How much does it cost in total to buy a property? Four costs that people often forget about…
Don’t let the total cost of purchasing a property give you a headache at the last minute…!
I get quite a few clients who don’t realise the overall purchase costs of buying a house which means either disappointment as they don’t have a big enough deposit for what they’ve been looking at on realestate.com.au or they end up with a greater expense in taking out a loan than they were expecting. It is human nature to only focus on the price you are paying for the house but you’ll also need to factor in the below costs so you know how much you are able to spend:
Stamp Duty and Transfer Duty
I’m no legal expert so my wording might not be what is in a textbook but this is basically a duty that is usually paid when a property is transferred from one person/entity to another. There are some exceptions but in ‘normal’ property transfers this is payable.
Just to make things more complicated for everyone, each State has it’s own Stamp Duty law at it’s own rate! Fortunately there are calculators that can help with the cost – here is a good link for a simple calculator http://www.afgonline.com.au/stamp-duty-calculator/
So on a $500k property purchase in South Australia for an owner occupied established home, Stamp Duty and Transfer Duty totals over $25,300 therefore meaning you need to finance $526,000. If you had a $50k deposit (10% of the purchase price). All of a sudden you are now just over the maximum 95% loan compared to the value of the property that most lenders will go to!
Lenders Mortgage Insurance (LMI)
LMI is insurance that covers the lender against loss if the loan size is above a certain % of the value of the property – generally LMI is charged above 80% for fully verified loans and 60% on lo-documentation loans.
Most lenders will allow LMI to be capitalised into a loan but only to a certain extent. So for our example above (assuming the loan is for $475k the maximum for a $500k purchase for most lenders), if the LMI premium is capitalised this will add almost another $18,000 on-top of your loan giving a final Loan to Value Ratio of 98.69% which is higher than almost all lenders limits for home loans! The borrower would be expected to put in enough extra contribution to bring this down to, on average, 97% which of course needs to be budgeted for.
Other Transaction Costs
Other items that purchases need to think about (and that will be taken into consideration in a loan application) is:
*Establishment costs of the loan – whilst there are many packages now that almost eradicate all upfront loan establishment costs such as Application Fee, Valuation Fees and Legal Fees, many still have all of the above and also some ‘hidden’ settlement fees;
*Government Fees – registration of mortgage is payable, generally not much but differs from state to state;
*Professional Fees – conveyancers are generally a good idea to ensure that the transaction goes smoothly. We generally provision for a fee of around $1k but obviously is dependent on your conveyancer. If you are selling a house and upgrading, you’ll need to factor in selling costs such as the real estate agent fees as well as the discharge of the mortgage etc.
Post Transaction Costs
What are your plans after the property has settled? Do you have funds for any renovations or new furniture you may require? Do you have sufficient funds to cover an event if something goes wrong like your car breaking down (or accidentally running through a red light – that is expensive as I found out!)?
Leaving yourself very short after a property purchase can be painful to say the least! As with most other major events in your life, purchasing a house should trigger a review of things like insurances so you know what you are covered for if something were to happen and from there you can figure out how much you you require in liquid funds. At the end of the day though a bit of pre-planning with a purchasing budget should set expectations and keep everyone’s stress levels at a minimum.
It is always a good idea to sit down and figure out the whole picture before visiting those open homes which will mean you have a clearer picture of what you can and cannot afford when going into the property market whether it is for an investment property, your first home or an upgrade to a bigger home.
Of course there are a range of options that can influence the total cost and structure of a transaction so rather than trying to figure it out yourself, engage the services of an expert mortgage broker like myself. It might just save you a whole lot of time, some heartache and a bit of cash.
If you have any friends or family looking to purchase a property in the near future, even if they are only just thinking about it, I am more than happy to help them through the complicated process! We can help you work through the best solution to get you what you want. Feel free to pass on my details and get them to contact me via email, SMS, Facebook or the good old trusty phone!
Mobile: 0400 986 020
Facebook: Gareth Thomas – Jobelle Finance