How To Negotiate Mortgage Closing Costs
You’ve found the perfect home – congratulations. If you’re like most buyers, you’re about to make the largest financial transaction of your life. There are many costs associated with buying a new home, and understanding exactly what those costs are and how to negotiate with your mortgage lender to save a little money is nothing short of a must.
A Quick Look at Mortgages
A mortgage is a loan that usually comes from either a bank or a building society that covers most of the cost of a property purchase. These loans are called secured loans because it gives the bank or building society the right to take the property back and sell it if you can’t make your monthly payments.
After you obtain your mortgage, you begin to work to pay it back. You typically pay back the amount you borrowed and the interest over a given period of time, which is usually 25 years. In the UK, there are mortgages with shorter and longer terms. As you work to choose the mortgage that works for you, you also select the overall term of the loan.
Until you have made all of the repayments, you don’t actually own the home. Instead, it remains secured against your property, so the lender could still repossess your home if you fail to pay it in full when the payment is due.
The Cost of Obtaining a Mortgage
Mortgage loans are not without fees. In fact, you’ll pay a number of fees to allow you to borrow the money you need to purchase your home. Most mortgages in the UK come with those fees before you ever take the loan out. You’ll see these called many things including arrangement fees, closing costs, and completion fees. These fees range from £999 to £3,000, depending on the mortgage you get. Typically they include a booking fee, which can cost between £99-£250, an arrangement fee, which can cost between £1000-£2000, and a mortgage valuation fee, which usually costs £150.
It’s important to note, too, that you’ll need to pay a deposit, initially, to even obtain your mortgage. In most cases, if you’re a first-time buyer, you’ll have to come up with about 5% of the purchase price of your home for a lender to even consider your mortgage application. That amount, though, is the absolute minimum. In fact, the more money you can come up with for a deposit, the better off you’ll be. As you add money to that deposit, you reduce your LTV, or loan-to-value, ratio. That’s the ratio between the amount you’ve borrowed on your mortgage and the amount you’ve paid. A deposit of ten, fifteen, or even twenty per cent means you have access to better mortgage deals with lower interest rates, and that means you actually end up paying quite a bit less over time.
Are Mortgage Closing Costs Negotiable?
In most cases, those upfront fees you pay when you take out a mortgage simply aren’t negotiable. Your lender isn’t setting those rates specifically for you. Instead, the institution that makes the loan sets those rates far in advance, usually through a computer algorithm based on what they think it costs to make a loan of your size. There are other kinds of things you can negotiate, like interest rates, but the fees themselves often have to be paid as they are. Fortunately, if negotiating mortgage closing costs is on your list of priorities because you’re simply not sure how you’ll be able to tackle those and the house too, there are things you can do. You can look for a fee-free mortgage. These kinds of loans don’t charge arrangement fees, so if you have a limited amount of money available as you prepare to buy your home, this can be incredibly helpful. What’s more, though, is that you can use the money you were planning to put toward fees toward the deposit on the home. There are some disadvantages to this type of loan, though. First, they are fee-free, but the reality is that the loan itself costs more as it typically comes with a far higher interest rate than other kinds of loans. That makes this type of mortgage look cheaper, but the costs overall tend to be more expensive in the long run. The amount you end up paying depends on the interest rate itself. Many come with a variable rate mortgage, which means it’s uncertain how much you’ll pay over the life of the loan. The rate could go up or down depending on the Bank of England’s overall base rate. If the base rate goes up, your mortgage payments do too. If it goes down, your mortgage payments do too. Take a closer look at how much you might pay over the life of the loan before you choose this type of mortgage.
Your other option is to roll the costs in with your mortgage. Often lenders will tell you that while those are called up-front fees, you don’t actually have to pay them at the outset. They can be rolled in with the balance of the loan. That could save you some cash initially, but given that it makes the actual balance of the loan bigger, and you’ll have to pay interest on all of that, it can be quite a bit more expensive in the long run to handle it that way.
The only real way to negotiate closing costs on a mortgage is to work with the home seller. If the market isn’t moving as quickly as most sellers would like or they’re incredibly motivated to sell the house, sometimes they’ll drop the price to accommodate your closing costs. Sometimes they’ll even volunteer to pay your closing costs for you as part of the negotiations so that you’ll finalise the contract and buy the home itself. In a hot market where houses move quickly, though, that’s not always the case, but it never hurts to ask for it when you initially put in the offer for the home.
