Property Calculations: How Much You Can Spend on Your New Property
The “How much can I spend?” Formula
Savings, you wish to use (always keep some back)
Sale Proceeds, of your current property (net of Estate Agent Fees)
Mortgage sum, you have been offered
Stamp Duty, see below to find out how much you’ll have to pay the government, for this property tax
Arrangement Fee, charged by some mortgage providers on their best deals or for fixed interest rates
Broker Fee, charged by some mortgage Brokers, if you use them
Solicitors Fees, you’ll need a ‘Conveyancing solicitor‘ for all the legal work and searches
Surveyor Costs, for your own peace of mind and that of your mortgage provider
Incidentals, such as legal search fees, indemnity insurance and a small contingency fund
Finders Fee, if you decide to use a professional to find your home
Renovation/Furnishing Costs, most properties need paint, some need new walls!
And the number left over is your Property Budget
Ok, Lets Make This Easier!
CREDITS (Money you have coming in)
Savings. You will need to put down a ‘deposit’ to buy a Property. Gone are the days when you could borrow 100% of the Sale price. If you need to borrow money (a mortgage) to buy your property then the Bank lending you the money will want you to have some of your own money at risk. This deposit is known as your ‘Equity’ in the property. Savings are your own money and anyone else helping you buy a property (e.g. Parents, relatives).
Mortgage lenders will want you to provide enough ‘equity’ (the deposit is your equity) so that if the price of the property falls (normally because the housing market has dropped) the value in the property lost is covered by your Equity. This means Banks will want you to contribute 10% or more towards the property purchase price. Banks will also reduce the interest rate you have to pay on your loan (mortgage), the more you contribute to the deposit. Usually the interest rate drops lower if you have a 30% deposit and is lowest if you have 40% or more (after 40% the rate is usually the same – even if you have a deposit of 90%!). Although banks do lend upto 90% of the property value, they usually only want to give you 80% to 85%.
Cash Buyers: of course you may be financially secure enough to buy your property without needing a mortgage – if you or the combined savings from you and anyone helping you meets the property price plus other costs. Just because you have 100% of the purchase price in cash, it doesn’t mean you should always buy in cash. View our Mortgage page to see when a mortgage be a better choice (especially Offset Mortgages).
Sale Proceeds. Should you already own a home or investment property that you are selling to help purchase your new property, keep in mind the following:
Estate Agent fees. You are probably selling your home through an traditional Estate Agent (87% of sellers do, 11% sell privately and just 2% use an online Estate Agent), in which case the fee you will pay is usually between 1% and 2% of the final sale price. Remember to remove this fee from any funds you will put towards a new property!
Asking Price versus Sale Price. When you market your property you set a price for which you are happy to sell at. If there is alot of interest in your property, or it is exceptional for some reason, then high demand may mean you achieve more than your ‘asking price.’ This happens frequently in Prime Central London, yet it’s still only the case for less than 5% of properties put up for sale.
More commonly, sellers accept a Sale price lower than their Asking price. So when you are thinking “oh I have £200,000 in savings and I’ll get £700,000 from my property sale” you may get a shock if demand is weaker than you expect and you only sell for £650,000. More importantly, it may put the new home you thought you could afford out of reach.
Estate Agents in London face alot of competition. Agents know that psychologically, if they say your property is worth £700,000, when they really think it’s worth £675,000 (and expect other agents to value the property at that price) then they are more likely to win your business (your ‘instruction’ to sell the property).
As all agents know this game, it’s likely (with fewer properties being sold in current times), that all of the agents will slightly raise the price they suggest you list your property at, leaving the valuation slightly over-inflated – even if you have consulted several Agents to get a good estimation of the property value. If they secretly believe you will sell at a lower price when you realise there is nobody prepared to pay the full asking price, they still benefit by winning a commission (only slightly less than it would have been at full asking price).
This price difference could mean a big difference for you though. Recent research by Hometrack said that in London sellers were achieving on average 93% of their asking price (that is the same as a £700,000 property selling for £651,000). Quite some difference! Especially if every penny of the sale price will go towards your new home.
How do you get around this?
* Sell before buying. It has become more common in London for homeowners to sell, rent for a while then buy, knowing exactly how much money they have to spend (aswell being seen as a ‘better buyer’ because you are ‘chain free’). Of course you can still sell your property and buy a new property at the same time (known as being in a ‘chain’), however if the sale price of your own home is less than you expected, you may not have time to look around and find a cheaper home that meets your needs in the time the buyer of your old home is willing to wait.
