Getting Your Foot On The Property Ladder – A Guide To Mortgages For First-Time Buyers
Chapter Twelve
Story Highlights:
Apart from the cost of your home purchase and deposit, this chapter takes you through all the extra costs you’ll be expected to pay when you buy your own home with explanations about:
- What fees you must pay your mortgage provider
- What your lender’s valuation survey is
- Whether you should have a structural survey done of the property
- The different types of home survey
- Surveys of new-builds
- What the Stamp Duty Land Tax is
- Paying Stamp Duty on your house
- Whether to use a solicitor or conveyancer
- Fees for conveyancing
- What insurance to take out with a mortgage
- How to save on removal fees
- Furnishing your new home on little money
The extra hidden costs when purchasing a home
Once you’ve struggled to save the money for the deposit for your home, you might breathe a sigh of relief thinking you’ve finished and now just need to wait until your mortgage application has been approved. However, there are a number of extra hidden costs which the first-time buyer isn’t always aware of but must be paid before the house is truly yours.
This chapter isn’t concerned with the deposit but with all those extra expenses, from mortgage arrangement fees to removal costs. Some may be small but they soon mount up and must be included in your budget for buying property.
What fees must you pay your mortgage provider?
First of all, your lender might charge you a booking fee (£100-£250) and an arrangement fee of up to £2,500 for organising your mortgage. You may still be liable for the booking fee even if your purchase falls through. Some lenders might impose cheaper fees as part of an incentive to attract your custom and they may even be waived entirely. If you aren’t charged fees by your mortgage provider, this could be because your interest rate is higher. This should be something you check during your mortgage application since a higher interest rate could end up costing you more in the long-term.
Fees owed to your lender can be added to your mortgage but bear in mind that you’ll then end up paying interest on them.
It used to be customary for lenders to impose a Higher Lending Charge (or Mortgage Indemnity Fees) if you had a high LTV (Loan to Value) in order to pay their insurance cover for the increased risk of lending to you. However, this is becoming less common nowadays and the insurance premiums are often shouldered by the lenders themselves. Fees owed to your lender can, of course, be added to your mortgage but bear in mind that you’ll then end up paying interest on them.
What is your lender’s valuation fee?
Your lender will also demand that a valuation is done of the property you intend to purchase. Costing about £150-£1,500 (depending on the value of your property), this charge might be paid by your mortgage provider as part of your mortgage package. It should be emphasised that this isn’t a full structural survey but instead is an inspection to assess the value of the property so your lender is reassured that it’s actually worth the amount you’re borrowing. As this survey won’t pick up on any major repair work which needs doing, you then have to ask yourself whether you want a more thorough survey of the property.
Should you have a survey done of your property?
A general rule of thumb is that the older a property is, the more important it is to have a survey carried out.
One advantage of having an independent survey done is that a surveyor will be able to identify any structural problems which could lead to a possible reduction in the house price. Also, having problems fixed in time could save you a lot of money in the long term. How much a survey costs depends on how thorough you wish it to be since there are different surveys available.
Summary:
You will be charged a booking fee and an arrangement fee by your mortgage provider and these fees can be added to your loan.
If the fees are waived, it might be because you’re being charged a higher interest rate on your loan.
The lender’s valuation fee assesses the value of the property rather than being a structural survey to highlight problems.
Older properties should have a survey done since it can save you money on the asking price or future repairs.
What are the different types of home survey?
There are three different types of survey: a basic RICS Condition Report (about £150-£300), a RICS Home-buyer’s Report (about £350-£1,000) or a full structural survey (about £600-£1,300). For modern homes in good condition, a basic report will probably be sufficient while conventional (standard) buildings under 50 years old might only need a home-buyer’s report. To save money, you could ask the surveyor to do the valuation and structural survey at the same time.
Surveys of new-builds – What’s a snagging report?
