For almost everyone buying a house it will involve getting a mortgage, and that’s a financial commitment that could be with you for up to 25 years.
But that’s just the main cost, not the only cost.
And while the mortgage is paid off over time, there’s more than just a few short-term costs you’ll need to factor into your budget.
So you will need savings, not just to cover the 5% deposit most lenders will now insist on, but also to cover expenses such as legal fees (typically anything between £0-£2,000), surveys (perhaps more than once), and Stamp Duty – if the property you want to buy will cost more than £125,000.
(If your circumstances mean that saving a 5% deposit is not an option, there are specific Affordable home buying schemes that might stil help you buy a home.)
Where to begin
You’ll not be doing this on a whim. Before you apply for a mortgage, check your credit report for any errors and to get an idea of your score, as lenders will check it. Ensure your credit record shows your correct current address; close unused credit cards, store cards, direct debits and mobile contracts, as some lenders will consider the total amount of credit you have access to, not just the amount you currently owe.
Set up direct debits for the minimum amounts to be repaid, so that you wont miss any payments, and try to pay more than just the minimum repayment due each month.
What if I have a low credit rating?
To help repair a bad credit history you could use a prepaid card for a year. Because you aren’t borrowing, a prepaid card can be set up without a credit reference check, and the repayment records will count towards your credit history, improving your score.
Choose the right mortgage for you… which might not mean the cheapest one right now
Researching a mortgage can be time-consuming, but it’s time well spent. Your bank will advise only on its own products, whereas a independent mortgage broker (yes, like me, but other advisors are available) can give you a recommendation based on the options from a panel of lenders.
First identify a mortgage product you like: fixed-rates give you some certainty in your budgeting over the initial term; variable rates can be lower right now, but they will vary – and the only way for rates to go currently is up. Can you afford the monthly repayments if interest rates rose to 3% or 4%, still low in historic terms, but vastly more each month than you’ll pay right now.
A repayment mortgage will mean, over the longer term, you have less of the capital to repay, but while that debt is deferred with an interest only mortgage, the immediate lower cost in the short-term might suit you for the first phase of your mortgage. Don’t leave yourself exposed if rates rise and you end up overstretched.
Then there’s discounted mortgages, tracker or capped mortgages, which all have benefits for specific needs.
Whatever you opt for in the end, it’s worth noting that at this point you might have to pay a booking fee to reserve the mortgage product you want. Typical cost: £99-£250.
Having chosen your preferred mortgage product and lender, you apply and get an agreement ‘in principle’, which tells you how much money the lender will offer and the interest rate you’ll pay.
Making an offer
Once you’ve found a home you want to buy, the next step is to make an offer, usually through an estate agent. But if you are buying, there is no fee to pay: you only pay for an estate agent if you’re selling the property.
As a seller, their fees usually range from 0.5% to 3% of the selling price you achieve, plus VAT. There are now more agencies offering fixed fee deals, so shop around and see which agency others in your area recommend.
You’ll also need a solicitor and a surveyor
The surveyor will survey the property you want to buy, to check for problems that might affect the cost of the home. There are different types of survey you can go for:
This survey is required by the lender to make sure the property is worth the price you’re paying. It is submitted before they will give final approval of the mortgage agreed ‘in principal’. Typical cost: £150-£1,500 depending on the value of property.
The property survey
You can pay for a more detailed survey that should identify any repairs or maintenance that might be needed as soon as you move in. According to information gathered by the Royal Institution of Chartered Surveyors (RICS), homebuyers who didn’t get a property survey faced an average repair bill of £5,750 after moving in, so it’s important to consider, especially if you’re not buying a new build.
Generally, it’s in your interest to pay for a decent survey at this stage. It can also help you to renegotiate the price if issues are uncovered.
The solicitor will handle the legal work around the property you want to offer on. They will tell you in advance how much you can expect to pay, many will ask for a deposit upfront, which is typically 10% of their expected total fee. Typical cost: £500-£1,500 + 20% VAT
Your solicitor also submits searches to the local council to check whether there are any planning or local issues that might affect the current or future value of the property you like. Typical cost: £250-£300
Finalise the mortgage
Your lender might value the property you like at a lower price, leaving you with a shortfall, so once you get the survey results you might want to go back and renegotiate the price of your new home.
If everything goes to plan, contact your lender or mortgage adviser to proceed. There is often an arrangement fee to set up the mortgage. Typical cost: £0-£2,000, which can be added to your mortgage. But if you choose that option, remember you’ll pay interest on the arrangement fee for the term of the mortgage, so if you have savings see if you can cover that separately.
It’s still not too late to change your mind
You can cancel your mortgage application up to the point you exchange contracts, but if you do, you lose some of your money spent so far in the process. That’s better than having a mortgage you can’t afford, but when you set your initial budget it’s worth thinking that with gazumping, or a poor survey report, you might end up bidding on more than one property before you succeed.
If there are no problems or delays, then you should receive the contract to sign and complete the sale. Before signing the contract, go through it with your solicitor to make sure all your queries have been answered.
At this stage, you are legally committed to the sale, as is the seller, who might ask for a deposit – typically £500-£1000 – to show intent.
Once you’ve exchanged contracts you’ll need to arrange buildings insurance.
The remaining money owed to buy the property is now transferred from your solicitor’s account to the seller’s solicitor’s account. You might be charged a telegraphic transfer fee for this. Typical cost: £25-£50.
You might also have to pay the lender a fee for setting up, maintaining and closing down your mortgage account. It’s often added to the mortgage, which means you’ll pay interest on it, so consider paying it up front instead as it usually costs only £100-£300.
Your solicitor will register the sale with the Land Registry. The cost of this will depend on the price of the property.
You’ll now need to settle your solicitor’s bill (minus the deposit and local searches if you’ve already paid them). Typical cost: £500-£1,500 plus 20% VAT.
If you are the seller, you will need to pay the estate agent on completion.
Buyers of residential homes costing over £125,000 have 30 days from the completion date to pay Stamp Duty in England. Your solicitor will usually arrange this for you.
If you’re using a removal company, moving on a weekday is cheaper. Typical cost: £300-£600+. And you might want to have a budget for initial decorations or new furniture.
That’s it, you’re in! If there’s money left then celebrate.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE