Picture the scene: you’ve found the perfect home, secured your mortgage offer and it looks like everything is on-track to move in before the end of March, as you’d hoped.

Then things grind to a halt. The property chain you’re in is gummed up, paperwork has gone missing and your solicitor seems to have vanished.

It suddenly dawns on you – you won’t complete before 31 March. You’re frustrated. You’re angry.

Why? Because it means that you’ll miss the looming Stamp Duty deadline and potentially have to pay thousands more in tax.

If that sounds familiar, you’re not alone. 

74,000 buyers, including 25,000 first-time buyers (FTB), could miss the deadline, facing a collective tax hit of up to £142 million, according to property directory Rightmove.

That’s because, from 1 April, a temporary increase in the nil-rate band – the threshold below which no stamp duty is paid – will expire after nearly two years.

From 1 April, FTBs will start paying tax from £300,000, instead of £425,000. Anything between £300,000 and £500,000 will be taxed at 5%.

That means a FTB purchasing a home at the national average (£268,087, according to the Land Registry) will continue to pay nothing. 

However, a FTB in London purchasing a £450,000 property will see their tax bill jump from £1,250 to £7,500.

It’s not just FTBs who will be hit. 

From 1 April, home movers will start paying tax from £125,000, rather than £250,000, as it is now. They’ll then pay 2% on the portion between £125,001 and £250,000, and 5% on amounts up to £925,000.

If you’re a buyer, missing that deadline will be incredibly frustrating. But is it a disaster? Maybe not. 

Granted, you’ll have to find the extra tax up front, which may mean having to raid your savings or, in some cases, delay your purchase.

But if interest rates fall over the next 12 months, as expected, you may be no worse off over the long run.

The current consensus is that the Bank of England will cut interest rates from 4.5% now to around 4% by the end of the year. Some experts believe they could fall to as low as 3.5%. That’s one percentage point less than they are now.

While mortgage rates aren’t directly tied to the base rate (they’re influenced by swap rates and global markets), a lower base rate often leads to cheaper mortgages over time.

And if mortgage rates fall enough, you could actually save more over time than you lose in upfront tax.

Mortgage numbers crunched

To show you what I mean, let’s imagine two scenarios: buying now with lower tax or waiting a year and paying higher tax, but securing a mortgage rate that’s one percentage point lower. Both properties are in England. 

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Scenario one: buy before the stamp duty deadline

• Purchase price: £268,087 (the current national average).
• Mortgage: five year-fixed rate at 90% loan-to-value (LTV), 5.4% interest rate (the current average at this tier). 30-year mortgage term.
• Stamp duty: £904.35.
• Five-year total cost (stamp duty plus five years’ worth of mortgage payments): £82,195.47.

Scenario two: wait a year

• Purchase price: £276,129 (same property but assumes prices have grown 3% in that year).
• Mortgage: 90% LTV at 5.4% for the year you spend in your old property, then 4.4% for the next four in your new property. 30-year mortgage term.
• Stamp duty: £3,404.
• Five-year total cost: £80,796.69.

Despite paying more stamp duty, you’d be nearly £1,399 better off over five years if you’d waited because lower mortgage rates have cancelled out the extra tax.

Now let’s try another example, but this time we’ll assume that you’re a home mover purchasing a £450,000 property.

Scenario one: buy before stamp duty deadline

• Purchase price: £450,000
• Mortgage: five year-fixed rate at 90% loan-to-value (LTV), 5.4% interest rate. 30-year mortgage term.
• Stamp duty: £10,000
• Five-year total cost (including stamp duty and mortgage payments): £146,451.98

Scenario two: wait a year

• Purchase price: £463,500 (same property, but assumes prices have grown 3% in that year)
• Mortgage: 90% LTV at 5.4% for the year you spend in your old property, then 4.4% for the next four in your new property. 30-year mortgage term.
• Stamp duty: £113,175 (£3,175 more)
• Five-year total cost (stamp duty and five years’ mortgage repayments): £142,407.63

In this example, you’d be more than £4,044 better off over five years, despite your higher tax bill, thanks to the lower mortgage rate you have secured on your new property.

In fact, your new mortgage rate would only need to be 0.66 percentage points lower than your current one to cancel out the effect of higher taxes.  

Clearly, the examples above are just illustrations, and they rely on certain assumptions about property values, house price growth and mortgage rates.

We can’t be sure, for example, that house prices will only increase 3% this year, although that’s what Halifax, the nation’s biggest mortgage lender, believes. 

Similarly, we can’t be sure mortgage rates will fall by one percentage point over the next year – or at all. 

I’ve also ignored FTBs in my calculations. There are two reasons for this: firstly, they will continue to pay nothing for purchases under £300,000, which should cover FTBs in most of the country outside London. 

And second, I would need to make some additional assumptions about rents for the second scenario. This would make like-for-like comparisons difficult.

But what I hope I have shown is that while it would be (incredibly) frustrating to miss the stamp duty deadline, it isn’t necessarily the end of the world. 

That’s not to say that you shouldn’t try to complete by 31 March if you can, as your savings will be even greater over the five years, especially if mortgage rates fall.

Therefore, you should make sure you are flexible, have all your paperwork to hand and are willing to badger your lender, broker and solicitor if necessary.

But if it’s looking increasingly likely that you’ll miss the deadline, don’t stress about it. Over the long-term, the impact may be far smaller than it seems today.

Photo credits: Pexels

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With thanks to talkRADIO.

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