When budgeting for a home, many buyers focus solely on the property price and the mortgage payments they’ll need to cover. However, there’s another crucial cost to consider—stamp duty. Stamp Duty Land Tax (SDLT) is a government tax that applies to property purchases in the UK, and depending on the property’s value, it can significantly impact your overall budget.

Understanding how stamp duty affects your mortgage planning is essential to avoid any unexpected financial strain during the home-buying process.

What is Stamp Duty?

Stamp duty is a tax that buyers must pay when purchasing a property or land over a certain price threshold. The amount varies depending on the property’s value and whether you’re a first-time buyer, moving home, or buying an additional property. In England and Northern Ireland, stamp duty is tiered, meaning different rates apply to different portions of the property price.

For example, if you’re purchasing a home for £300,000, a certain portion of that value will be taxed at different rates. The more expensive the property, the more you’ll pay in stamp duty.

How Stamp Duty Affects Your Home-Buying Budget

When planning your mortgage budget, it’s crucial to remember that stamp duty is an upfront cost that cannot be rolled into your mortgage. This means you’ll need to have the necessary funds available on top of your deposit. Failing to account for stamp duty can throw off your overall budget, as it can add thousands of pounds to your upfront costs.

Here’s how it can affect your budget:

1. Higher Upfront Costs: Stamp duty is due shortly after purchasing the property, and it must be paid in full. For example, if you’re buying a property worth £400,000, the stamp duty could be around £10,000, depending on current rates and your buyer status. This is a significant amount that needs to be budgeted for alongside your deposit and legal fees.
2. Impact on Available Deposit: If you haven’t prepared for stamp duty, you might find yourself needing to dip into your deposit savings to cover the cost. This can reduce your deposit, which in turn can affect your Loan-to-Value (LTV) ratio and, potentially, the mortgage rate you qualify for. A lower deposit might mean a higher interest rate, which increases your monthly mortgage payments.
3. Additional Borrowing Power: While stamp duty cannot be included in your mortgage, the overall cost of the tax may influence how much you’re willing to borrow. You might opt for a smaller loan to ensure you have enough to cover the stamp duty, thereby affecting the size of the home you can afford.

First-Time Buyers and Stamp Duty Relief

First-time buyers benefit from a stamp duty relief scheme, which exempts them from paying the tax on properties up to a certain value. Currently, first-time buyers purchasing a home worth up to £425,000 are exempt from stamp duty on the first £425,000. For properties between £425,001 and £625,000, they pay 5% on the portion above £425,000.

This relief can help first-time buyers save a considerable amount and should be factored into their budget calculations. If you qualify for relief, it can reduce your upfront costs and leave more of your savings available for your deposit or other home-buying expenses.

Planning for Stamp Duty: Using a Stamp Duty Calculator

A stamp duty calculator is an excellent tool to help you budget for this tax before committing to a home purchase. By inputting the property price and your buyer status, you can get an accurate estimate of how much stamp duty you’ll owe. This helps you plan your savings accordingly and ensures you’re not caught off guard by an unexpected tax bill.

Additionally, stamp duty calculators can factor in current relief schemes or regional variations, giving you a clearer picture of your total costs.

Additional Properties and Stamp Duty Surcharge

If you’re buying an additional property, such as a second home or a buy-to-let, you’ll face an additional 3% stamp duty surcharge on top of the standard rates. This surcharge significantly increases the amount of tax you’ll owe, making it essential to plan for if you’re expanding your property portfolio. Again, a stamp duty calculator can help you estimate these costs so you can budget effectively.