Work out how much you can afford

You have decided that you are buying a property, but exactly how much can you afford? On top of the cost of the house itself, there are many other, one-off expenses involved in buying a home and moving which can tot up to between £2,000 - £5,000. In order to get a good idea of what sort of homes you can realistically hope to buy, you also need to take these extra costs into account. To help you do your sums, here is a guide to working out how much money you have to spend and what the costs are.

Calculating your Price Range

You need to work out:

1. The amount you will get from the sale of any current home
2. The amount you can borrow
3. The amount you have in savings or investments which you can use
4. Once you have done this, work out how much the other, one-off costs of buying and moving will add up to
5. Deduct this sum (4) from the total sum of 1, 2 and 3 and you will have a rough estimate of the kind of price range you are looking at

How much should you borrow?

Before looking at properties, you should consult a lender or mortgage adviser as to what your maximum possible loan would be. This will be based on the size of your deposit and how much you earn.

All buyers need to put down a deposit on the property – a mortgage lender will rarely pay the whole price of the property. You should try to put down at least 5 per cent of the value of the home as a deposit, and more if possible. The smaller the deposit you put down, the more your lender will charge you for the extra risk. Most mortgage lenders charge a 'mortgage indemnity guarantee fee' (MIG), or a fee for loaning a higher percentage of the value, on bigger loans. If you do not have enough money for the deposit, for example if your house is not sold yet, it is possible to get a 'bridging loan' from your bank, which will be repayable on the sale of your house.

Lenders will usually lend up to three times the size of your annual income, though some will lend up to four times your income. If you are buying as a couple, this increases to either three times the first income plus one year of the second income, or two-and-a-half times your joint income. Work out which way would allow you a higher loan and find a mortgage with which you can get a joint income allowance which suits you. Your lender will contact your employer to confirm your income, or if you are self-employed you will have to supply proof of your income.

One Off Costs

Arrangement Fee
A fee charged by lenders to cover the cost of setting up the mortgage. Some lenders waive this fee.
Lender's Valuation (Basic Valuation)
All lenders require a valuation of the property to check that it is worth the price being paid for it. This is commissioned by the mortgage lender but you must cover the cost. The cost of the valuation depends on the value of the property – for example, allow about £125 for a property worth £50,000, £165 for a £100,000 house and so on. Some lenders do not charge this fee, as an incentive for you to take out a mortgage with them.
Survey
It is strongly advised that you have your own independent, more detailed survey carried out to check for any defects. See our Surveys page for further information.
Legal/Conveyancing Fees
You will need to hire a solicitor to deal with the legal aspects of buying a property.
Stamp Duty
This is a government tax, charged for properties above £120,000. If your new home is priced between £120,000 and £250,000, you will pay 1% of the property price. From £250,000 to £500,000, it will be 3% and over £500,000 it will be 4%. So, for example, if you are paying £200,000 for your home you pay £2,000 in stamp duty.
Stamp Duty Land Tax Exemption in 'Disadvantaged Areas'
If you're buying a residential property in an area designated by the government as 'disadvantaged', you don't pay any Stamp Duty Land Tax if the purchase price is £150,000 or less. To find out more about Stamp Duty Land Tax and how you pay it, please see the HM Revenue & Customs article Tax on Buying Property.
Land Registry Fee
The Land Registry is a government department which looks after the registers of all registered properties in England and Wales. It charges a fee for transferring the register to the new owner. This fee is charged according to property price. Price (£) Fee (£) up to 40,000 40 40,001 – 70,000 60 70,001 – 100,000 100 100,001 – 200,000 200 200,001 – 500,000 300 500,001 – 1,000,000 500 1,000,001 and over 800
Local Authority Search Fees
Local searches will be carried out by your solicitor/conveyancer to ensure that there are no potential problems such as planning permission on neighbouring properties or plans for new roads nearby. Allow at least £60, or more in London boroughs.
Other Search Fees and Disbursements
These include index map, commons, the coal authority, land charge, company searches, bank transfer fees. Allow about £70 to cover an average house purchase.
House-hunting Expenses
House-hunting itself can be a costly business – allow money for eating out, travel and telephone calls, and hotels if you are buying in a different area. Consider whether you will need time off work.
Removal Fees
Ask for quotes from at least 3 different removal firms, as prices vary. Remember you will need to give tips. You can do the removal yourself, but this is much more time-consuming and inconvenient. If you are DIY-ing it, costs will include van hire (+VAT and insurance), petrol, and return travel from the van hire company when you return it. You will also need about £25 for insurance.
MIG Fees (mortgage indemnity guarantee)
This is an insurance premium charged by some lenders where your loan amount is more than 75% of the price of the property – in other words, where the loan to value (LTV) is greater than 75%. Other lenders do not charge an MIG, while some only charge when the LTV is more than 80 or 90%. This is charged in case you default on your mortgage repayments and the mortgage lender cannot recover its money. Note that this protects the lender, not you.
Contingency Fund
Leave a decent-sized contingency fund for emergencies. You do not want to be left completely penniless in case you have unexpected extra costs

Information provided from www.home.co.uk