You’ve been saving hard for a deposit for your first home and reckon you’re just about ready to buy. But are you? It pays to remember the loads of extra costs of buying a home.
In this week’s show, Sally Tindall from RateCity talked us through the many additional costs to look out for. Spoiler alert: unfortunately the “minimum 10 per cent deposit” you’re busy saving for really is the bare minimum.
Watch the segment, and then read on for more info:
As Sally points out, it’s never cheap to buy property. She likens getting the minimum deposit together as “scaling Everest” and it can definitely feel like that. Property prices are climbing, so it can feel like a real triumph when you finally stack together the necessary amount. Be warned, however. The deposit is just the beginning of your climb. There are many “extra” costs associated with buying property. Here are some to look out for.
The extra costs of buying a home
1. Stamp duty
This government tax will be your biggest additional cost after the property purchase price. Sally estimates that you’ll pay around four per cent of the property’s value. The amount of stamp duty you will have to pay varies considerably depending on factors like:
- which state you live in;
- whether you’re a first home buyer or not;
- the purpose of the property you’re purchasing (eg. a home you plan to live in as your primary residence or an investment property); and
- the type of property it is (eg. existing home, new home or vacant land).
Read more: So, you’re buying your dream home… now what?
Other factors like whether you’re classified as a foreign purchaser will also come into play. You can use an online stamp duty calculator to find out how much you will pay. Find out more by visiting the revenue office of your state:
- Australian Capital Territory
- New South Wales
- Northern Territory
- South Australia
- Western Australia
2. Lender’s mortgage insurance
Unless you have a 20 per cent deposit, or someone who will act as a guarantor, your lender will generally insist that you take out lender’s mortgage insurance (LMI). LMI is an insurance policy that protects the lender if you can’t afford to meet your loan repayments.
Note that even though you pay for it, LMI is there to protect the lender, not you, the borrower. It’s not there to protect you in case you can’t make your mortgage repayments. That’s a different insurance policy called mortgage protection insurance (or sometimes mortgage repayment insurance).
Instead, LMI reduces the risk to the lender in giving you a loan. Your lender can claim on the policy if the property needs to be sold and the sale does not equal the unpaid value of the mortgage.
Some of the factors that affect the cost of LMI include:
- Your deposit amount – the higher your loan-to-value ratio (LVR), the higher the cost of LMI.
- The size of your home loan – the more you are borrowing, the greater the risk to your lender
- The purpose of the property you’re buying – will you live in the property, or are you buying it as an investment?
- Your employment status – whether you are a full-time, part-time or casual employee may affect the perceived risk of giving you a loan
- The insurer used by the financial institution – premiums can differ between institutions
LMI can run into many tens of thousands of dollars. In many (if not most) cases you will be better off saving a 20 per cent deposit rather than paying for the policy.
3. Mortgage establishment fees
These fees vary between lenders, but all lenders will have some kind of additional charges to set up your mortgage. Some examples include:
Application fee – aka ‘start up costs’ or ‘establishment fee’. This fee starts at around $100, but can be significantly more. You can ask your lender to waive their application fee as a sweetener, and some banks won’t charge the fee at all.
Property valuation costs – in order to reduce their risk, lenders may engage a third party to inspect and value the property to ensure that the amount you are borrowing is appropriate to the estimation. The fee for this will depend on your lender and where the property you are buying is situated.
Legal costs and document preparation – these may be included in the mortgage establishment fee, or listed separately.
Note that there may also be ongoing fees to pay for the life of your loan. They can be a one-off payment or a monthly ongoing fee. This includes administration like monthly service fees, redraw costs, default fees or extra repayment charges. Be sure to discuss additional mortgage fees with your lender when you take out your loan.
4. Transfer fee
State governments charge a fee to transfer the title of the property from the seller to the buyer. This varies a lot between states and territories, so click on your state to check what fee you’re up by visiting the revenue office of your state. You’ll find the links under ‘stamp duty’ above.
5. Legal fees
While it’s possible to complete the legal requirements of buying a home yourself, it’s not advisable. You should seek legal assistance from either a solicitor or property conveyancer. They will help you with things like:
- Ensuring the seller is legally entitled to sell the property to you and that there are no encumbrances on the property (an encumbrance is a claim against a property by a party that is not the owner.)
- Reviewing and exchanging the contract of sale
- Arranging to pay the stamp duty you owe (see ‘stamp duty’ above)
- Looking after the transfer of the title of the property from the seller to you (see ‘transfer fee’ above)
- Checking the strata body corporate records and organising a strata inspection (if your buying a unit that’s part of a strata scheme)
6. Property inspections
It’s important to get professional pest and building inspections done before you purchase. Sally estimates that these will cost around $300-$500 per report, so it can be tempting to ‘DIY’ these inspections. Don’t do it, because nothing beats professional reassurance.
Sure, inspection fees can really add up (especially if you need to get them done for more than one property). However, it’s worth the peace of mind. Money spent upfront can uncover hidden issues with the property that can run into many thousands of dollars. For instance, the last thing you want to find when you move into your ‘dream home’ is a neighbourhood of termites living in your walls.
7. Home and contents insurance
You’ve bought it, you’ve mortgaged it and now you will want to insure it. The cost of home and contents insurance varies widely, so it pays to do your homework. Using a comparison website can make this simple. You can input your own particular circumstances and compare the offerings of many insurers in one hit. Try to see what’s on offer through at least three of these sites, as they will differ. Try a website like:
“One of the biggest mistakes you can make is not leaving anything in reserve,” says Sally. “Roofs leak, hot water systems can blow, so just make sure you have enough to ride out a few rainy days.”
So, take into consideration all the extra costs of buying a home and then add another ten per cent or more. Remember, as well as all the emergencies that can occur with home ownership, you’ll also want to furnish, decorate or even renovate your new purchase. Having a reserve in the bank will help you turn your new property purchase into a home to build your future in.
This article contains general information only. It should not be relied on as finance or tax advice. You should obtain specific, independent professional advice from a registered tax agent or financial adviser in relation to your particular circumstances and issues.