Now, we know nobody’s going into buying a home thinking it’s a cheap decision, but it’s important to keep in mind that the price of the property itself will not be the only cost you’ll have to open your cheque book for. In this post, we are going to give you a breakdown of all the costs you will encounter so that you know exactly what to expect.
Often first-time buyers are taken off guard when a laundry-list of upfront costs hit them, followed by the various ongoing costs for the remainder of the time you wish to reside in that property. Do ensure that you secure a stable cash flow before embarking on your first property hunt, because there’s nothing worse than spending all your hard-earned savings on a deposit, only to struggle with the day-to-day running of your new property.
These are the various fees and taxes you will have to pay during the initial step of purchasing your property, often before you even have the keys in your hands. These can add a significant amount to the overall cost of your purchase, and so it’s important to have enough saved and available to pay for these as you can’t pay these with your mortgage.
Your deposit is a percentage of the purchase price, usually between 10% to 20%, that you will pay up front towards the cost of your home. It’s important to consider how much you can put down at this stage, because the larger the deposit is, the better interest rates you will have access to for your mortgage, and therefore the less you’ll have to pay back over the duration of your mortgage.
For a property priced at £250,000, you will be expected to pay a deposit between £12,500 and £62,500.
Stamp Duty (often abbreviated as SDLT) is a tax paid to the government to purchase properties in England or Northern Ireland, with similar taxes in Wales (Land Transaction Tax) and Scotland (Land and Building Transaction Tax).
You won’t have to pay Stamp Duty if you purchase your property before 31 March 2021 as it has been temporarily frozen. But with the process often taking months, it is still something to consider.
Until the 31 March 2021, you will not pay any Stamp Duty on any property purchased under the price of £500,000.
From the 1 April 2021, Stamp Duty will return to the pre-July 2020 threshold. However, when purchasing your first home you will receive a discount (relief), with not having to pay any Stamp Duty on properties up to £300,000 and paying 5% on properties between £300,001 and £500,000. As the examples below show, Stamp Duty can add a significant cost to the amount you need to have saved to make your purchase!
Example 1: For a property priced at £250,000, from the 1 April 2021 as a first time buyer you will be expected to pay £0 in Stamp Duty.
Example 2: For a property priced at £450,000, from the 1 April 2021 as a first time buyer you will be expected to pay £22,500 in Stamp Duty.
It’s important to keep in mind if you are buying a home with others, they will also have to be first time buyers to qualify for relief.
Lenders normally require a valuation survey before they can provide you with a mortgage. This is so that they can assess the property and determine if it is valued at an appropriate amount in accordance with your loan application. Though they are not only beneficial to lenders, but they will also give you an insight on how much the property is worth.
The cost of a valuation varies depending on the price of the property being valued, usually between £150 and £1,500. Although it is important to note some lenders provide free valuations, so it is important to shop around for the best deal!
Example: For a property £250,000 the average valuation fee is £295 based on the top 10 lenders in 2019.
Getting your property surveyed is a key step that will provide you with peace of mind before moving in. A professionally qualified surveyor will be able identify potential issues with the property that could end up costing you tens of thousands of pounds down the line, so avoid using friends or family members ‘surveying’ the property just to save a few hundred pounds.
The Royal Institute of Chartered Surveys (RICS) provides varied reports and surveys you can purchase, ranging from £250 for a basic condition report, to over £600 for a complete structural survey.
Solicitors will handle all the legal work for you when buying your home, including conducting searches which we covered in our previous blog post.
Fees vary between firms, and you can expect to pay anywhere between £900 to £1,500 including VAT.
When you finally move into your new home, you will have to consider the costs of moving your personal possessions into your new home.
Professional moving companies can provide an extensive list of services, from doing all the packing and boxes to you to only providing the transportation of self-packed boxes. These services will cost you anywhere between £250 to £600 depending on the company and service you chose.
If you don’t have much to move – for example if you don’t own any furniture – you could rent a van and do the move yourself. This would be considerably cheaper, even if you grab a few friends and offer them dinner ‘on the house’ (pun intended)!
It’s important to remember that after you move in, there will be ongoing costs for your new home, often paid on a monthly or yearly basis. On the face of it, these ongoing costs are not as large a sum as the upfront costs, but they will very much add up over time, and will have to be paid for the foreseeable future.
Of course, if you have purchased your home with the help of a mortgage, you will need to make monthly payments to pay back the money you have borrowed, with interest. Your repayment schedule is determined by the overall amount you have borrowed, the length of the mortgage, and the interest rate you have been offered.
The percentage of the price you put down as a deposit affects your Loan-to-Value (LTV) percentage and depending how low your LTV is, your lender will be able to give you a lower interest rate. If you put down a 10% deposit, your LTV is 90%; similarly if you put down a 25% deposit your LTV is 75%.
If you were to have a 90% LTV, the best interest rate you would have access to at the time of this article’s writing is 3.64%. Conversely, if your LTV was lower at 75% thanks to a larger deposit, you would unlock a much better interest rate of 1.99%. In this simplified example, assuming a 25 year mortgage, the overall amount you would pay to purchase your £250,000 home would be £279,126 in the case of the lower deposit, and £290,842 with the higher deposit – a significant difference! Even in today’s world of low interest rates, if you can afford a larger deposit, it is often worth it for the better rates that you will unlock.
There are two types of insurance you can consider for your new home: building insurance and content insurance. You will usually be required to take out building insurance if you are the freeholder, to cover for any damages to your home from flooding, fire, subsidence, etc. Content insurance can also be taken out to insure your personal belongings and possessions against theft and damage.
Insurance policies are provided on a case-by-case basis and are estimated on the value of the property and items you wish to be insured.
