Buying a home isn't as simple as choosing a piece of clothing from Kmart, checking its price tag, and purchasing the item at the checkout.
From stamp duty to building inspections, the list of upfront and hidden costs can be quite extensive. Almost all of the costs depend on your location and the value of the property. Here are the hidden out-of-pocket costs you should budget for when it comes time to purchase your property.
Home loan establishment fee
An establishment fee covers the cost of the documentation and set up of the new mortgage with your lender. The fees payable depend on the lender, the loan amount, and other contributing factors. Loan application fees are typically fixed or a percentage of the loan amount.
It is a one-off payment made when your loan is approved. The establishment fee generally costs anywhere between $200 to $1,000 though many lenders waive establishment fees on some products or for special promotions.
Ongoing monthly fees
Some lenders charge ongoing monthly fees, also known as administrative fees to service your loan. Even though the fee may be quite small, it can add up in the long run. Not all home loan products have this fee payable, so check if the loan you're considering includes this as a charge.
Lenders mortgage insurance
Should your loan be in excess of 80% of the property value that you are purchasing, Lenders Mortgage Insurance (LMI) is generally required to be paid. It protects the lender (not the borrower) in the event that the borrower defaults on the loan and there is still money owing after the property is sold.
LMI can be a one-off payment you pay upfront, at the time of settlement of your home loan. However, the truly hidden cost might be if you opt to roll it into the home loan. If it's rolled into the home loan i.e. you borrow the amount, you'll pay interest on it.
Valuation and settlement costs
When you're purchasing a home, a lender will likely require a valuation to determine the worth of the property. Essentially, they're making sure they aren't lending you more than the value of the home. Lender valuations tend to be on the conservative side, especially in a hot property market.
While most lenders require this to be conducted through them, some may allow you to use a third party. Generally, property valuations can cost between $200 to $600. However, some may offer free valuations.
Check with your lender to ascertain whether or not they will charge you for valuation and settlement costs when processing your loan.
Legal and conveyancing fees
Once you have found a property that you are ready to make an offer on, you will need the assistance of a conveyancer or legal representative, such as a solicitor. Conveyancers prepare, execute, and lodge all the legal documents required to enable a swift and legal sale. They also facilitate the transfer of land ownership.
Fees can include costs associated with title searches, preparing documents, and settlement fees. These fees will vary depending on how complicated the transaction is and the location of the property.
Stamp duty property taxes
Stamp duty is a state levy imposed on all property transactions - it's one of the biggest costs you'll face when buying a home. It is also known as land transfer duty.
Stamp duty can cost up to tens of thousands of dollars. The amount payable is based on the property's value, whether you are buying as an owner occupier or investment, whether you are a foreign purchaser, and if you are entitled to any concessions or exemptions.
The more expensive the home, the higher the stamp duty. For instance, a $600,000 property in NSW would set you back by just over $22,000 in stamp duty. Whereas a $800,000 property would almost $32,000.
If you're a first home buyer, you may be eligible for stamp duty exemptions and concessions. For example, in Queensland, first home buyers aren't required to pay stamp duty on properties under $550,000 and vacant land under $400,000.
Work out how much stamp duty you may have to pay with InfoChoice's stamp duty calculator.
Some states have also moved to a property tax, or at least the choice of paying one, instead of stamp duty. This usually works out to be a couple thousand a year - depending on the state and home of course. While this eliminates the hefty upfront cost, it's an ongoing one. Many states also charge additional taxes if you let the property or land sit vacant.
Insurance
Many lenders require the home to be covered by insurance in case something unexpected happens.
A home insurance policy, or sometimes called building insurance, covers the costs associated with rebuilding the home's structure in the event of a potential hazard e.g. fire, storm, flood damage.
You also can't forget about contents insurance as well. Contents insurance covers the financial cost of replacing household personal items and furnishings. Some examples of items covered are: curtains, furniture, white goods, TV, computers and other electrical appliances, clothing, and jewellery.
Both home and contents insurance are immediate and ongoing costs after buying a home.
The cost of your insurance policy is based on:
- Your desired level of cover: For example, a premium policy will cost more than a basic policy, as it includes more benefits and covers a broader range of events.
- The sum insured: the maximum amount you may receive for a total loss insurance claim on your home and contents, minus any excess owed. The sum insured amount should be enough to cover replacement or rebuilding costs for your home and possessions.
- Natural hazard risks: the suburb's risk of natural events (such as floods or bushfires) influences the cost of insurance. The higher the risk, the higher your premium may be.
- Home security: homes with security cameras, alarms, and deadbolts may have a lower insurance premium.
- The number of people living in the property
- The age and structure of the property: the insurer will note the age of the home and its construction materials to determine its sturdiness (whether it would withstand severe damage) and how much repairs/replacement may cost.
- Location of the property: suburbs with higher crime rates typically have higher premiums.
- Any extra covers you wish to add
- How the property is occupied: if the property is owner-occupied or an investment, it may affect the premium.
Owners corporation (body corporate)
If your land is subdivided (e.g. into units, apartments or townhouses) an owners corporation may need to be formed. This is also known as body corporate.
The purpose of an owners corporation is to oversee and maintain the common areas in the building such as any elevators, gyms, hallways, and gardens. It also covers the buildings' insurance and the admin fees to run the body corp/strata management.
An annual body corporate fee is required and you can organise to pay this in a once off fee or quarterly or half yearly instalments.
It can be a good idea to get an estimate of the expected body corporate charges you may be expected to pay before signing on the dotted line.
Building and pest inspections
Prior to purchasing a home, it's a good idea to have a building inspection carried out.
A building inspection fee is a small price to pay for peace of mind and can save you money on repairs in the future. Building inspections help identify any issues with the property such as faulty wiring, cracked walls, and structural damage.
Investors will gain peace of mind, knowing that what they're buying isn't going to collapse around them.
Building inspections can cost around $400-$500. A combined building and timber pest inspection is usually available at a slightly higher fee. A pest inspection will assess the property for infestations such as termites and vermin.
An optional extra might be a drainage inspection - this assesses the property's drainage, which can be handy if you live in a flood-prone area.
Some homes up for auction - typically high-end ones - might have a building and pest inspection already done, allowing you to move quickly and save on costs.
Mortgage registration and transfer fees
Mortgage registration fees and transfer fees are a state government charge for registering a mortgage and transferring the property ownership. The amounts vary by state or territory with some charging a set fee while others are on a sliding scale – often under $1,000 each.
For more information, look up the land titles or land registry office in your state or territory.
As you can see, there are many hidden or unexpected costs that you should be aware of and that you will need to budget for. By making yourself aware of all costs associated with property purchase, you should be able to maximise your borrowing power and ensure you buy the house you want at the price you can afford.
This update is not financial advice. This article is general news and information.
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