Big on Budgeting – The Cost of Buying a House
Owning your own home or your own office can often be a great investment. Paying a mortgage can be cheaper than paying rent, and providing you keep up to date with your mortgage payments, and you can keep the property for a reasonable period of time, it should go up in value and so be worth more.
We’re not here to give you mortgage or financial advice (although we can introduce you to people who will give you that advice if you need it!) but there are some things we’d like you to know about before you start the process. That way, you’ll be better prepared financially and the transaction is likely to go more smoothly for you.
So, here is a summary of the financial aspects of property purchase that you need to think about
Firstly, and probably most obviously, you are going to have to pay for the property you are buying. Most people will use a mortgage to do this, but you’ll almost certainly have to put some of your own money in. Most lenders will want you to put in at least 10% of the purchase price. The more you put in, the better deals you might be able to get on the terms of the mortgage. A mortgage company will look at your criteria, specifically how much you are borrowing, how much you earn, how good your credit rating is, how much money you have in the bank and what you are buying to decide how much they will lend on and on what terms.
In addition to borrowing the purchase money, you may also have to pay a fee to the mortgage company, called an arrangement fee. This covers their expenses, such as having the survey carried out, doing checks on you and dealing with their paperwork. This is something that can often be added on to the mortgage, but you need to make sure it’s within your budget. This is something that your mortgage broker can help you with.
Sometimes we are asked about the mortgage for the people that are selling the property to you. How can we be certain it will be paid? Don’t worry – this is all part of what we do. We will know in advance who their mortgage(s) are with, as it will show up on the land registry search. It is a part of the transaction that the Vendor agrees that they will remove all charges before we complete. Between exchange and completion, the vendors conveyancing solicitors will give us an undertaking (a Solicitor’s promise) that they will use the purchase money to pay off the mortgage and remove any charges. It is their responsibility to make sure this happens, and to make sure they have sufficient funds to do this. So if there is negative equity (where the house is worth less than the mortgage) they have to obtain surplus funds from their client in advance.
In addition, if there are any service charges payable on the property (typically flats and leasehold shops and offices) you will have to pay the balance of that quarter’s service charge account on completion. Service charges are almost always payable on 25th December, 31st March, 30th June and 29th September. If you complete part way through a quarter, you will have to pay your share of the remainder of that quarter, pro rata. This isn’t something we can calculate until exchange, as we won’t know what the completion date is and so we won’t know exactly what your share will be, but we will know in advance how much a whole quarter is, so you can do a rough calculation for yourselves.
Next thing is searches. If you are buying with a mortgage, the mortgage company will insist on searching being done on the property, such as seeing if it’s in a flood risk area and checking with the local authority as to whether there is anything we need to know. For example, we’d be looking to make sure that any relevant works done at the property were done in accordance with any necessary planning permission and that building regulations had been complied with and signed off on. Without this, the Council may have the right to tell you to undo or redo the works, even if they were done by a previous owner. Even if you are buying with cash, we will often advise you to have the searches done anyway, so you know about any possible problems or defects. What searches you do and how much they will cost will depend from area to area and from time to time, but this is something you need to add to your budget.
Obviously there are conveyancing fees too. At the outset we will tell you what are fees are going to be, and an indication of what expenses we might incur on your behalf such as search fees and land registry charges. Some solicitors will charge you a proportion of their fees if the transaction is called off half way through. If that is something we are going to do, we’ll let you know at the start.
Although the vendor will pay the estate agents commission, if you have used an agent to find the property for you, they may have fees that need to be paid on completion. If this is something that you may have incurred, please let us know and we can help you check if you do have to pay and if so, when.
There may be other, non legal, fees that you might incur but it’s a good idea to start thinking about all of these things now, so you are prepared. Here are a few examples.
- Removal costs. Will you need help moving your furniture and belongings into the property? When we get a bit nearer the time, you should start getting quotes and find out on their availability. When we are ready to exchange contracts, we will need to agree on a completion date and you might not want to agree to a date for completion only to find there are no removal companies near you that can do that date.
- Post redirect. Particularly if you are a business, you might want to arrange for all of your post to be automatically redirected to your new premises. Not only should you add this in to your budget, but this is something that should be set up in advance as it can take a few weeks for the post office to process it.
- Speaking of things that need a lead in time, if you are setting up or moving any telecommunications services, such as satellite TV, telephone lines or internet, you may need to set this up in advance and add it to your budget.
Buying a property can be expensive, but with careful planning and budgeting, hopefully it will be worth it in the end.
Disclaimer – our articles are designed to give you guidance and information. There is no substitute for proper direct advice, particularly as everyone’s circumstances are different. If anything in this article may affect you, please contact us for advice that is specific to your circumstances.