A Guide to Residential Stamp Duty and Mortgage Life Insurance

Are you on the hunt for your first or next home? Firstly, congratulations! Securing a mortgage or purchasing a property outright are both important steps that could change your life for the better.

Before you pop open the champagne and settle into a new home, however, it is vital that you do some careful budgeting. Working out whether you can afford a home in the long term takes work and requires you to add up the many costs of homeownership.

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If you're new to the housing market, you may not realise that there are several taxes and fees you will have to cover on top of your deposit and regular mortgage payments.

One crucial tax you may have to pay is Stamp Duty. In this helpful guide, we lay out the particulars of Stamp Duty, as well as other costs you may need to consider when securing a mortgage.

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What is Residential Stamp Duty?

In short, Stamp Duty is a tax you may have to pay if you purchase land or property in England and Northern Ireland. The amount of Stamp Duty payable for a property will depend on its value, as well as whether it is your primary home. It also applies to both leasehold and freehold properties – in other words, you will have to pay the tax regardless of whether you have a mortgage or bought your property outright.

If you buy a property in Scotland or Wales, slightly different rules apply. Buyers in Scotland should look into Land and Buildings Transaction Tax whilst buyers in Wales should pay attention to Land Transaction Tax.

How does Residential Stamp Duty work and how much does it cost?

Stamp Duty works according to certain bands and the type of property being purchased. The higher the cost of a property, the more its owners may be required to pay. There is also a Stamp Duty threshold, below which no Stamp Duty is payable. At the moment, this stands at £500,000 for England & Northern Ireland, having been temporarily adjusted from £125,000 and £300,000 for first time buyers in July 2020 (see below for more information about Stamp Duty relief).

For a quick way to work out how much Stamp Duty you will need to pay on a given property (if any), check out the Money Advice Service’s handy Stamp Duty calculator.

COVID-19 alterations

It is important to note that the UK government recently implemented temporary reductions on Stamp Duty to help ease the financial burden on homeowners and business owners throughout the COVID-19 pandemic.

If your property costs £500,000 or less, you will not be required to pay any Stamp Duty until 31 March 2021, regardless of whether or not you are a first-time buyer. If you own a property that surpasses this value threshold, you will need to pay a Stamp Duty rate based on the value of your property over £500,000.

Suppose you purchase a home for £600,000 before 31 March 2021. The Stamp Duty payable can be calculated like so:

0% chargeable on the first £500,000 (£0) + 5% on the remaining £100,000 = £5,000

Finally, if you’re purchasing a second home costing £40,000 or more, you will still be required to pay Stamp Duty.

Who pays Stamp Duty and when?

As the buyer of a property, it is your responsibility to ensure that any Stamp Duty you owe is paid out to the HMRC within 14 days of the purchase being completed. Failure to do so could result in a hefty fine. Fortunately, your mortgage adviser or solicitor should generally take care of your Stamp Duty payment and will make sure that you do not miss the deadline.

If you wish, you may be able to add the cost of Stamp Duty to your mortgage loan. If you are interested in doing this, it is a good idea to talk through your options with your mortgage provider.

Other costs to consider when securing a mortgage

Stamp Duty is just one of the costs to consider when you’re thinking of purchasing a property and taking out a mortgage. Other important costs you need to consider include:

  • Arrangement fees: Mortgage lenders may charge arrangement fees to cover their administration costs. Arrangement fees may also be called application fees or booking fees, and their costs can vary widely. It is important to be aware that low interest rates can sometimes be advertised to disguise very high arrangement fees, so it is important to fully cost a mortgage product before committing to it. The fee can sometimes be added to the mortgage if you wish, but you will have to pay interest on it.
  • Booking fees: Some lenders charge specialised booking fees in exchange for securing a discounted or fixed-rate deal. A fee of this type needs to be paid as soon as a mortgage application is submitted and will not usually be refunded if a property purchase falls through.
  • Valuation fees: Lenders charge valuation fees in exchange for checking how much your desired property is worth. This may be different from the current offer price.
  • Survey fees: A survey fee is an optional expense paid to property inspectors who will double-check that your desired property is free from structural problems or other significant issues. This can be useful if you want to avoid paying for renovations further down the line.
  • Conveyancing fees: These fees are to cover the costs of the legal work involved with purchasing a property. They should go straight to a solicitor.
  • Land Registry fees: These are small fees paid to the Land Registry, an organisation responsible for registering properties under the names of their owners.
  • Mortgage life insurance: This is another optional fee, but it could be a vital way to protect your family from financial burdens in the future. To help you understand why this is the case, we’ve set out some additional information below.

What is mortgage life insurance?

Put simply, mortgage life insurance is a type of insurance policy designed to help pay off your mortgage if you were to pass away. It is not to be confused with mortgage payment protection insurance (MPPI), a product which only covers payments in cases of redundancy or long-term sickness.

There are generally two types of mortgage life insurance including level term insurance and decreasing term insurance. The former allows you to determine the size of the payout, which is then fixed for the policy’s duration. The latter is not fixed, reflecting reductions in premiums and liability. In this way, decreasing term packages tend to be a little cheaper, but payouts tend to be smaller.

Why should you consider mortgage life insurance?

Mortgage payments are not always fully covered by standard life insurance policies, so mortgage life insurance will add a layer of financial protection for your loved ones. It is always advisable to take out mortgage life insurance when a mortgage is in place. This is particularly true if your household currently relies on more than one source of income and would struggle to cover mortgage payments if an income was taken away.

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