Did it even occur to you that new-builds would need a survey? There’s often a mistaken assumption that because a house is new, there will be no problems with it. On the whole, this is true but there might be minor defects which weren’t spotted when the house underwent its building regulations inspection. For example, scratches on kitchen work surfaces or doors which don’t close properly.
Ideally, it’d be better if these problems were sorted out before you moved in. Partly because you can prove that you didn’t cause the damage and partly because it’s much easier for repairs to be carried out if you aren’t living in the house. However, the builder can refuse you access until legal completion of your purchase.
There’s no such thing as a ‘snagging’ inspector but you could use a surveyor or member of a construction body who has experience of new-builds. Although you pay for the report (£300-£600), the inspector can report directly to the builder so the problems are rectified.
If you find the price of the report too expensive, the NHBC has a home checklist which you can download; it gives you guidance on what you should be looking for. If you decide to hire someone to do the inspection for you, you ought to receive a couple of quotes from different companies so you’re sure of paying a fair price. Such snags can be reported up to 2 years after your purchase and afterwards claims can be made under the NHBC 10-year warranty. This organisation also has a resolution service if you’re in dispute with the builder over problems and their repair.
Questions on home purchase costs
Some costs related to a home purchase are not immediately evident or advertised to the home buyer. Some of these costs hidden costs are the loan origination fee, real estate agent fees, insurance fees, closing costs, as well as certain types of property taxes. Importantly, the costs of furnishing and moving into a new house are sometimes overlooked by home buyers who are focused on the property itself and no further costs.
A solicitor or licensed conveyor is necessary in the UK to do the legal work when you buy a residential property, as well as when you sell one. Legal fees are normally around £900-£1,500. Additionally, however, your legal representative will also carry out local searches, to find whether there are any local plans or issues with the area of the property, and these checks can cost £250-£300.
Depending on the type of mortgage that you are looking to take out, different rules and requirements for deposits apply. A buy to let mortgage, for instance, may require as high as 25% of the property’s value. This is because the lender assumes larger risk because of the additional factors involved compared to someone buying a property as their home. As a general rule, a larger deposit payment means less risk for lenders.
What is the Stamp Duty Land Tax (SDLT)?
The Stamp Duty is a tax which is paid on the purchase of property – whether it is freehold or leasehold, bought outright or with a mortgage. Although first-time buyers used to be exempt, you now have to pay this tax if the value of your property exceeds £125,000. In Scotland, there’s a similar property tax called the Land & Buildings Transaction Tax.
Paying the Stamp Duty on your house
Stamp Duty is charged according to the value of your home. The first £125,000 you’re exempt and then you pay 2% on any amount exceeding this sum up to a limit of £250,000 when it becomes 5%.
Stamp duty must be paid within 30 days of completion or you’ll be charged both penalties and interest on the sum owed.
You should submit a SDLT return to HMRC; this is obligatory even if you are exempt from the tax. The duty must be paid within 30 days of completion or you’ll be charged both penalties and interest on the sum owed.
For most home-buyers this is usually done by their solicitor as part of their service. Even if your legal representative does it for you, you’re still liable for checking that it is actually paid on your behalf.
Summary:
There are 3 types of property survey – the one you choose (and its price) will depend on the age and/or value of your property.
A snagging report is an inspection of a new-build for minor defects which the builder is responsible for repairing.
The Stamp Duty Land Tax is paid on the purchase of property in the United Kingdom (though Scotland has its own land/property tax).
Stamp Duty is charged at 2% of the property’s value on the amount exceeding £125,000 and must be paid to HMRC within 30 days.
Should I use a solicitor or a conveyancer?
As soon as you put in an offer for a home and your mortgage application is underway, you should start looking for the person who will be responsible for transferring the legal ownership of the property to your name. You could use either a solicitor or a conveyancer. Your choice can play a vital role in the successful completion of your purchase. You need someone who is experienced, able to keep up with all the paperwork and meet all the deadlines. A mistake on their part can cause delays to your home purchase and in the worse case scenario can even result in the sale falling through.
