Mortgage deposits and loan-to-value
Unless you’ve saved a large amount saved up to pay for a property outright, you’ll need to take out a mortgage to be able to buy your new home.
When you take out a mortgage, you’ll need to pay a certain percentage of the property value upfront as a deposit.
The more you can pay as a deposit, the less you’ll have to borrow and the lower your interest rate will be. This is where the loan-to-value (LTV) ratio applies. Your LTV is the proportion between the amount you borrow and the overall value of the property, expressed as a percentage.
So, if the property you wish to buy is worth £500,000, and you can afford to pay a deposit of £100,000, then your mortgage will be worth £400,000, which is 80% of the total property value.
Your LTV in this case will be 80%.
If you’re a first-time buyer and you’re struggling to come up with enough of a deposit to get a mortgage, then you should see if you qualify for the government’s Help to Buy scheme.
For more on this, see our guides on help to buy and mortgages for first-time buyers.
Mortgage payments and fees
Of course, once you’ve got the deposit worked out, you’ll also need to consider your regular mortgage repayments.
The size and nature of the payments will depend on the kind of mortgage you take out.
If you have an interest-only mortgage, then your monthly payments will consist solely of interest, with the actual capital being paid off at a later date.
If you take out a repayment mortgage, then each monthly instalment will consist of a portion of what you’ve borrowed, plus interest. This way you pay the whole loan off gradually over time.
The rate of interest you pay will depend on various factors. For more information on this, head over to our guide on mortgage interest rates.
There will also be various upfront fees to pay when you set up a mortgage including:
Arrangement fees (general setup costs, usually up to around £2,000)
Valuation fees (charged by some lenders for the valuation of the property)
Mortgage account fees (similar to arrangement fees but also covering general maintenance of the account)
Higher lending fees (only charged in some cases for those who take out a mortgage with an LTV over 80%)
It is important to watch out for all of these extra costs as they can end up being rather substantial, meaning that the whole process of buying a property costs significantly more than you initially expected.
When you do come to take out a mortgage to purchase your new property, make sure you shop around online and compare mortgage deals using a free, easy-to-use service like ours.
Stamp Duty Land Tax
Stamp Duty Land Tax (SDLT) is a tax payable on the purchase of any property valued over £125,000. There are different rates of SDLT payable depending on the value of the house in question:
Anything between £125,000 and £250,000 is taxed at 2%
Anything between £250,000 and £925,000 is taxed at 5%
Anything between £925,000 and £1.5 million is taxed at 10%
Anything over £1.5 million is taxed at 12%
So if your property is worth £800,000, then you’ll pay nothing on the first £125,000, then 2% on the next £125,000 (the portion between £125,000 and £250,000) and 5% on the remaining £550,000. This would total £30,000 in SDLT.
Other costs
Among the other costs that you might incur while purchasing a new house are:
Legal fees
This includes solicitor’s costs and legal Land Registry fees or conveyancing, that is, the actual legal transfer of the property between two people.
Surveyor costs
Before you purchase the property, you’ll want a surveyor to go over the property to make sure that there aren’t any structural issues that you need to address. The costs of surveying will depend on the nature of the property. Less standard homes, such as those with thatched roofs, cost more than others.