* Discount the contribution from your sale. A very prudent method would be to assume you are not going to sell at your full asking price (then if you do sell at full price you can reduce your mortgage or spend the extra on renovations). Ask your agents to be honest about that percentage of the sale price they achieve for similar properties. I would use 90% as a guide. This may sound low, yet I’ve sold my own property in Prime Central London and only achieved this level (there isn’t an Oligarch waiting to buy every home!).
* Have back up funds or increase your mortgage. If you have alot of savings and are only putting part of them towards the new property purchase, you could fund a shortfall from your sale price using these savings. Do maintain your “safety blanket” though and Never reduce this in the hope that ‘everything will be alright.’
* Increase your Mortgage (or Debt : Equity ratio). Having planned to put down a 30% deposit and borrow 70% of the purchase price from a Bank you could always increase the amount you are borrowing. If you consider this remember: Don’t borrow more than 80% (even if the bank will lend it to you). Don’t stretch yourself if the repayments would suddenly diminish your “monthly sponge” to a low level. Remember that interest rates are low now and as they rise in the future – so will the mortgage payments. Banks will probably charge you a higher interest rate (and you may have to repay for longer than you intended) so the overall Real cost of purchase goes up too. Does it still feel comfortable?
We have a whole page dedicated to Mortgages. A mortgage is the name for a loan the bank or building society gives you to buy a home with. It’s definitely worth reading our Mortgage Guide on the next page, to ensure you have thought about how much you should borrow (you shouldn’t just accept the highest amount offered to you), how you will repay and the Real cost of Buying a Property.
Remember to think of your mortgage as a fluid amount and set a higher and lower band. For example, if the Mortgage company will lend you £500,000 and you think around £450,000 would be comfortable for you (in terms of repayment amount each month, fees and the time it will take to pay of the mortgage), then your ‘Fluid Amount’ may be £400,000 to £460,000. You hope the amount you need for your new property will be closer to £400,000, yet if you really found something exceptional you may stretch to £460,000 with this still feeling comfortable. The likely result is the mortgage you take out will be somewhere inbetween this range (like £437,000). Having an upper and lower level focuses your search on the right property to buy. If you are selling a property at the same time, it gives you a good guideline for how much you can drop your Asking Price if need be.
DEBITS (Money you need need to pay out)
The largest cost aside from Buying your property is the ‘purchase tax’ you will have to pay the UK government when you buy a Property. When you purchase an item from a shop, you pay VAT, when you purchase a Property, you pay Stamp Duty (the name given to the tax). Stamp duty is paid once only, when buying a property (your solicitor will ensure the tax office at the HMRC get the payment, if you want the details click here).
Stamp Duty increases the more expensive your property is. You pay a Percentage of the purchase price. The percentage paid is shown below:
|Purchase Price / Lease Premium or Transfer Value||Stamp Duty|
|Up to £125,000||Zero|
|Over £125,000 to £250,000||1%|
|Over £250,000 to £500,000||3%|
|Over £500,000 to £1 million||4%|
Over £1 million to £2 million
|Over £2 million||7%|
|Over £2 million (purchased by corporate bodies) from 21 March 2012||15%|
So for example, Stamp Duty on a house purchased for £700,000 is: £700,000 x 4% = £28,000.
Once the property price jumps into a higher band, you pay that percentage on the whole amount.
i.e. for a £200,000 property you pay 1% of £200,000. Unlike income tax, you do NOT pay ‘zero’ on the first £125,000 then 1% on the next £50,000 of value. For this reason you won’t find a property listed at £505,000 (just over the £500,000 threshold where stamp duty changes from 3% to 4%), as the small increase in sale price increases the stamp duty by £5,000 .
Usually properties jump in value at least £25,ooo above each threshold, so properties would be advertised at upto £499,000 then they jump to £525,000. Solicitors sometime break down the value of a property into a sale price and separate ‘fixtures and fittings’ (e.g. Fridge, carpets, other items left behind that aren’t a permanent feature of the property).
For example sometimes you can legitimately agree on a Sale price of £510,000 then claim £11,000 of the purchase price as ‘fixtures and fittings’ if they really are worth that (always follow your solicitors guidance here… it isn’t worth saving at the expense of upsetting the Tax Office!). This then brings the value of the property into the lower stamp duty band.
You can’t be silly and say that £50,000 of a £300,000 property is fixtures and fittings, to drop into a lower tax band – HRMC (Government tax office) will investigate anything that looks suspicious, so be honest. If you want more detail on Stamp Duty, see the official UK government page here
Mortgages are loans that a Bank or Building Society gives you, in return for some security (the deposit you put down and the right to take your property if you don’t pay) and in return for you repaying that loan with ‘interest.’ Usually buyers think of the interest on a mortgage as the only cost of borrowing money. There are actually two more fees: early repayment penalties and arrangement fees.
