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| HOMEBUYING GUIDE Buying Costs Hidden horrorsDon’t let your homebuying bill come as a shock. Amanda Jarvis reveals the hidden costs of buying a home When we talk about saving up to buy a home, most of us think in terms of saving for a deposit. But as well as a deposit you will need money to set up your mortgage and pay for the services of a solicitor and surveyor. This can add up to £6,000 to your homebuying bill. We look at the hidden costs of homebuying and explain how your hard-earned cash will be spent. Your mortgage costs There are several fees associated with taking out a mortgage, which can add up to hundreds of pounds. The first fee you may encounter is the booking fee. This is often charged if you apply for a fixed-rate or discount deal. Abbey National charges £199 booking fee for its current 4.49 per cent fixed-rate deal, and Nationwide charges £150 for its 4.09 per cent two-year discount, for example. The fee secures the mortgage deal. “A booking fee is an upfront fee which you pay to reserve a chunk of the cash that the lender is offering at a special rate,” explains Robert Clifford, managing director of mortgage broker Mortgageforce. “The lender charges it to stop you pulling out of the deal and to prevent people from making lots of applications with different lenders.” The next fee you may encounter is the arrangement fee. This is, as its name suggests, an administration fee paid to the lender for setting up the mortgage. The fee is usually in the region of around £200. Britannia Building Society charges a fee of £295 on its 3.69 per cent, two-year fix and £495 on its 3.54 per cent two-year fix. But not all lenders charge this. You may find that your lender charges a completion fee instead, which is paid on the day you move into your home. These fees are generally between £200 and £400. Lenders will have special offers from time to time. As we went to press Cheltenham & Gloucester had dropped its administration fee for mortgages over £40,000. That offer ended at the end of 2002, but it doesn’t charge any administration fee if you apply for your mortgage online. It is unusual to pay a booking fee, an arrangement fee and a completion fee and you may be able to avoid fees altogether. “There are some fee-free packages available to first-time buyers,” explains Clifford, “but you need to make sure that they really are fee-free, as many lenders will just add the fees to the loan. “Finding a lender who will add the fees to the mortgage is one way to mitigate costs.” Clifford points out that interest will be charged on the fees over the 25-year mortgage period, so it is not always sensible to do this. Before the lender will agree to lend you the money to buy your home, it will need to carry out a valuation on the property to make sure it is worth what you are paying for it. There will be a charge for this, usually in the region of £250. “This is known as a valuation for mortgage purposes (VMP),” explains Clifford. Because it is carried out for the benefit of the lender, the valuation fee is often refunded.” Alliance & Leicester, for example, refunds the valuation fee on some of its first-time-buyer deals, as does Direct Line. Cheltenham & Gloucester doesn’t charge a valuation fee at all. You will also need to arrange for a survey to be carried out. If you use the lender’s surveyor, he or she can carry out the survey or homebuyer’s report at the same time as the VMP, so it should work out cheaper. (See page 53 for more on surveys.) Bear in mind that the lenders with the cheapest costs are not necessarily those with the best mortgage deals. MIG fees The next – and the largest – fee you may need to pay is the mortgage indemnity guarantee (MIG). This is an insurance policy that protects the lender if you can’t pay your mortgage – so it benefits the lender and not you. Most lenders charge MIG if you borrow more than 90 per cent of the value of the property, known as the loan to value (LTV). MIGs are charged as a percentage on the amount you borrow above the lender’s MIG limit. Royal Bank of Scotland, for example, makes no charge if you borrow between 75 and 90 per cent; 75 to 95 per cent is charged at 8.95 per cent, and 75 to 100 per cent is charged at 12 per cent. This means that if you are buying a property for £150,000 and can put down a deposit of 5 per cent, you will need to borrow £142,500. The MIG will be charged at 8.95 per cent on the difference between £142,500 and 75 per cent of the value of the property (£112,500). This works out to a MIG payable of £2,685. If you were to borrow 100 per cent, the MIG would be £4,500. Most lenders will allow you to add the MIG fee to your loan, but again you will pay interest on this over the length of the mortgage. This may only be possible if adding the amount doesn’t push you over the lender’s LTV limit, which is a problem if you are borrowing 100 per cent. Your legal bill A solicitor will charge around £400 to carry out the conveyancing on your new home. This price will vary depending on the price of the property, the complexity of the work and the place you live. Some mortgage lenders offer free legal fees or a contribution to the costs. Direct Line, for example, offers free legal fees, or a contribution of £300 towards the costs. (See page 51 for more on solicitors.) On top of this basic fee you will have to pay disbursements – these are the fees that the solicitor pays on your behalf for carrying out searches and transferring your mortgage money to the seller. The disbursements will be detailed on your final bill. (See box on right for typical costs.) Your largest disbursement is stamp duty. This is payable on most property transactions over £60,000 and will be added to your final legal bill. (See box on left for details of stamp duty rates.) Searches When you buy a home you need to pay a fee to register your ownership. This is what the Land Registry fee is for. The fee charged is tiered depending on the cost of the property and ranges from £100 to £800. Just before completion you will be charged a further £4 for a final check to make sure none of the details have changed. This information is used to produce house purchase and house price data. Then come the searches. The cost of the local search can vary from £60 to £200, depending upon your local authority. “‘Local search’ is a very misleading name,” says Mike Carter, partner and head of conveyancing and remortgaging at solicitor Scott Rees & Co. “The search is against your property only and will tell you very little about adjoining properties. It will not tell you if the building next to you has planning permission, for example.” What it will show you is if there are any outstanding financial charges against the home, if there are likely to be any road improvements within 200 metres of your home, if there is a tree preservation order, and if your home is in a conservation area or is a listed building. This search can also reveal if planning permission was not granted for an extension or a conservatory. You can apply for retrospective planning permission, but there will be a cost, which should be picked up by the seller. You will also have to pay a fee – usually in the region of £30 to £40 – for an environmental report on the area. This will show if there are any landfill sites, evidence of contamination or previous industrial usage that could affect your property. It will also show if your home is in a flood plain or at risk from subsidence. Going underground There are other searches that are unique to certain areas. For example, a coal-mining search of £15 may be carried out to see if your home is likely to collapse into a coal mine. A similar tin-mining search may be carried out in Cornwall and an Underground search in London. If you are buying a leasehold property there is another cost that you might not have expected. “A cost that can come as a bit of a shock is the charge that you will need to pay to the landlord to register change of ownership,” says Carter. “The cost will be stipulated in the lease and can be anything from £5 to £120 depending upon the landlord.”When you complete and move into your home, you will be presented with your final legal bill. Your solicitor will have set up what is known as a completion account. Fees from the lender such as completion fees or valuation fees will have been taken from this account, so you will find them added to your legal bill along with disbursements. It’s easy to forget about VAT, but it will be added to your final legal bill. VAT is not charged on searches, but it will be added to your solicitor’s costs as well as to the telegraphic transfer-fee cost.
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