6.1.3 The costs of buying a home
Once you’ve chosen a mortgage, it has to be applied for and the home purchased. This is equivalent to the ‘Stage 3 Act’ part of the financial planning process. In addition to the deposit, this is where homebuyers rack up other bills as well.
To show you how these costs may add up, let’s suppose you’re buying a property for £200,000. What costs do you incur?
- Mortgage arrangement fee (common with fixed rate, capped and discounted mortgages): say, £500.
- Legal costs including local searches and Land Registry fee: £800.
- Survey and valuation: £350.
- Stamp Duty Land Tax: £2000. (In 2014/15 this was charged on an increasing scale: 0% on property purchases up to £125,000; 1% above £125,000; 3% above £250,000; and higher rates above that. SDLT is calculated on the price of the property but on the above graduated – or ‘stepped’- basis - rather than a ‘flat’ rate. In the 2017 Budget Statement it was announced that first-time buyers of residential properties costing up the £300,000 would be exempt from SDLT. This also applies to the first £300,000 on properties priced up to £500,000 in expensive parts of the country.) In Scotland the equivalent to SDLT is Land and Buildings Transaction Tax.
- Removal costs: say, £700.
- GRAND TOTAL: £4350.
There may also be a fee to the mortgage broker if you’ve used one to help choose and organise the mortgage. But more often the broker is paid by commission from the mortgage provider and this is ultimately borne by the borrower through charges for the mortgage.
The largest cost will be the price of the property itself, which you, the buyer, can try to negotiate down from the seller’s ‘asking price’. Once a price has been agreed, both parties approach their solicitors (or other conveyancer) to seek completion of the transaction.
Is the agreed price binding? In Scotland, the buyer submits their offer to the seller by an agreed date and the seller selects the best offer. Usually, at this point, the price agreed is binding so the mortgage needs to be arranged before the offer is made.
In England, Wales and Northern Ireland, until the legal contracts are ‘exchanged’ between the two parties, both the buyer and the seller are able to seek to change the price originally agreed and even to pull out of the deal without penalty. Sellers may accept a new, higher offer up to the point when contracts are exchanged – an unpopular process known as ‘gazumping’ – but if the market is weak there is the risk of ‘gazundering’, where the buyer cuts the level of their offer at the last minute.
The exchange date is particularly important if there is a long ‘chain’ of sales involved. Usually buyers and sellers in a chain of housing transactions coordinate to try to ensure that no one remains committed to buying a property without having secured a commitment to have their existing property bought. The longer the chain, the greater the risk of problems that will prevent completion of the individual transactions.
When the documentation is agreed and exchanged, the buyer pays a deposit to the seller and a ‘completion date’ is agreed, when ownership passes legally from the seller to the buyer and the money is paid. This is also usually moving day.
One decision that needs to be made if two people are going to buy together (whether as partners or not) is how the property will be owned legally. For instance, if they own it as joint tenants, each jointly owns the entire property, so upon the death of one party their interest in the property would pass automatically to the survivor. Therefore, couples will usually buy a property as joint tenants.
By contrast, tenants-in-common each have a distinct share in the property. In Scotland, the equivalent terms are joint owners and owners-in-common. However, in Scotland, joint owners will have to have a ‘survivorship destination’ clause in the deeds to determine what happens to the property if one of the joint owners dies.