The True Cost of Buying a Home
What you may not realise – particularly if you’re a first-time buyer – is that there are quite a lot of costs associated with buying a home. Closing costs really aren’t the only thing you’ll be paying as you prepare to make this big purchase. Here are the fees that you’ll face as you buy your home.
- Stamp Duty: In the UK, any property that costs more than £250,000 is subject to stamp duty, unless you’re a first-time buyer. If that’s the case, you won’t pay Stamp Duty on a home that is worth up to £425,000. Stamp duty must be paid on second homes as well. If it’s a second home you must pay stamp duty on anything that costs more than £40,000. Currently, the rate on second homes is 3%. Stamp duty is a requirement whether you’re buying a freehold property or a leasehold, whether you’re paying by cash or you’ve obtained a mortgage. In Scotland and Wales, you’ll pay different taxes on your purchase instead of stamp duty.
- Surveyor’s Fee: Any time you buy a property, you want to make sure there are no potential problems, and that’s where a surveyor comes in. While you’ll already be paying the fee for a mortgage valuation, hiring a surveyor is just as important. The mortgage valuation fee is simply to check that the money they’re lending on the property isn’t too much. It takes just a few minutes for a valuator to make decisions, and those decisions are based on the features of the home, the neighbourhood, and the sales of other similar properties in the area. Essentially, it just tells the lender whether the property seems like a good value. A survey, on the other hand, takes a fairly deep look at the property, telling you what repairs or maintenance you may need to carry out. If you’re purchasing a house that does require repairs, the survey gives you a better understanding of what those costs might look like so you can negotiate either the repairs themselves with a buyer or the cost of those repairs. Studies have shown that buyers who didn’t get a survey before they purchased their house tend to face more than £6,000 in repair costs, and the last thing you want as you work to buy a home is additional costs.
- Legal Fees: The home buying process requires you to hire a Conveyancer, typically a local solicitor, who will carry out all of the legal work required to purchase a home. There are quite a few tasks involved with transferring property from one person to another. Conveyancers initially request and check the draft contract the seller sends over along with all of the forms the seller must complete. He or she will review the fixtures and fittings form to better understand exactly what’s included in the sale including cookers, curtains, wardrobes, and the like. Your Conveyancer will also review the property information form that includes data about the property’s boundaries, planning permissions, and any ongoing disputes between neighbours. Additionally, your Conveyancer handles all of the required searches that must be done on your new property like water, environmental, and local authority searches. Once the process is finished, your Conveyancer will pay the stamp duty on your behalf and register your new home with the land registry. While costs vary here, you can expect to pay between £500 and £1,500 to have a Conveyancer handle all of these tasks.
- Removals Costs: This is one you were likely expecting. Finding a good removal company can get quite expensive. The larger the home you’re moving from, the higher your overall costs. This is true for distance as well. The further away you are, the more likely you are to experience higher costs. For example, if you’re moving from a three-bedroom home to a larger four-bedroom home across town, you can expect to pay £450. If, though, you’re moving quite a bit further, you can expect to pay almost double that. The cost of moving a one-bedroom flat across the country could cost you nearly £1000. Often you can chat with a removal company before you hire them to get a better understanding of what you might. Many firms will do a pre-move survey with you so that they can assess your needs and give you a better quote. It’s important to note that there are extra potential costs with a removal company. For example, some companies will charge you for packing materials. If that’s part of the estimate, you may be able to find them elsewhere for quite a bit cheaper. Some removal companies also provide packing services. If you need someone to come in and pack your items for you, you can expect to pay almost £300 depending on exactly what must be packed. Likewise, removal firms will provide unpacking services for an extra fee. In the event that you have valuable items, you’ll want to note that with your removals company. They may suggest crating them to help protect them during the move. While that can be quite an expense, it’s well worth the overall cost. Your firm may or may not offer removals insurance, and if they don’t, it’s important to take out a policy as they cost very little and cover quite a bit in the event that something happens to your stuff as you move. Most removal firms will require you to pay in advance of your move, typically at least a week before the day of completion, so have that money ready.
