The prospect of paying stamp duty costs can be daunting, especially for a first-time buyer. As a mortgage broker, I’m often asked if it’s possible to include stamp duty to a mortgage, rather than paying it upfront.
Stamp duty must be paid to HMRC upon completion, so you can’t delay payment by ‘adding’ it to your mortgage. Your lender may agree to lend more money to cover the cost of stamp duty. If they do, it may affect your affordability, and you will be charged interest on the extra amount.
Read on for more important considerations when adding stamp duty to your mortgage. I’ll also cover stamp duty rates, exemptions, and reliefs.
If you would like advice on your individual circumstances from an experienced mortgage broker, please do not hesitate to get in touch with Goldmanread for a no-obligation chat.
What is stamp duty land tax?
Stamp duty is a tax imposed by the UK government on property. It is payable by the purchaser to HMRC and is calculated based mainly on the property purchase price.
Stamp duty is a significant revenue stream for the UK government, helping to fund public services and infrastructure. It also stabilises the market, curbing buy-to-let investments and second homes and making housing more accessible for first-time buyers.
Who must pay stamp duty tax?
Anyone purchasing a property in England and Northern Ireland must pay Stamp Duty Land Tax (SDLT) unless they fall into one of the exemption categories listed below. In Scotland, home buyers need to pay Land and Buildings Transaction Tax (LBTT) and in Wales, Land Transaction Tax (LLT).
Stamp duty reliefs and exemptions
Here are the main stamp duty exemptions and reliefs for residential property in England and Northern Ireland.
Stamp duty reliefs
First-time buyer relief: You won’t pay any stamp duty on the first £425,000 and only 5% on the portion between £425,001 to £625,000.
Other reliefs: Other reliefs are available for non-residential property and investment property, including multiple dwellings. See the SDLT guidelines for full details.
Stamp duty exemptions
In some cases, you won’t have to pay any stamp duty at all, including:
- If the property purchase price is less than £250,000 (providing it is your only home).
- Inheriting property through a will.
- Transferring property due to divorce or civil partnership dissolution.
- Buying a freehold property for less than £40,000.
- Purchasing a new or assigned lease of 7 years or more (where the premium is less than £40,000 and the annual rent is less than £1,000).
How is stamp duty calculated?
How much stamp duty you pay depends on the value of the property sale, if you are a first-time buyer and whether it is your only property.
- 0% tax on properties up to £250,000
- 5% tax on the portion from £250,001 to £925,000
- 10% tax on the portion from £925,001 to £1.5 million
- 12% tax is applied to property with a value above £1.5 million
- First-time buyers only: 5% tax on properties between £425,001 to £625,000
Higher Rates for Additional Properties
A 3% surcharge applies for the purchase of second homes or investment properties. It’s important to note that even if you’re moving house, you may need to pay the 3% surcharge if your existing property sale doesn’t go through before the purchase of your new property. In this scenario, you will usually be eligible for a stamp duty refund within a 36-month window.
Non-UK Residents
Non-UK residents face a 2% surcharge on top of the standard SDLT rates for residential properties in England or Northern Ireland. Non-residency is determined by spending less than 183 days in the UK in the 12 months before the purchase.
Stamp duty rates are correct as of May 2024. Rates are subject to change, see the latest stamp duty rates here.
You can calculate your estimated stamp duty bill using the government’s stamp duty calculator here.
Your stamp duty return must be paid within 14 days of completion of your property sale, either by the buyer or their solicitor.
Can a mortgage cover stamp duty?
In the past, lenders offered additional unsecured loans to borrowers to cover stamp duty and other house-buying costs. In some cases, the combined loan and mortgage was up to 125% of the property price, and borrowers often found themselves in negative equity. This all came to an end in the 2008 credit crunch.
Nowadays, mortgage lenders generally only allow their arrangement fees to be added to the mortgage loan. If you meet their eligibility criteria, they may agree to increase your loan to allow for stamp duty costs, but there are drawbacks to doing so:
Affordability for a mortgage: When you apply for a mortgage, a lender will assess your affordability, including your loan-to-value ratio, income, and credit history. Increasing your loan amount could affect your affordability and how much you can borrow.
Increased overall debt: Incorporating SDLT into your mortgage means you will be paying interest on it for the duration of the mortgage term, increasing the total amount you borrow.
Higher monthly payments: A larger mortgage means higher monthly repayments, which could put a strain on your monthly budget.
Impact on Loan-to-Value (LTR) ratio: Adding SDLT to your mortgage affects your loan-to-value (LTV) ratio, i.e., the ratio between the borrowing amount and the property value. This could potentially result in higher interest rates or more stringent lending criteria.
What are my options if I can’t add stamp duty to my mortgage?
There are no guarantees that your mortgage lender will allow you to borrow more money to pay your stamp duty. It’s absolutely crucial, therefore, to have the fees factored into your budget from the start.
Given that stamp duty on a £450,000 house is £10,000, it could prove disastrous if you don’t have the funds available.
So, what are your options if you can’t add stamp duty to your mortgage?
Savings: The best case scenario is to use your personal savings to pay the SDLT upfront.
Take from your deposit: If you don’t have enough savings to cover stamp duty, you could take it from your deposit fund. This will affect your loan-to-value ratio, which will, in turn, affect how much you can borrow.
Explore other lenders: Not all lenders have the same policies. This is where mortgage brokers can be a big help, as they can search across a wide range of lenders to find the best deal for you.
Personal loan: It’s important to consider that this will increase your monthly financial commitments and may affect your mortgage affordability assessment.
If none of these options are viable, you may have to delay your house purchase until you’ve had time to save the funds.
Speak to Goldmanread Mortgages today
When considering buying a home, whether as a first-time buyer or an existing home mover, it’s important to get professional advice.
At Goldmanread, we have extensive experience in guiding clients through their home purchases. You can rely on our independent advice to ensure you make informed decisions and secure the most competitive deal for your circumstances.
For friendly mortgage advice, please contact us today.