They both have their pros and cons. Solicitors have more expensive fees but they’re knowledgeable about all aspects of the law so if your property purchase is slightly more complicated (for example, you’re also negotiating an extension of a lease), then it might be worth paying extra for their expertise. On the other hand, in larger law practices, they might have an in-house conveyancer who is responsible for your purchase (so why pay a solicitor’s fees?) whilst in smaller practices, you should ask about cover for holidays or sick leave.
Although conveyancers haven’t studied law, they are highly specialised in property purchases. If your purchase is straightforward, they may be sufficient for your needs.
Finding the right solicitor or conveyancer
Before you hire a solicitor or conveyancer, you should check your mortgage provider’s policy regarding legal representation for a home purchase. Some have a ‘panel’ of approved professionals and might charge you an extra fee (of around £200) if you hire someone who isn’t on their list. To avoid this extra charge for the lender’s representation, you might decide to choose one from this ‘panel’.
Alternatively, you could ask family and friends for their personal recommendations – perhaps someone who dealt with their own home purchase. The estate agent might offer you the service of their own conveyancer. Be very careful before you accept since the estate agent might receive a generous commission for this recommendation and ultimately this will be passed onto you in higher fees.
Solicitors must be a member of the Law Society and you could visit their website for a list of solicitors in your area. For conveyancers, you could consult the Council for Licensed Conveyancers. Unfortunately, these professional bodies don’t give their members ratings so you have no idea of what level of service to expect.
Legal fees for conveyancing
You could be charged anything from £850 to £1,500 for conveyancing fees and the price depends on your location, the type of property and how complex the ownership transaction will be. The solicitor or conveyancer could charge in a number of different ways: an hourly rate, a set fee or as a percentage of the price of the property. You should avoid professionals with an hourly rate since it’s very difficult for you to verify how long has been spent on your case.
You should ask for quotes from a number of professionals and be very wary of deceptively low quotes since they often have hidden extra costs. Also, a quote should be itemised so if you have a very clear idea of what you’re paying for. You might have to pay 10-20% as a deposit for their services.
Summary:
Solicitors or conveyancers are responsible for the legalities of transferring property into your name.
Solicitors and conveyancers have both advantages and disadvantages.
You could consult your mortgage provider, family/friends or professional bodies for the right person to deal with the conveyancing of your home purchase.
Conveyancing fees vary and you could be charged by the hour, a set fee or a fee based on a set percentage of your home’s purchase price.
What other conveyancing fees are there?
Apart from the tax for Stamp Duty and your fee for hiring a solicitor, there are other fees which you must take into account when you make a home purchase: local searches, the Land Registry fee, a CHAPS fee and if applicable, a Right to Buy supplement.
Local property searches
There are a number of searches which a solicitor/conveyancer must carry out on your behalf. Some are required by the lender to protect themselves against liabilities of the property whilst others are recommended for all home purchases. These include searches relating to planning issues, environmental concerns and Rights of Way. They might be necessary to identify any problems which could affect the value of the property such as flooding or subsidence. Depending on which searches are carried out, you should estimate these to cost £250-£300.
Registering at the Land Registry
The Land Registry holds all the records of 24 million properties in the UK. Your conveyancer will register your ownership of the property on your behalf. Although the title will be put in your name, it’ll be registered with the details of your mortgage as a charge on the property. The fee will be £90-£140 depending on its value.
CHAPS fee and right to buy supplement
CHAPS is an electronic transfer fee of £40-£50 for transferring the money lent by your mortgage provider from their account to your solicitor for the purchase of the property.
If you’re taking advantage of one of the government-run Right to Buy schemes, you’ll have to pay administrative costs. To apply for the bonus from Right to Buy ISAs, the amount has been capped at £50. It’s pricier for a Right to Buy equity loan which will cost you around £200-£300 as an extra supplementary charge.
What insurance should I take out?
