How much homes really cost

You may be shocked at the true cost of buying a home with a mortgage!

At worst, buying a home can be one of the most frustrating, tortuous and prolonged struggles known to mankind. Even at its best, home-buying is a complicated and awkward process.

What's more, buying a home requires a juggling act rarely seen elsewhere. You have to deal with sellers, estate agents, solicitors, surveyors, mortgage lenders, removals firms and energy companies. In fact, at least a dozen different organisations get involved when you buy a home.

What's more, each of these individuals or companies expects to get paid for their efforts. Thus, when you add up all these extra expenses, they amount to a pretty hefty burden for homebuyers.

The money pit

Let's do the sums to see how much a home really costs here in the UK, starting with the obvious:

1. The purchase price

Clearly, the biggest outlay when buying a home is its purchase price. According to the Halifax House Price Index, the average value of a UK home in June was £162,109.

However, regional prices vary widely, with the three most expensive areas being Greater London (£259,492), the South East (£222,450) and the South West (£184,562). The three cheapest regions to buy a home are Northern Ireland (£118,189) Yorkshire and the Humber (£118,683) and Scotland (£120,951).

To keep things simple, I'll assume we're purchasing a home for a nice, round £160,000, which is broadly in line with the UK average.

2. Stamp Duty Land Tax (SLDT)

SDLT, alias 'Stamp Duty', is a tax levied by the government on UK property and land transactions. For residential use, Stamp Duty is charged at the following rates:

*Purchase* *price (£)*	*SDLT* *rate*
Up to £125,000*	0%
Over £125,000 to £250,000	**1%
Over £250,000 to £500,000	3%
Over £500,000 to £1 million	4%
Over £1 million	5%

* This threshold extends to £150,000 for 'disadvantaged areas'.

** 0% for first-time buyers until 24 March 2012

Note that Stamp Duty is charged on the whole of the amount paid and not the value in excess of the tax threshold. Thus, for a first -time buyer,a house costing £250,000 attracts zero tax, but a property costing £1 more incurs a charge of £7,500.03 (3% of £250,001).

These 'stepped' tax rates cause 'Stamp-Duty bunching', whereby a disproportionately large number of transactions takes place just below the £125,000, £250,000 and £500,000 thresholds.

Therefore, for our hypothetical £160,000 home, the SDLT is 1% of the price, or £1,600 (or zero for first-time buyers).

3. Estate agent's fee

You pay an estate agent for selling your home, not for helping you to find one.

Hence, the typical fee of 1% to 3% of the purchase price doesn't apply here. However, a 2% fee when selling a £160,000 home is £3,200.

4. Solicitor's fee

In theory, it's possible to buy a home without using a solicitor. In practice, everyone uses a solicitor or licensed conveyancer to deal with the legal aspects of buying and selling property. These fees vary widely from firm to firm and throughout the country, but expect to pay between £300 and £1,000 for legal work -- and much more for complicated or non-standard transactions.

5. Surveyor's fee

It's wise to have a Chartered Surveyor check over the property to make sure that it's in satisfactory condition and to point out any potential problems.

6. Removal fees

When you move home, you'll need to take your furniture and other belongings with you. In my experience, a professional move carried out by a member of the British Association of Removers (BAR) typically costs between £500 and £1,000 for a four-person family. Depending on your family's size and possessions, your moving costs could fall below or above this range.

7. Other fees

On top of the above professional fees, there are various other costs involved in buying a home, such as:

Local Authority fees (local, environmental and water searches totalling perhaps £300);
Land Registry fees (perhaps £250);
Charges for installing or reconnecting telephone, cable TV, broadband and other utilities;
Royal Mail redirection (£40.85 per surname for one year);
Money-transfer fees (perhaps £30 per telegraphic transfer);
Buildings insurance (don't overpay for this protection by buying it via your lender!); and
Life insurance (to repay your mortgage if you die before it is paid off).

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By the way, you'll have to add VAT (Value Added Tax) at 20% to most of the above professional fees, too. Ouch!

Now for the really big bill...

Other than the property itself, the biggest cost of buying will be the total amount you pay for a home loan. Around two out of three properties are bought using mortgages, but loans are harder to come by these days, thanks to the credit crunch.

Thus, to secure a decent interest rate, you need a sizeable deposit, say, a quarter (25%) of the purchase price. On our £160,000 home, this comes to £40,000 -- a sum which would be impossible for most first-time buyers to build up without a big helping hand from 'the Bank of Mum and Dad'.

For a mortgage with a 75% loan-to-value ratio, interest rates range from about 2.5% to 5% a year, depending on whether the rate is variable or fixed. However, today's rates are abnormally low, thanks to the Bank of England's base rate being stuck at a 317-year low of 0.5% a year.

Thus, assuming a lifetime mortgage rate of 6% a year, a repayment mortgage of £120,000 over 25 years would cost £773 a month. After 300 monthly repayments, the total amount repaid would be £231,900. This is very close to twice the original loan, thanks to an interest bill of £111,900.

Furthermore, the above calculation includes interest, but ignores other mortgage costs. The largest of these is a mortgage arrangement fee, which could be anything from nothing to 2.5% of the amount borrowed. Also, mortgage lenders love to charge booking, legal, valuation and exit fees, which add hundreds more pounds to the final cost.

Lastly, if you borrow a high proportion of a property's value, typically 90% or more, then you may be hit with a Higher Lending Charge (HLC). This can add up to hundreds or even thousands of pounds for higher-risk borrowers.

Budget before you buy

In summary, buying a home is a huge financial commitment -- and one which should not be entered into lightly. Indeed, the extra costs of buying a home can add £5,000+ to the upfront costs, so it's vital that you budget for these additional expenses well in advance!

More: Find your ideal mortgage | House prices will struggle for a decade | Homeowners face another two years of payment shocks