Working out what your total budget is when buying a house

 

Working Out what Your Total Budget is

To work out how much you can afford for your next move up the property ladder you need to deduct all your expenses of the transaction (cost of both your house sale and house purchase) from your total assets (which is the sum of the profit on your sale + any savings you have spare + the maximum mortgage you can get).

 

Profit on sale (sale proceeds minus redemption figure on mortgage1 ) £        

Spare savings                                                                                            £           

Maximum mortgage offer3                                                                           £           

                                                                                                                   Sub total       £             

Expenses and costs of sale4                                                                         £           

Expenses and costs of purchase5                                                                £           

Purchase price of new property6                                                                  £           

                                                                                                                  Sub total       £            

Available budget for new property                      =            £          

 

Notes :


1.   Find this out by telephoning your lender and asking them for the redemption figure Then simply deduct this from the estimated value of your property

 

2.    Remember until you have sold your house, all your transaction expenses will come out of your spare savings.

 

3.    You can borrow anywhere up to 3 to 5 times your salary (but if you are purchasing jointly with your partner more usually 2.5 times your combined incomes).Orthodox wisdom holds that your monthly mortgage payments are no more than a third of your monthly net income (i.e. what you take home after tax).To find out how much you can borrow we recommend you use a qualified independent mortgage broker.

4.   What expenses will arise on sale? Typically consider and budget for the following:

i.        Marketing costs. Estate Agents charged a fee based on a percentage of your sale proceeds – typically between 1.5-2.5% + VAT. If you market the property yourself budget for £500. If you sell at auction it will cost a minimum of 2.5% +VAT of your sale price.

ii.        Mortgage Redemption Charges – a redemption fee may be payable (typically equivalent to 6 months interest payments) so it is essential to find out if this is the case from your lender or the mortgage terms.

iii.        Legal costs – choose a solicitor that works on a “fixed-fee” and “no sale, no fee” basis. This will save you a lot of money if you have any abortive transactions or things don’t go quite as smoothly as planned. Otherwise budget for legal fees of between 0.5 – 1% of your properties value.

iv.        Removal expenses – consider hiring a van; packing-up yourself; and (if your home contents insurance does not provide cover) arranging your own “goods in transit” insurance. If you hire a van don’t forget to cost in the hire and petrol as well.

v.        Storage charges

5.    What expenses will arise on the purchase?

i.        Legal costs- usually higher for a purchase as there is more work for the lawyer to do. Remember this is the most important and biggest transaction most people have in their lives and you want your solicitor to do the job thoroughly so although you want a competitive price you do not want one where it is uneconomic for the lawyer to do the work properly. If the quote includes the Stamp Duty you pay when you buy a house take out the Stamp Duty so you can compare the underlying cost with other solicitors’ quotes. Also check that the following are all itemised and included in their quote

  • Land Registry searches & Office copies
  • VAT
  • Land Registry fees
  • Bank telegraphic transfer charges
  • Your mortgage lenders legal fee
  • Professional Indemnity cover
  • Local Authority searches
  • Drainage searches
  • Mining searches

ii.        Mortgage Broker Fees – approximately 0.25%-0.5% (i.e. if they arrange a mortgage for you of £100k, you’ll pay a fee of £250 – £500 + VAT). If the broker receives a commission from a lender you must be informed and can expect any reputable mortgage broker to deduct this from their fee.

iii.        Stamp Duty Land Tax (SDLT) – payable on purchases on all land, houses, flats and buildings worth over £125,000

£125,001 – £250,000   – 1%

£250,001 – £500,000   – 3%

£500,001 & upwards    – 4%

So if you’re buying a £600,000 home you will actually pay £624,000 (that extra £24k goes to The Inland Revenue).

iv.        Mortgage Lender’s Valuation Fee Your lender will want to make sure the property you are buying is sufficiently valuable to secure the mortgage loan (note this is not the same as whether the property is worth the purchase price for which you would need a homebuyer or full survey). Typically 0.15 – 0.2% (+VAT) of the property’s value

v.        Mortgage Lender’s Legal Fee – for handling the mortgage funds and paperwork

vi.        Your Lender’s Arrangement Fee – usually £300 to £450 charged for arranging a mortgage particularly if it is a cheap repayment or “fixed rate” or “capped rate” mortgage. Be careful as this may be applicable even if your purchase falls through.

vii.        Mortgage Indemnity Guarantee – an insurance policy that covers your lender’s losses if you can’t repay your loan – The policy does not cover you. The charge for this policy can be £500 – £1,200 so check the position with your mortgage broker.

viii.        The Survey – a lenders valuation or homebuyers report will not consider structural issues but unless the property is old a full survey might be an expense you can avoid provided you accept the risk. To be on the safe side particularly for older properties go for a full structural survey. Whenever you make an offer on a property make it “Subject to Survey & Contract” as this will allow you to pull out of the deal or re-negotiate if the results of the survey are not satisfactory

ix.        Building & Contents Insurance – your mortgage lender will insist that you have building insurance and they may also invite you to take it out through them but lenders make large commissions from doing this and you very rarely get the best deal. To get the right cover, you will need to know the general value of your belongings and the rebuild cost of the property (this will be in your survey). Just in case the deal falls through at the last minute, do not cancel the policy on the house you’re selling until the day you move out.

x.        Contingency Fund – set aside a contingency in case you need say more than one survey or drainage and electrical reports.

xi.        Preparing Your House for Sale – make it more presentable

xii.        Refurbishment of Your New House

xiii.        Bridging Loans – if you buy before you sell your existing house.xiv.        Life Insurance – to cover the mortgage (if you are run over by a bus) or repayments (if you lose work or are unable to work through sickness).