Buying a property: the financials and hidden costs

Mortgage application form

Before contemplating buying a house, it is vital to do as much research possible. You need to consider whether the long-term financial commitment of home-ownership is for you or whether renting is a better option for you. Before embarking on the home-buying process, there are a number of financial elements that need to be taken into account:

  1. Credit history - before starting the buying process, look into your credit history to find out if all the facts are correct and if there are any problems which may reduce a lender's willingness to offer you a mortgage or reduce the amount you can borrow.

  2. Affordability - use a mortgage calculator to get an initial idea of what amount you may be able to borrow. Speak to mortgage brokers or lenders to get a clearer idea of exactly how much you may have to spend on a property. The next step would be to secure a mortgage approval in principle.

  3. Deposit - the typical deposit requirement for first time buyers is currently 24% according to the Council of Mortgage Lenders (26% for all home buyers), which means a new buyer must currently find almost £34,000 on average as a down payment. Whether purchasing with financial assistance from family or not, this is clearly a huge sum and will require serious consideration as to how it can be raised - perhaps using a monthly saving plan.

  4. Arranging a mortgage - always give careful consideration and seek advice when choosing a mortgage product. For instance, a fixed rate deal may be the best option for homeowners who want greater certainty in their monthly outgoings. Also, calculate how changing interest rates would affect your mortgage payments - the base rate is currently at a record low of 0.5%, but a change of 1% may make a significant difference to your monthly payments. Most mortgages include arrangement fees depending on circumstances and if you are selling before buying, check whether you'll incur a repayment penalty on your existing loan.

  5. A survey is strongly recommended to avoid nasty surprises once you move in. Surveys differ in terms of comprehensiveness and therefore price; a basic survey is to provide the lender with a valuation of the property; a home-buyer survey reports on the condition of the property and any noticeable defects; and a building survey will provide greater peace of mind in looking for potentially costly problems with structure, or upgrades to plumbing and/or electricals. Remember - if your survey turns up something that stops you from buying the house, you still have to pay for it.

  6. Stamp duty - stamp duty rates vary from 0% for properties under £125,000, 1% for properties priced between £125,000 and £250,000, 3% for £250,000-£500,000 properties, 4% for properties over £500,000 and, from April 2011, 5% on properties priced at £1m or more. Currently, first time buyers are exempt from stamp duty on properties bought for less than £250,000.

  7. Legal and estate agent fees - estate agents fees differ, but typically they vary between 1% to 3% of the purchase price. Expect solicitors' fees to be around £500 to £1,000, with around £200 in search fees on top of this.

  8. Moving, utility and renovation costs - you may encounter costs when moving, such as removal company fees, van hire or storage costs. Once you have moved into your new home, don't forget the other costs you are likely to face - such as home and contents insurance; council tax; utility bills and potential ground rent / service charges. Depending on the condition of the property, there may also be the cost of redecorating, as well as buying furniture and appliances for instance.