Beginners, beware of the costs
Sunday 29 September 1996
Unless you fully understand what is involved, it is easy to place an unnecessary strain on your finances. In all the excitement of finding somewhere to live, first-time buyers often forget about some of the irritating incidental costs - such as surveyors' fees, stamp duty and solicitors' costs.
The few hundred pounds involved may seem trivial when set against the size of your mortgage. However, you will have 25 years to pay back your mortgage; the conveyancing and other costs must be paid at the outset. This can be a headache when you are trying to find the money for a sofa, a washing machine and a new fridge-freezer.
The exact costs will vary according to the firms of solicitors and surveyors you use. Solicitors' fees are likely to be close to pounds 300, while your surveyor will charge you another couple of hundred pounds.
If you are buying a property for more than pounds 60,000, you will have to pay stamp duty equal to 1 per cent of the purchase price. Then there is mortgage indemnity insurance (sometimes called "MIG"). This protects the lender should you default on your loan, and you will normally fork out for it if you are borrowing more than 75 per cent of the value of the property. The higher the percentage you borrow, the more you will have to pay. Borrowing 95 per cent of the value of a pounds 50,000 property might cost you about pounds 850 for the MIG.
Finally, if you opt for a special mortgage deal with a fixed or discounted interest rate, you will have to pay your lender an arrangement fee of pounds 200 to pounds 300. Few loans have no fees at all. However, some lenders offer you money towards your legal costs and/or a free valuation as part of the package.
In today's market, borrowers are offered a plethora of mortgage deals, but nearly all of them are either discounted-rate or fixed-rate schemes. With a discounted mortgage, borrowers pay a rate of interest that is less than the market rate for the first few months or years. It is possible to find mortgages that charge interest at less than 1 per cent for the first six months or so. Much more common are deals offering rate savings of between 1 and 2.5 per cent. The cost of a discounted mortgage will still fluctuate in line with the overall level of interest rates.
With a fixed-rate scheme, borrowers have the security of knowing that the cost of their mortgage will not rise for the period of the arrangement. Fixed-rate deals usually last for one to five years, though they are sometimes longer.
Some of the discounted deals around at the moment look seductive - largely because many building societies are so desperate for new borrowers that they are prepared to lend money at rates that will lose them money, at least initially. Many fixed-rate mortgages look less attractive because they charge interest at rates above building society base rates of 6.5 to 7 per cent.
But what first-time buyers must remember is that interest rates are at a 30-year low, and are highly likely to rise again fairly soon. That is why many fixed-rate mortgages are currently more expensive.
Tim Fletcher, marketing manager for lending at Bradford & Bingley Building Society, recommends that first-time buyers on a very tight budget opt for a fixed-rate mortgage. That way, they have absolute certainty about their monthly payments, and will not be hurt by a rise in interest rates.
Home-buyers who plan to move again within a few years must be aware that they will be charged interest penalties if they redeem a fixed- or discounted-rate mortgage within (usually) five years of taking out the loan.
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