There are different insurance policies you should consider when taking out a mortgage: buildings insurance, home contents insurance, life insurance, mortgage payment protection insurance, critical illness/income protection insurance.
Buildings and home contents insurance
Insuring the building will be a condition of your mortgage since your lender is keen to protect their investment. This policy will cover you for damage caused by fire, flood, subsidence, etc. Home Contents insurance protects you from damage or theft of your own personal belongings and it’s completely voluntary – though advisable to prevent financial loss.
There are a wide range of insurance providers but you should research the market, receive a few quotes and make sure you understand the terms and conditions of your policy. The ABI estimates the average buildings policy costs £263, the average home contents policy will set you back £135 whilst a joint buildings/home contents policy is £297 (figures for 1st quarter of 2017). As you see, there’s a considerable discount if you take out both policies from the same insurance provider.
Life insurance
Whether to take out life insurance is up to you but such policies can ensure that your mortgage is paid off if you die. This might be something to consider if you have dependants. It’s possible to purchase guaranteed life insurance for the term of your mortgage. The advantage of this type of policy is that your premiums will stay the same even when you get older.
Mortgage payment protection insurance
This type of policy is often offered by your lender when you take out a mortgage although you might be able to find cheaper policies from general insurers. This insurance will pay your mortgage payments for up to 2 years (within certain limits) because of an accident, sickness or redundancy. This policy is quite flexible so if you have other insurance policies, you can choose which of these 3 you want to be covered.
Critical injury cover vs. income protection insurance
Instead of taking out life insurance (which only covers you if you die), you might want to think about what would happen if you were the victim of a serious injury, illness or disability. Would you be able to afford your mortgage repayments if you weren’t working?
Critical injury cover gives you a lump sum which enables you to pay off your mortgage while income protection gives you a regular payment to top up your income.
Critical injury cover gives you a lump sum which enables you to pay off your mortgage while income protection gives you a regular payment to top up your income. The premiums for income protection tend to be more expensive but you’re covered for more health conditions.
However, both are complex financial products with exceptions and conditions you must fulfil so you should consult a professional before deciding whether to take out this insurance and which suits your circumstances best.
Summary:
There are a number of other fees you should budget for when buying property such as fees for local searches, the Land Registry, a CHAPS fee and if applicable, a Help to Buy supplement.
Buildings insurance is compulsory if you have a mortgage while home contents insurance is highly recommended for your own peace of mind.
Whether to take out life insurance, critical injury cover or income protection insurance is a personal decision and depends on your circumstances.
Insurance policies are a complex financial product so you should research the market and make sure you understand the terms and conditions of any policy.
How to save on removal fees
If you are moving from your parents’ home or a flatshare, it’s quite possible that you can manage the move with the help of family and friends without hiring a removal company at all. Even from a one-bedroomed rental property, you could save money by hiring a van and driving it yourself.
If you have a lot of belongings and furniture, you might have to hire a removal company. They cost £300-£600 depending on how much you have and how far it must be transported. Some companies will also do the packing for you but at an extra cost. You can save money by gradually doing the packing yourself and at the same time use this opportunity to de-clutter. After all, the less you have to move, the less you’ll pay.
Furnishing your new home on little money
Realistically, how much are you going to have left over once you’ve paid all these fees and charges on buying a home property? If you’ve been renting for years, you’ll probably already have the basics. They might not be in the best condition or might not fit your new home but don’t rush to buy everything new and then get yourself into debt. New furniture can be purchased gradually.
If you don’t possess much in the way of furniture and electrical appliances, family and friends can be a great help. Perhaps they’ve recently changed their sofa and want to get rid of the old one? It might not necessarily be to your tastes but it’ll do until you have the money to buy new.
Alternatively, some online sites or the small ads in local newspapers can be a great source of bargains. Second-hand furniture and appliances are an ideal solution until your finances have recovered from buying a home. You have to be patient – your home isn’t going to look like a house from interior decorating magazines until you’ve lived in it a while.
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