How to budget for a house

How to budget for a house

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Budgeting for a house can take a lot of time and effort, but with a little bit of planning, you’ll be able to map out your savings targets and start saving for your ideal home. Here we look at a few tips for saving for a house as well as pointing out a few of the more important points you should consider along the way.

How to budget for a house

To budget for a house, you’ll need to figure out what you can afford to spend on a home. Next, you’ll need to make a plan to save for the deposit and additional expenses. Lastly, you’ll have to map out your future payments and include them in your budget.

How to budget for a house

To budget for a house, you’ll need to figure out what you can afford to spend on a home. Next, you’ll need to make a plan to save for the deposit and additional expenses. Lastly, you’ll have to map out your future payments and include them in your budget.

1. Work out your deposit

The first step in figuring out how to budget for a house is to work out how much you’ll need for a deposit. Although deposits are subject to change depending on who you get them from, you’ll tend to need a deposit of 15% of the home’s value if you’re a first-time buyer. Deposits will usually be between 5% and 20% of a property’s value, but you’re best off getting a mortgage in principle to give you an idea of what you’ll need.

When looking to get a deposit for your mortgage, you can start from one of two places. The first is based on how much money you already have saved that could be used for a deposit. Try using a mortgage calculator to see how much you could expect to borrow and start having a look at the available properties at that price. You can always look to save more if you decide you’d like to buy a property that’s a bit more expensive.

The second way of planning for your deposit is to look at the price range of the houses you like and look to start saving for the deposit from there. You’ll want to consider how much you can afford to save each month and how long you want to be saving for.

For example, considering that a 5% deposit for the average house price in the UK is £11,500 and you can afford to save £500 per month towards a deposit, it would take just under two years to save for the deposit. Depending on how you look at it, this might seem out of reach either because you’d like to save quicker or because you can’t afford to save that much each month.

Considering the time taken to save, you should bear in mind that the average time to save for a deposit for a couple in the UK is three and half years, with single people taking an average of more than 13 years to save for a deposit. You’ll also need to consider that if you’re a first-time buyer, you’re likely to be asked for more than a 5% deposit.

To start planning to save for your deposit, take a look at our deposit planner spreadsheet.

What is a mortgage in principle?

A mortgage in principle is a statement from a mortgage lender saying that “in principle” they are happy to lend you a certain amount when you apply for a mortgage. The statement is based on factors such as your salary, financial history and marital status.

Importantly, a mortgage in principle is not a legal contract, meaning that the lender is under no obligation to give you that mortgage. Mortgages in principle best used to give you an idea of what you could realistically afford when buying a house.

What is a mortgage in principle?

A mortgage in principle is a statement from a mortgage lender saying that “in principle” they are happy to lend you a certain amount when you apply for a mortgage. The statement is based on factors such as your salary, financial history and marital status.

Importantly, a mortgage in principle is not a legal contract, meaning that the lender is under no obligation to give you that mortgage. Mortgages in principle best used to give you an idea of what you could realistically afford when buying a house.

2. Budget for additional expenses

As well as budgeting for your deposit, you’ll need to consider the extra costs that come with buying a home. Aside from the deposit, some of the extra costs you’ll have to save for are:

  • Stamp duty
  • Conveyancing
  • Surveys
  • Mortgage arrangement and broker fees
  • Life insurance

There are smaller additional costs to these that you’ll need to pay when buying a home, but in terms of larger costs, these are the main ones you need to look out for.

How much is stamp duty?

Stamp duty is a tax on any property purchase in the UK. The cost of stamp duty depends on how much you’re spending on your property. The factors that affect stamp duty are:

  • The price of the property
  • Where the property is in the UK
  • If you’re a first-time buyer
  • If the property is a second property (i.e. buy-to-rent or second home)

If you’re buying your home for less than £125,000, you won’t have to pay any stamp duty. First-time buyers are also exempt for the first £300,000 as long as the property is being bought for less than £500,000. To work out how much stamp duty might cost you, use this tool from L&C.

What is conveyancing?

Conveyancing is the process of legally transferring a property from one party to another. There are two stages to conveyancing, with the first being the exchange (where the terms of the purchase are finalised) and the second being completion (where the property is transferred).

