Can You Add Stamp Duty to Mortgage? Expert Advice on Your Property Purchase

Introduction

When buying a property in the UK, one of the most significant upfront costs is Stamp Duty Land Tax (SDLT). For many buyers, finding the cash to cover the stamp duty in addition to the deposit and other costs can be challenging. A common question buyers ask is, “Can I add stamp duty to my mortgage?”

In this guide, we’ll explore whether it’s possible to add stamp duty to your mortgage, what your options are for covering the cost, and the implications of borrowing more to cover stamp duty. We’ll also look at alternative ways to finance your stamp duty and strategies for managing your overall budget when buying a property.

Can You Add Stamp Duty to Your Mortgage?

The short answer is no — most mortgage lenders will not allow you to add stamp duty to your mortgage. Lenders typically only lend based on the purchase price or value of the property, whichever is lower. Stamp duty is considered an additional cost, and lenders expect you to pay it upfront as part of the overall transaction costs.

However, while you can’t directly add stamp duty to your mortgage, there are other ways to cover the cost, including borrowing more through your mortgage or using other forms of credit. It’s essential to carefully consider the financial implications of borrowing to cover stamp duty, as this can increase your overall debt and affect your ability to meet monthly payments.

Options for Financing Stamp Duty

If you don’t have enough cash on hand to cover the stamp duty upfront, there are several options you can explore:

1. Borrowing More Against Your Property Some lenders may allow you to borrow more against the value of the property, which could help you cover the cost of stamp duty. For example, if you’re purchasing a property worth £300,000 and need a mortgage of £240,000 (80% loan-to-value), you might be able to increase the loan amount to £255,000 (85% loan-to-value) to cover the stamp duty, assuming the lender is willing to offer the higher loan-to-value ratio. This would allow you to effectively borrow more to cover the stamp duty, though it would increase your mortgage payments and potentially extend your mortgage term.
2. It’s important to note that not all lenders will allow you to borrow more for this purpose, and doing so could push you into a higher loan-to-value band, which could result in higher interest rates and increased monthly payments.
3. Personal Loans Another option for covering stamp duty is to take out a personal loan. This allows you to borrow the amount you need for stamp duty without affecting your mortgage. Personal loans typically have fixed interest rates and repayment terms, making them a good option for those who need to spread the cost of stamp duty over time.

However, taking out a personal loan means you’ll have additional monthly repayments on top of your mortgage, so it’s essential to make sure you can comfortably afford both. Be sure to shop around for personal loan deals to find the best interest rate and repayment terms.

3. Credit Cards Some buyers use a credit card to pay for stamp duty, especially if they are offered a 0% interest rate on purchases for a limited time. While this can be a useful short-term solution, it’s important to have a plan for repaying the balance before the interest-free period ends. Otherwise, you could end up paying high interest on the outstanding balance, which would significantly increase the cost of borrowing.

Using a credit card for such a large expense also requires careful budgeting, as it can be easy to fall into debt if you’re unable to repay the full amount within the promotional period.

4. Bridging Loans Bridging loans are short-term loans designed to cover the gap between buying a property and securing long-term financing. In some cases, buyers use bridging loans to cover the cost of stamp duty, especially if they are waiting for the sale of another property to complete.

Bridging loans tend to have higher interest rates than traditional mortgages or personal loans, and they are usually intended for short-term use. While this can be a viable option for some buyers, it’s essential to understand the terms and conditions of the loan, as well as the risks of relying on short-term finance.

5. Saving Up for Stamp Duty If possible, the best option is to save up for stamp duty ahead of time. By budgeting for stamp duty alongside your deposit and other costs, you can avoid taking on additional debt and the associated interest payments. While saving up for stamp duty may delay your property purchase, it’s often the most financially prudent option in the long term.

The Impact of Borrowing for Stamp Duty on Your Mortgage

If you decide to borrow more to cover the cost of stamp duty, whether through your mortgage or another form of credit, it’s essential to understand how this will affect your overall financial situation.

1. Increased Monthly Payments Borrowing more to cover stamp duty means that your monthly payments will increase. For example, if you increase your mortgage by £10,000 to cover stamp duty, your monthly mortgage payment will rise to reflect the higher loan amount. This can put additional strain on your finances, so it’s important to make sure you can comfortably afford the higher payments.
2. Higher Interest Costs Borrowing more will also increase the total amount of interest you pay over the life of your mortgage. Even a small increase in your mortgage amount can add thousands of pounds to the overall cost of borrowing, especially if you have a long mortgage term. If you take out a personal loan or use a credit card to pay for stamp duty, you’ll also need to factor in the interest costs associated with those loans.
3. Loan-to-Value (LTV) Ratio Increasing your mortgage to cover stamp duty could push your loan-to-value (LTV) ratio into a higher band. Lenders typically offer better interest rates to borrowers with lower LTV ratios (e.g., 60% or 70%), so if borrowing more pushes your LTV above 80%, you may end up paying a higher interest rate on your mortgage. This could result in significantly higher monthly payments and increase the total cost of your mortgage.
4. Credit Score Impact Taking out additional loans or using a credit card to pay for stamp duty can affect your credit score. If you already have a mortgage or other debts, taking on more credit could impact your ability to borrow in the future. It’s essential to make sure you can manage the additional debt without negatively affecting your credit score or financial stability.

Can First-Time Buyers Add Stamp Duty to Their Mortgage?

First-time buyers in the UK are often exempt from stamp duty on properties valued up to £300,000, and they pay reduced rates on properties valued up to £500,000. This means that most first-time buyers won’t need to worry about paying stamp duty, as long as the property falls within these thresholds.

However, if you’re a first-time buyer purchasing a property above £500,000, you will need to pay the standard stamp duty rates on the portion of the property price above £500,000. In this case, you cannot add stamp duty to your mortgage, so it’s essential to budget for the cost upfront.

How to Budget for Stamp Duty

If you’re concerned about how to cover the cost of stamp duty, here are some tips to help you budget effectively:

1. Use a Stamp Duty Calculator Before making an offer on a property, use an online stamp duty calculator to estimate how much tax you’ll need to pay. This will give you a clearer idea of how much to budget for and help you avoid any surprises later in the process.
2. Save Alongside Your Deposit When saving for your property purchase, it’s important to save for both the deposit and stamp duty. Many buyers focus solely on saving for the deposit and forget to account for other upfront costs, such as stamp duty, legal fees, and moving costs. By saving for stamp duty alongside your deposit, you can avoid needing to borrow more when the time comes to complete the purchase.
3. Consider Lower-Value Properties If you’re struggling to save enough for stamp duty, consider purchasing a lower-value property to reduce your stamp duty liability. For example, properties valued below £125,000 are exempt from stamp duty, while first-time buyers can purchase properties up to £300,000 without paying any stamp duty.
4. Ask for Financial Help Some buyers receive financial help from family members or friends to cover the cost of stamp duty. If you’re in a position to receive assistance, this can help you avoid taking on additional debt.

Conclusion

While you cannot directly add stamp duty to your mortgage, there are several ways to finance the cost, including borrowing more against your property, taking out a personal loan, or using a credit card. It’s important to carefully consider the financial implications of borrowing to cover stamp duty, as this can increase your overall debt and monthly repayments.

The best approach is to plan ahead and budget for stamp duty alongside your deposit and other upfront costs. By saving for stamp duty early and considering alternative financing options, you can avoid the need to borrow more and reduce the financial burden of your property purchase.