You’ve spent months or perhaps years saving up for a deposit on a home and you’ve finally got a sum set aside that you’re happy with.
But what about all those other costs you’ll need to fork out for when you move, with one of the most expensive being stamp duty? These can mount up, and you may wonder how you’ll afford them.
The current average house price in the UK is £288,000, according to the Office for National Statistics. If you bought a property for this much, your stamp duty bill would come in at £4,400. If you don’t have this readily available, it could take you a while to save up, so you may be wondering if it’s possible to add this tax to your mortgage?
The short answer is – yes – it may be possible to add the tax you’ll need to pay to what you borrow. But there are a couple of downsides to doing so.
Read on to find out more.
One of the ways the interest on your mortgage is calculated is through your loan-to-value ratio. The smaller the ratio, the more competitive the deals that will be open to you. For instance, if your deposit equals 75 per cent of the overall value of the property, you’ll be the majority owner, your mortgage provider will ‘own’ a 25 per cent stake and the loan to value ratio will be 25 per cent.
This makes you appear very attractive as a borrower, so you should be offered among the most competitive deals on the market (although other factors, like your credit history and income, will also be considered). The best deals tend to have a maximum LTV of 60 per cent, so this is a good position to be in.
However, it is more likely that you will have saved up a deposit that is smaller than you need to borrow, such as 30 per cent of the property’s value. This would give you a LTV ratio of 70 per cent. Although this is above what you need for the most attractive deals on the market, you would still find plenty of mortgages available to you (depending on your circumstances). However, if you find a mortgage based on this LTV but then want to add stamp duty to it, the LTV will change.
A change of just a percentage or two could put some of the better mortgage deals out of your reach – particularly if your original LTV was around the 60 per cent mark. And if your deposit is smaller and your LTV is 90 per cent, adding stamp duty to your mortgage may not be an option at all, as the days of 100 per cent mortgages are pretty much over, and a 95 per cent mortgage would come with a very high rate of interest due to the increased risk to the lender.
Having said all that, stamp duty is still a sizable chunk to pay, so you may conclude that it’s better to forfeit a more competitive mortgage deal in favour of adding this tax to your loan. There is a further drawback to be aware of though.
While your stamp duty charge no-doubt feels like a hefty chunk of cash to part with, if you borrow the money you need for it through your mortgage provider you’ll ultimately end up paying back more. That’s because you’ll be paying it off over the course of your mortgage term, and as these tend to last a long time – typically 25 years – you’ll pay a lot of interest on it.
What are my options?
So, if you don’t have the funds available for your stamp duty charge, what should you do? You might be thinking of paying for it using a different type of credit, like a loan or credit card, but we would caution against this. When you apply for your mortgage, you will be asked about your income and all your current outgoings, and your lender will use this to calculate how much you can afford to borrow. They will also ask you if you have any future spending commitments you know of, and if you’re planning to borrow to cover the cost of your stamp duty this could count. Because this added expense would alter your outgoings, there’s a risk your mortgage provider may decide you can’t afford the mortgage you applied for anymore.
Even if you apply for the extra credit after your mortgage offer has been made, your lender can re-check your credit history after this time and if your commitments have changed, they may even withdraw your offer.
Really, the most obvious answer to this dilemma is to wait and save up the sum you need for your stamp duty, or look at properties that are slightly cheaper.
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Intelligent Lending Ltd (Credit Broker). Capital One is the exclusive lender.