This is a yearly payment made to your local council in order to pay for services such as bin collection, libraries, fire, police services, and many more. It can either be paid in a single payment or in monthly instalments. The amount is set by which council tax band your home falls into, bands are determined by the value of your property in April 1991. If you think that sounds a bit archaic, it’s because it is!
For example, a London property valued at £250,000 today could fall under council tax band B in a certain London borough. The council tax for this property in London would range from £600 to £1,200. You can find detailed information about which band your selected property would fall under in the property listing itself, or by asking the agent selling the property.
Utilities will usually include electricity, heating, water, gas, and broadband. It might be a good idea to ask the sellers how much they paid monthly for these services to get a rough idea of how much you should budget for, and potentially shop around for better deals.
You may also want to factor in a telephone line and a television subscription.
Maintenance and Repairs
With home ownership comes the unfortunate responsibility of paying for your property’s upkeep. From repairing appliances when they break down, to repainting your home every 5-10 years, you should budget to spend between £2,000 and £3,000 per year for general wear and tear. And watch out – the average repair bill when moving into a new home is £5,750 for homeowners who didn’t conduct an extensive survey on their home before buying it. It (literally) pays to comprehensively check a property before you complete your purchase!
Now that it’s become abundantly clear that the costs of buying a home can really add up, you might be wondering how you’ll even be able to get onto the housing ladder. Luckily, there are many ways to get a leg up and boost your ability to make that purchase sooner. Many of these tips and initiatives can be combined together, further boosting your purchasing power.
ISA stands for Individual Savings Account. These differ from a regular savings account because they offer you tax-free interest on the income you earn in this account. There are two types of ISAs that are geared towards buying your first home: the Help to Buy ISA and the Lifetime ISA. While you are no longer able to open a new Help to Buy ISA, you should still consider opening a Lifetime ISA.
A Lifetime ISA is designed to help you save towards buying your first home or retirement, and the government will give you a 25% bonus on your balance, up to a maximum of £1,000 per year. There are some important factors to consider with the Lifetime ISA: firstly you are only able to save £4,000 per year in your ISA, and you are only permitted to withdraw your money under three circumstances: you are buying your first home, you are aged over 60, or you are terminally ill and have less than a year to live. If you need to withdraw your cash for any other reason, you will have to pay a penalty, currently 20% of your balance as of March 2020. However this rate is expected to increase to 25% in the future.
If you were savvy enough to set up a Help to Buy ISA before the deadline you will also receive a 25% government contribution, but you will have to follow a different set of rules. Firstly, you can only save a maximum of £200 per month, which would be £2,400 per year. But you will have the added flexibility of being able to withdraw your cash when needed without having to pay any penalties. However, unlike the Lifetime ISA, there is a deadline of when you can claim your bonus, you can continue to pay into your ISA until November 2029 and after that you only have 12 months to claim your bonus.
With high house prices, extensive checks when trying to get a mortgage, and the considerable time it takes for the average worker to save up for a substantial deposit, It’s not a surprise that many people turn to a different bank for help: the Bank of Mum and Dad.
There are many ways your parents can help you in your purchase: by gifting or loaning you your deposit for the property, by acting as your guarantor, or even by taking out a ‘Joint Borrower Sole Proprietor’ (JBSP) mortgage to avoid excess Stamp Duty. A JBSP is a loan under which both you and your parents will be named on the mortgage, but only you will be on the deed for your home. This allows you to access the Stamp Duty discounts available to first-time buyers.
If you’re struggling to find a suitable place for yourself within your budget, have you ever considered that perhaps some of your friends are in the same position as you? Imagine if your budget could be doubled or even tripled – you could look at areas and properties previously well outside of your price range.
This is indeed what co-buying could potentially offer you. It allows you to stop paying rent sooner and jump-start your move onto the property ladder. You should however think very carefully about co-buying with others and consider your other purchase options first, as you may find yourself in a difficult position if your relationship with your co-buyer friends sours for any reason.
Help to Buy Equity Loan
If saving for a large deposit is a concern to you, and you are open to buying a new-build property, the government’s Help to Buy scheme might be right for youThe Help to Buy Equity Loan scheme is an interest-free loan scheme for first time buyers only. It is also important to note to be eligible, you will need to purchase a new build home, with a purchase price of no more than the relevant regional price cap, and have at least a 5% deposit. With this scheme, you can borrow between 5% and 20% of the purchase price of a property outside of London, and between 5% and 40% in London. With the interest free component of the loan allowing people to get onto the housing ladder sooner than they otherwise would, this scheme has proven to be very popular. Originally due to come to an end in December 2020, this scheme has been extended until 2023.
Help to Buy Shared Ownership
Shared Ownership is another government sponsored program like the Help to Buy Equity Loan scheme. It is there in case you aren’t able to obtain a mortgage for the complete price of your home. In this situation, Shared Ownership will allow you to purchase a share of your home, usually between 25% to 75%.You are then required to pay rent for the remaining share. Later, you will get the opportunity to buy out the remaining shares of your home.
To qualify for Shared Ownership, you will have to have a combined household income lower than £80,000 outside of London, or £90,000 in London.
However, be wary of the fact that nor only will you be paying your mortgage and your rent, but you’ll also face many of the ongoing costs unique to homeownership (such as service charges and ground rent), making this an expensive option in the long run.
If you’ve made it this far – congratulations! You now have a fairly comprehensive idea of what you – and your bank account – should expect before you dive too deep into looking for that perfect first home.
Even if you feel that you’re not quite in the right financial position to buy your first home, planning early for your future purchase will go a long way, as this helps unlock the most value out of schemes like the Lifetime ISA. There are a variety of options to consider regardless of your financial situation, and it is best to lay the groundwork early!
If you’re ready to start thinking about where you’d like to buy your first home, keep an eye out for the next articles in this series!