- Buildings Insurance: If you are buying a home, your lender will require you to have a buildings insurance policy to protect it against all kinds of problems including fire, flood, subsidence, and other problems. You’ll also want a contents insurance policy to help cover your possessions. The building’s insurance itself tends to run about £100 per year, and it covers the property and the fixtures and fittings that are permanent. Typically you can file a buildings insurance claim in the event that you have a fire, a car runs into your property, or a natural disaster happens. Keep in mind that general wear and tear problems aren’t included in this policy. So, if you develop a pest problem or your gutter fails, you likely won’t be able to make a claim. Your lender will require you to get a policy from the moment you become responsible for the property, an event that typically occurs after the exchange of contracts. There are some factors that can make this kind of policy more expensive. For example, if you’ve previously had building insurance and you filed a claim against it in the past, that can make things more expensive. Similarly, if you live in a high-risk area, you may also experience higher overall insurance costs. Most people tack on a contents insurance policy with their building policy, too, and for good reason. The average cost here is less than £50 per year, but without it, you have no coverage for things that aren’t part of the structure of your home like your furniture, your TV, and all of your personal belongings. A good policy will give you quite a bit of coverage for those belongings in the event of a break-in or a disaster. You may even be able to make a claim against it if you’re travelling abroad and your stuff is stolen.
- Council Tax: Based on where your property is and what it’s worth at any given time, you’ll pay council tax to your local council on an annual basis. The costs are set by the local council, and they go toward helping to fund local services in your area. For example, your council tax might fund rubbish collection or take care of your local library. The amount is based on the valuation of your property and exactly how much your council needs to fund the property. Typically you pay this tax in ten monthly instalments. There are some exceptions. For example, if you have a lower income, you live with someone who has a disability, or you are severely mentally impaired, you may not have to pay council tax. You may also choose to spread your tax payments over 12 months instead of ten.
Getting the Right Mortgage May Mean Lower Costs
Mortgage costs can be quite high, but getting the right mortgage to meet your needs could mean lowering your overall costs in buying a home. Finding the right mortgage to meet your needs begins with finding the right lender. There are two basic ways you can get a mortgage. You can work directly through a lender. You can also work through a mortgage broker or a financial advisor. Most people choose to work with a mortgage broker when they want access to different kinds of loans or they have a problematic financial situation like bad credit or a non-standard income like a home business. In those cases, a specialised mortgage lender can be the best option, and typically you need to work through a mortgage broker to find that type of lender. If, however, you’re fairly average in terms of income and credit history, going to the bank for a mortgage isn’t a bad deal. It just means that you’re gaining access to a fairly standard array of mortgage products.
Once you connect with a lender, it’s time to begin exploring the mortgage you actually need. There are a number of different kinds of mortgages. Some are designed just for those who are buying their first home. Others are designed for those purchasing a second property so they can become a landlord. Understanding the type of mortgage that’s right for your financial situation is key to getting the perfect one for you. Here are just a few of the types of mortgages you may want to consider.
- Help To Buy Mortgages: If you have a fairly small deposit and this is the first time you’ve bought a house, a Help to Buy mortgage might be the ideal product. This is a government-backed mortgage that is designed specifically to help first-time buyers purchase a home. You can buy a new-build property with a 5 per cent deposit with this type of loan, and it remains interest-free for five years. Essentially, you borrow up to 20% of the value of the home with Help to Buy, then you take out a traditional mortgage on top of that. The loan still continues after the fifth year, but interest is then charged at a rate of 1.75%. The loan must be repaid at the end of the term – which is typically 25 years – or when you sell your home.
- Right to Buy Mortgages: This is another type of mortgage designed for first-time buyers. It allows you to buy your council-owned home for up to £84,200 off the purchase price. To be eligible, you have to have been a public sector tenant for the past three years, and the property you’re considering has to be your only home. While some properties are excluded, most council-owned properties fit into this, and it’s worth considering if you’ve been a tenant for the past three years.
- Guarantor Mortgages: If you have a small deposit and a relative or friend who is willing to be named on the mortgage that can help should you miss any payments, this is an excellent option. Many people who apply for this kind of mortgage simply can’t get a loan on their own because they don’t have the available deposit or they have a low income. This kind of loan, though, helps to connect you with a reputable borrower so that the lending institution has some guarantee they will get paid and you can still own the property.
