Buying your first home will always end up costing more than you expect. For some reason, everyone in the business of buying and selling property assumes you are made of money, when in fact it’s usually quite the opposite.
But going prepared may mean you can save on some of these costs – and at least you will be ready for the others, which should at least save you a considerable amount of heartache. Here we list the most common expenses and give tips on where you can make savings.
Arrangement Fee
Lenders call this different things; it could be an administration charge, or even a booking fee. Basically, it is designed to cover the administration costs of processing a mortgage application.
Cost vary according to the lender and occasionally banks and building societies don’t charge them at all, especially for first time buyers. But in this current environment, you're probably going to have to cough up. Expect to pay over £500, and in some cases they could be over £1,000.
If you do have to pay such a fee, make sure it is only charged on completion of the loan. If you have to pay on application and the mortgage falls through for any reason, you may lose your money, although some lenders will make a refund in certain circumstances.
Valuation Fee
The lender will want to make sure your property is suitable security for its money. To do this, it will appoint a surveyor to carry out a valuation report. This report is solely for the lender’s benefit and in some cases you will never see it. Even if you do, though, it won’t be of any help. It is not designed to point out defects, or say whether you are getting value for your money. It will simply say whether, in the event that you default, the lender has a good chance of getting its money back.
A valuation report should cost around £100, although this will depend on the size and type of property, as well as where you live.
MIG
A mortgage indemnity guarantee, also known as a mortgage indemnity premium or high loan to value fee, is an insurance policy for the lender. But you pay. If you want to take a mortgage with a high loan to value (LTV), ie, the amount of the mortgage is close to the value of the property you are buying, the lender will insure itself against any default.
It’s quite expensive to repossess a property, especially if – as is likely – the mortgagee is in considerable arrears. So if the LTV is high, the final debt could end up higher than the value of the property. The MIG is a policy that will cover the difference.
So surely if the MIG is insurance for the lender, then the lender should pay it? Unfortunately, in many cases, that’s not the case; the lender will pass the cost on to you. Some lenders will pay it themselves, but many don’t. And that’s not all. If in the unfortunate event that you do lose your home and the lender has to claim on its insurance, the insurer will then come after you to make good the shortfall. Rules are different in Scotland, however.
The level at which you will have to pay a MIG varies from lender to lender, but as a rule, if the lender does levy such a charge, it will do so at a LTV of 90 per cent or more. It’s usually charged as a percentage of the loan and all lenders calculate their fees in different ways so you need to check with your lender. But it’s likely to be steep, usually over £1000 even on relatively small mortgages.
Some of those lenders that do not charge MIGs will increase the rate at which you repay your loan. While it may seem a bit of a backdoor way of levying the same charge, it can work out to your benefit. Although at the moment, propert is in the doldrums, historically, property prices have always risen. So after a couple of years you may be able to remortgage and take the same amount but at a lower LTV, therefore reducing your rates.
Stamp Duty
Stamp duty is a tax on all property purchases above £175,000. For most homes, those costing between ££175,000 and £250,000, the charge is one per cent. If you are lucky enough to be able to afford a property worth more than this, the charge rises to two or even three per cent.
Intermediary Fee
Going to an independent financial adviser or mortgage broker may mean you get a better deal on your loan, especially if you are self-employed or have had credit problems in the past. But the advice you are given will cost you.
Intermediaries get their income from two sources. Firstly they get a commission from the lender for putting business its way. Secondly, they will charge you. This can work in two ways, either you pay a flat fee or the amount is a percentage of the loan they find for you.
Intermediaries must tell you about their charging structure before they offer advice, so make sure you know exactly what you are paying before you start.
Surveys
The valuation report is essential so there’s no getting around it. But there are other surveys that can be carried out and although you’ll have to pay for them, they could save you thousands.
The first, and most common, is the Homebuyers’ Report. Here the surveyor will carry out a thorough check of the property and make sure there are no hidden faults. The survey is for your benefit, not the lender’s, so there is no danger of you losing a mortgage offer.
These surveys aren’t cheap – around £400 normally – but they could be worth their weight in gold. If anything does come up in the report, you could arrange for the existing owner to get the work carried out before completion or you could negotiate a reduction in the price to take account of the additional expense.
If you are buying an old property, or one with unusual or unconventional structural features, you may want to think about having a structural survey carried out. This is much more expensive and detailed and will basically ensure that the property will remain standing for many years to come. The surveyor will check the foundations, brickwork and roof to make sure that all is well.
Generally the surveyor carrying out a valuation or homebuyers report will recommend that you have such a survey done. But it is expensive, depending on the type of property you could be paying over £1,000.
Legal Fees
In the bad old days you didn’t just have to pay your own legal costs, you also had to pay those of your lender as well. Thankfully that practice has pretty much died out now, but paying your own can still make a hefty dent in your pocket.
In theory you can do all the work yourself, it’s not that complicated. But most people employ a solicitor or conveyancer – a specialist in buying a selling property – and many lenders insist on it.
A solicitor will check the title of the property – ie, the seller has the right to sell it – and carry out searches which will check the status of the property – ie, is it in a conservation area, is there a compulsory purchase order hanging over it. Your solicitor will also check out any proposals for the surrounding area, so if there are plans to build a motorway at the end of your garden you should find out about it before completing the purchase.
Once the purchase goes ahead, your solicitor will also ensure all the administrative duties are carried out properly. He or she will register your ownership of the property with the relevant authorities, make sure the paperwork is correct and signed, and arrange for the funds for the purchase – both your deposit and the money from the mortgage company – go to the right place. In short, a solicitor smoothes the path to buying your home.
Legal fees vary wildly, and what you will pay will have a lot to do with how much competition there is in the area. Beware of those companies that ask you how much the property you are purchasing is worth before quoting you a price – the property value has no impact on the amount of work they have to do, so they may just be trying to gauge how much you can afford.
Generally, you shouldn’t have to pay more than £400 for legal services, although your final bill is likely to be much higher because there are a number of expenses that the company will incur – searches, transfer fees etc – which will be passed on to you. The key here is to shop around, as prices can vary radically even between local firms.
There is also no real need for your legal services to be carried out by a local company, although it is the norm. But if you find that local solicitors are too expensive, cast your net further afield.