Conveyancing fees will vary, so make sure to shop around for the best deal. You’ll usually end up paying between £800 and £1,500, although in certain cases where the process takes longer, you could end up paying more than this.

What are surveys?

A survey is an inspection of a property by a licensed surveyor. The survey will look at the structure of the property and highlight any issues (e.g. unstable walls). Surveys are optional and do not need to be completed for the purchase of a property to go through. However, in most cases, surveys are definitely worth the money as for a relatively small fee, they can highlight issues with a property that would otherwise cost you thousands in the future.

The price of a survey varies depending on the type of survey you choose:

  • Condition report - £300
  • Homebuyers report (survey only) - £350
  • Homebuyers report (survey and valuation) - £450
  • Building survey - £500

The valuation is a particularly important part of a survey and is the part that your mortgage lender will carry out whether or not you decide to get a survey.

The reason for this is that the valuation given by the surveyor will inform your mortgage lender of the actual valuation of the property. If the valuation is lower than the price you’ve agreed for the property, you might find that the lender will refuse to give you a mortgage for the full amount.

To explain further, say you agree to a price of £150,000 for a flat. From there, you agree to put down a deposit of £10,000 with a mortgage for £140,000. However, the surveyor inspects the flat and determines that it is only worth £145,000, and because of this, they will only give you a mortgage up to that amount, leaving you £5,000 short of the original asking price. In this situation, you would then need to either negotiate with the seller to get the flat at a lower price, or you’d need to make up the difference between the mortgage and the cost of the flat yourself.

To find a surveyor in your area, try this tool from the HomeOwners Alliance:

Building surveyor comparison quotes

What is a mortgage arrangement?

The mortgage arrangement fee is the cost of acquiring your mortgage. A few mortgage lenders charge no fee for this service, whereas others can charge up to £2,000. In some cases, you can choose to add the mortgage arrangement fee to the mortgage itself, although doing this does make it subject to interest.

Who are mortgage brokers?

Mortgage brokers are companies who help you look for a mortgage when you start buying a home. In addition to giving you a hand when trying to find the right mortgage for you, brokers can be useful as they can advise you on which one might suit you best by looking past the upfront costs and considering the long-term financial impacts. Broker fees are usually around £500, but some brokers work on a commission basis (i.e. the mortgage company will pay them this fee), in which case they are completely free to use.

Why do I need life insurance when buying a home?

The reason mortgage lenders ask you to purchase life insurance when buying a property is so that if something were to happen to you, your mortgage could be paid off. Sometimes the policy will cover the whole of the mortgage, whereas in others, it’ll just cover a partial repayment. This can be particularly helpful if the home is purchased by a couple who would not be able to afford the mortgage without their other half’s income.

3. Plan your payments

Once you have an idea of what payments you need to cover and when you should start adding them into your monthly budgets. For the larger costs, it might be the case that you need to include savings targets in your budget to cover them all. Unlike the mortgage, these costs typically need to be paid before the purchase of the property can be completed, so you’ll need to make sure that you can cover them all in time for the exchange.

Added to this, you should also make sure that you’re able to afford your mortgage repayments once they start. For this reason, most lenders advise getting a mortgage that is fairly similar in cost to any rental payments you’re currently making. Furthermore, you should consider additional costs like service charges (if the property is a flat) as you’ll need to include these in your monthly budget moving forward.

Not that you’ll want to get ahead of yourself too much, but you might even want to have everything mapped out for when you decide to move on from this property. First off, you should check whether your property is freehold or leasehold. If it’s freehold, then you will own the land the property is on. If it’s leasehold, you will own the property but not the land, meaning you’ll need to pay ground rent.

If you are purchasing a leasehold property, you should also check how long it is due to last as if it’s less than 85 years, you could find selling the property almost impossible. The cost of extending the leasehold rises incredibly quickly - usually up around £25,000 if the leasehold has around 60 years to run - so make sure to check how much your property has before purchasing and speak with a solicitor if you’re unsure at any point.

If you're looking to save for other important events, make sure to take a look at our guides on saving for life events, and for everyday help with budgeting, a thinkmoney Current Account is a great way to manage your bills.