- Bad Credit Mortgages: Lenders view those with a low credit rating as a risk, but there are some bad-credit mortgages available to those people. While there are no rules about exactly what makes you qualify for a bad credit mortgage, typically you need to have an adverse credit action – like a bankruptcy – on your credit record within the last six years. These kinds of mortgages should be used carefully, though, because they often require larger deposits – sometimes as much as 15% – and they tend to have both higher fees and higher interest rates.
- 100% Mortgages: If you’re having a tough time saving up the money to buy a home, this is a good possibility. It’s sometimes called a 100% loan-to-value mortgage, and you’re not required to have any kind of deposit to get it. While most lenders require a deposit of at least 5%, with this kind of mortgage, you can get a home without a deposit. Typically you’ll need a guarantor with this kind of mortgage or you’ll need to put some other kind of property down as an agreement to help protect the lender.
- Buy to Let Mortgage: If you’re purchasing a property to rent to tenants at a later date, this is the ideal type of mortgage to meet your needs. It’s important to note that you wouldn’t want this type of mortgage on your primary home, though, as they often have fairly high interest rates and fees, and you’ll be required to make a larger deposit. With this kind of mortgage, you borrow money on a home that you don’t intend to occupy. They’re usually for a far shorter term, and at the end of the term, you’re expected to repay it in full.
Along with the various mortgage types, you’ll also need to consider whether you want to be fixed or variable mortgage rates. Most mortgages come with one or the other type of rate. Variable rates mortgages tend to have lower rates initially, but those do rise and fall with the Bank of England’s base rate. Fixed-rate mortgages tend to have slightly higher rates, but they are set for the life of the mortgages. The benefits of a fixed rate mortgage are that it’s easy to budget around your house payment, and it will stay the same over the life of the mortgage. The drawbacks, though, are the fact that you may be subject to early repayment charges, and if the rates should go down while you have your mortgage, you’re locked into that amount. Variable rate mortgages have a number of benefits, too. There’s usually no early repayment penalty with this type of loan product, and they usually have lower fees. The problem, though, is that your rates, and thus your repayment amount, could change over time.
Applying for a Mortgage
After you’ve thought about which mortgage might best meet your needs, the next step is to actually apply for the loan. You’ll go directly to the bank or your mortgage broker to complete the application. Your lender will ask you for payslips from at least the last three months. You’ll also need proof of your UK residency status. Additionally, you’ll be asked to provide a number of bank statements, your annual tax summary, and some cash flow statements. Typically, this entire process can take between twenty and forty days, so if you’re considering purchasing a home, it’s best to make certain a lender will make a loan before you even start shopping for a house. Your lender will then take that information and look at your current credit history to better understand whether you’re asking for a loan their institution wants to make. In the event you do have a problem with your credit, you can work to explain the problem to your lender and show what steps you’ve taken to fix it. For example, if you have an ex-partner who took advantage of you financially, you can typically work with a lender to help them understand that things in your life have changed since then, and you may still be able to qualify for the loan.
As the lender works to decide whether you’re a good fit for their loan products, make certain you respond to any enquiries promptly, as that will help to speed the process up. Often there’s a need for additional documentation, and ensuring you provide that on an as-needed basis is a must.
Once you obtain mortgage approval, you can begin shopping for the house you wanted. Often your lender will even issue a guarantee statement so you can show potential sellers that you’re serious about making the home purchase. That, in and of itself, can help increase the chances of you getting a home that you really want, elevating your own offer above those potential buyers who have not taken the time to sit down and work with a lender.
Home Ownership Is Well Worth the Cost
While there are many costs involved with home ownership and the process of getting a mortgage can be fairly arduous, the reality is that it’s a step well worth taking. After all, owning a home gives you true freedom, and in the long run, it can really pay off, giving you an investment you can count on again and again. In fact, at some point, owning a home could actually make you money if you ever decide to let it to others. While buying a home is a big financial commitment, and there are a lot of costs involved with the process both upfront and as time goes by, it’s the ultimate when it comes to freedom and security. It’s your home, and you can decorate it and furnish it as you like. You never have to deal with an unreasonable landlord who might push up the rent or make you move out on short notice. Instead, you’ll have a place you can come home to again and again with a measure of security. It could even save you some money, as thanks to products like fixed-rate mortgages, you’ll easily be able to control your costs again and again.
Understand the costs of a mortgage, including closing costs, then decide whether home ownership is the path forward for you. It may not be possible to negotiate closing costs on a mortgage, but it is possible to negotiate many other different factors in a mortgage.