Much More Than A Mortgage!
Mortgage lending hit a record high in 2006. However, there's a lot more to buying a house than just a home loan...
According to the Council of Mortgage Lenders (CML), a trade association which represents almost all of the UK's mortgage lenders, mortgage lending hit an all-time high in 2006.
The CML announced that its members lent a record-breaking £346 billion in 2006, up a fifth (20%) on 2005's lending. (This is the gross figure, so the net figure after redemptions and repayments amounts to under a third of this sum.) This rise was driven by house-price growth, plus an increase in the number of house sales.
What's more, the CML predicts even higher lending this year, although the Bank of England's surprise rate rise last week -- and any further rises -- may well take the wind out of mortgage lenders' sails. For the record, there are now 11.6 million mortgages in the UK; here's how our mortgage debt has grown over the past decade:
Source: Bank of England
Although this vast increase in mortgage debt may appear disturbing, the good news for homeowners is that housing wealth has grown even faster than mortgage debt, as I revealed in Our £3.8 Trillion Nest Egg.
Although your monthly mortgage repayments will be your largest home-buying expense, they are just the start of the fun. Indeed, to budget for the wider cost of home-owning, you need to factor in numerous extra charges, some of which are one-offs, while others are ongoing. Here are a few to watch out for:
Look beyond the mortgage interest rate
Although you may be attracted to a mortgage by its deliciously low interest rate, you need to check the other charges linked to it. As I revealed in Free Yourself From Fees, these can amount to thousands of pounds over the life of your loan. So, keep your eyes peeled for:
- administration, arrangement, application or booking fees;
- valuation or survey fees (to value and inspect the condition of a property);
- any higher lending charge (learn more in Kill Off This Housing Rip-off);
- redemption penalties (fines for paying off your loan early); and
- exit, sealing and deeds fees.
Other home-buying fees
One of the biggest costs involved in buying a home is Stamp Duty Land Tax (SDLT). This tax on property prices is paid by buyers and, thanks to soaring house prices, it pumps billions of pounds each year into the coffers of HM Treasury. Here's how the SDLT rates stack up:
SDLT rate (%)
£125,000 or less
Over £125,000 to £250,000
Over £250,000 to £500,000
The big scam with SDLT is that a property costing £250,000 attracts a tax of £2,500, but the tax on a property worth £250,001 is three times greater! In other words, the tax isn't stepped: you pay the highest appropriate rate of SDLT on the entire value of a property. This has the effect of creating pricing glitches around the SDLT thresholds, since buyers don't want to move up into the next SDLT bracket.
On top of a hefty SDLT bill, you also have to fork out:
- estate agent's commission if you're selling a property (say, 1.5% to 2% of the selling price);
- your solicitor's or conveyancer's fee and expenses (which could be anything from £300 to many thousands);
- professional removal, storage and travel costs; and
- any costs involved in redecorating, replacing appliances and so on.
Moreover, you'll find an even longer list of incidental expenses in Revealed: The Hidden Costs Of Moving Home. All of the above expenses can tot up to tens of thousands of pounds, so ignore them at your peril!
Other ongoing expenses
Once you've bought your first house and settled in, then reality dawns on you. In effect, you've just signed up to a contract which typically requires you to make three hundred monthly mortgage repayments over a 25-year period. Eeek!
Obviously, over such a long timescale, a whole host of different things can go wrong, so you need some kind of cash cushion or safety net to fall back on. Indeed, as this article explains, you can't expect the State to pay your mortgage when you're unable to do so, so you're forced to rely on private insurance policies, such as the following:
- life insurance (to pay off your loan if you die; only needed if you have a spouse/partner and/or dependent children)
- income protection insurance (to protect against the financial consequences of long-term illness or injury);
- critical illness insurance (cover for serious ailments such as heart attacks, strokes and cancers);
- home insurance (to protect your home and its contents);
- accident, sickness and unemployment insurance (also known as mortgage payment protection insurance, but MPPI is a huge rip-off, as I warned here);
Frankly, if you've bought any of these policies from your mortgage lender, then you've been mugged. You could save thousands by shopping around for Best Buy alternatives, so what's stopping you from doing so?
Finally, in addition to all of the above, you have maintenance costs to take into account, plus the ever-spiralling cost of Council Tax; gas, electricity and water; and other household expenses. Wow, with all these to allow for, it's a wonder that anyone can afford to buy a house these days!
> Take a look at our Mortgage Calculator.