See our Mortgage page for full details. All you need to know here is that you may be charged a sum (this can be from a few hundred to a few thousand pounds) as an “arrangement fee” by the mortgage provider. This is an upfront charge. You shouldn’t be put off by this. You should have your mortgage proposal agreed before looking for a home (and definitely before making an offer to purchase a property). Be sure to subtract the Arrangement Fee in your calculations.
Buying a property with a mortgage? How does the mortgage lender know that your property is worth what you are paying for it (and hence that lending you the money is a good idea)? Simple… they have an expert, known as a property surveyor, examine the property and estimate its value. Of course, they send you the bill for this survey. You can see our Property Home Survey page for details about which types of surveys are available and a guide to costs. Decide which one you want before you find a property to buy and subtract this cost from your cash available to spend. It is best to allow for 2 or even 3 survey costs. Why? Well you may conduct a survey and find a major problem (subsidence) or a number of smaller problems (rising damp, roof in need of replacing, unsafe electrical wiring) which put you off purchasing the property. If the property purchase falls through before ‘exchange of contracts’ you will also need to pay for another survey for the next property you seek out to buy.
‘Conveyancing’ Solicitor Costs
Conveyancing is the term used to describe the legal process associated with buying a property. Conveyancing solicitors are simply lawyers who specialise in performing the legal functions required to help you buy a property. You can see our choosing a Conveyancing Solicitor page for full details. Make sure you factor in the cost, and to be extra careful… double the cost. You can be 99% of the way to purchasing a property and it can fall through at the last minute (this happens more than you think). If so, you still have to pay the solicitor (and the survey fees and the incidentals). Some solicitors offer an insurance policy against this for around £50 – £100. Otherwise, be cautious and just double the expected cost of Conveyancing and Surveys.
This is “other stuff.’ Most of which comes as additional expenses your solicitor pays then claims back from you. Some of these can and will include:
Land Registry search [ensures the seller owns the right to sell the property: the ‘legal title’]
Local, Environmental and Water search [checks performed with the local authority/ council]
Bankruptcy search [checks no outstanding financial concerns on the property]
Money Transfer fees [to send the deposit and purchase amounts on a specific date between accounts of the buyer and seller]
Indemnity Insurance [additional insurance taken out. Usually to cover you against claims arising against work done on the property by the previous owner, that they did not get certificates or permission for. Also Tithe insurance: see our Insurance Types page.
Buildings Insurance [you arrange this yourself for the Exchange Date – not the completion date as many people falsely assume]
Removals cost: unless you have some strong friends with a large van, you will likely need to hire someone to help with the move. A small move may cost £300, an average move £750 – £1250 and for those with large homes or expensive items that need extra care the cost can be thousands.
Of course the traditional way to find a property: putting in the hard work yourself, incurs the lowest costs, yet phone calls, travel and mostly your time (and time off from work) should all be accounted for! Buying Agents are more commonly being used to help find properties. In London Buying Agents are more popular than in the rest of the UK. Key reasons for using an agent are: saving your time, help if you live outside of London, local knowledge, knowledge of off-market properties and help in negotiating a good purchase price. See our page on Buying Agents if you would like to know more, just remember from a cost perspective this can be between 1% and 2.5% of your purchase price (only if they find you a property that you buy) plus a few hundred, to possibly a few thousand pounds upfront as a ‘retainer’ which you pay regardless of if they find you a home.
Renovation/ Furnishing Costs
Buying a new-build home means you likely won’t have to do any work on a property. For most purchasers there will be some work, whether it is just a fresh coat of paint, or cosmetic work to the outside of the building. We advise that you keep back a renovation fund of at least 2% of the property price, even if you are moving into a new home. Why? Well even new homes or traditional homes that look ‘perfect’ bring up something you need or ‘want’ to do within the first few weeks. This will most likely be something you simply don’t think of in advance (e.g. an extra radiator in a cold living room, extra light fittings in a dark hallway, or electrical/ plumbing work. Of course you may need as much as 20% of your purchase price or more, if the new property needs alot of renovation.
Get quotes before you agree to buy as everything from decorating to building work costs more than you think! Especially in London where demand is high and labour rates are the highest in the country (not to mention other costs for workers such as parking, permits, time to travel). Always add 25% to quoted prices as there will be something that you forgot, or a hidden cost that arrives once you do the work.
Furnishing your new home may require completely new sofas, beds and rugs or it may just be that you have to add one or two items as you will use your existing furniture. Either way, budget on some cost here as there will be a dining table that doesn’t fit, an old bed that falls apart during the move or the need for a new chest of drawers or wardrobe. Given the big cost of buying and moving, it’s important to leave some funds for furnishings, or you’ll be frustrated by all the big bills.
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