the most comprehensive type that should always be done on older properties or ones with non-standard features.

Surveys range from a basic home condition survey costing around £250 to a full structural survey from £600 or more. You pay the surveyor direct or the lender if they arrange it for you.

Building insurance fee

This is also known as a freedom of agency fee and is payable to the mortgage lender if you decide to go elsewhere for buildings insurance. It’s normally paid on completion, usually taken off the balance you receive and normally costs around £25.

It is a charge for the small amount of work needed by the lender to ensure your insurance policy protects them if your house ever needed to be rebuilt.

Stamp duty

Stamp Duty is a significant expense for most people when they buy a new home and one that has become more of a factor with recent changes introduced in April 2016 that affect buy-to-let investors and people buying a second home.

Stamp duty is a tax paid to the government for land and property transactions in the UK. Initially you pay the money to your solicitor who then pays HMRC when the property purchase is complete.

There is no charge on properties valued at £125,000 or less or £40,000 if it’s a second property, but above that you are charged a percentage of the property price that goes up as the value of the property does.

Buyers now pay stamp duty progressively based on how much overreach threshold their property costs. You will have to pay 2% on £125,001 and £250,000, 5% on £250,001 to £925,000, 10% on £925,001 to £1.5million or 12% on property that costs above £1.5m.

Conveyancing

Some lenders will cover this fee but only if you choose one of the firms of solicitors they use. Alternatively they may offer you cashback on completion.

You can opt to use your own solicitor but you will have to get permission from the lender first because the solicitor will be covering the legal work for both you and the lender.

The likely cost is in the region of £1,000 to £1,500 and you will have to pay costs to the solicitor at different stages as they complete different tasks.

Land Registry fee

This is an essential but at least relatively low fee. The Land Registry has to register the property under the owners name so when you buy a property from someone else the Land Registry charges a fee for the cost of transferring the entry in the register associated with the property from one name to another.

The fee is on a sliding scale depending on how much the property is sold for ranging from £40 for properties sold for under £80,000 to £910 for properties sold for £1,000,001 and above. Full details are at this link.

Your solicitor will pay this fee on your behalf and will ask you for the money on completion of the property purchase.

4 - Costs after completion

Removal costs

This is usually a necessary cost unless you can borrow a large van from work or friends. The cost also depends on how far you are moving. It could range from £100 to hire a small van for a local move to nearer £1,000 for moving to the other side of the country with all your worldly possessions.

Leasehold costs

This won’t be an issue for most homebuyers but if you buy a leasehold property, normally a flat, you will have to pay a service charge for the upkeep of the property, plus ground rent to the freeholder. You may also have to contribute to bigger repairs on the property from time to time.

Mortgage repayments

After you move into your new home and have paid all of the other fees, the long-term fee (for most people!) kicks in. Every month you have to pay a fee for the cost of borrowing to buy your home.

Mortgages come in all shapes and sizes but the most common type is a repayment mortgage. The way this works is that you borrow the money you need to buy a new home through a mortgage. This is repayable over an agreed term, normally 25 years, at an interest rate.

With a repayment mortgage, over the course of the mortgage term, you gradually repay the capital lent to you and the interest. At the start of the term, after the first year, when you see your mortgage statement it can be a shock to see just how little of the capital is repaid and how much is going towards the interest. But this is because of the way mortgage repayments work and at the end of the term, the proportion of each repayment that goes on interest and capital switches round.

The interest rate can stay the same for a period if you get a fixed term mortgage or can be variable, linked to the Bank of England base rate plus a premium added by the lender, I.E, the Bank of England rate plus 1.5%, in which case the rate will change as the Bank of England changes the base rate.

 There are other types of mortgages as well, including offset mortgages that are linked to savings and capped rate mortgages where the rate won’t go above a certain level.

Interest-only mortgages are less common since the 2008 credit crunch, but many people have them. The clue to the way they work is in the name; you just pay the interest off and don’t repay the principal amount.

Furnishing

Once you have completed the purchase of your home, you are likely to want to buy some furniture for it. It is unlikely you will furnish it just with furniture you already have because it may be bigger or you may want a new style that fits in with your new home.

If you are moving into a home for the first time or were renting a furnished place before, you may need to buy most things from sofa’s to carpets and kitchen appliances. This can be a big expense. If you move into a new build home, the developer may offer some of these items free or as part of the cost of the property and you may be able to choose from a selection of carpets and white goods.

Sometimes the seller of a home will offer to include some items as part of the sale. This may be good for you, but you may not like their choices or style and may want to choose your own. 

Maintenance and repairs

If you own a house, then this is a necessary expense to budget for. How much you will need to spend each year depends on a number of factors, including the size and age of the property, what type of features it has which could go wrong, and luck!

Many homeowners who buy a resale property will make some repairs or changes as soon as they acquire the property to get it to the level or state of repair they want it to be in from the outset.

When you get a survey done on the property, it should highlight what needs doing.

Council Tax

One further expense that is tied into any new property purchase is council tax, which is set through a banding system that defines how much council tax is payable in relation to your property.

The council tax banding groups were set over a quarter of a century ago, in 1991, and are based on property valuations at that time.

Your property will be within one of these and the amount you pay is dictated by this and your local council’s own decisions on what to spend money on and when to increase the council tax charge, if central government allows them to.

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YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP PAYMENTS ON YOUR MORTGAGE.

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