Buying Real Estate Part 5 - Costs of Buying a Home and Your Budget
The hidden costs of buying real estate and working out your budget
Planning Ahead is Key
Buying a new home means you will need to plan ahead for all the costs associated with the purchase.
It's crucial to plan ahead and think of factors such as stamp duty, legal fees and ongoing expenses so you know the true cost of your home. This will help you determine whether you can afford it and keep up with ongoing payments. Here is an overview of some hiddens costs you shoudl be aware of:
There are a number of fees associated with taking out a home loan so it’s critical that you get a clear picture of what you’re facing before you sign.
Loan establishment fees can range from zero to $1000 so make sure you check with your lending specialist.
Every lender requires a valuation of a property before they are willing to lend, this is to ensure that the property is worth the asking price. A standard valuation generally costs between $300 to $500.
Lenders Mortgage Insurance (LMI)
If you want to borrow more than 80% of the property purchase price you will normally be charged Lenders mortgage insurance. This insurance payment covers the lender in the event that you can’t pay the home loan back.
Get your budget and savings in order well before you buy to avoid this hurdle! The cost of LMI will vary depending on how much you borrow and the type of loan you select but it will be approximately $10,000.
When you’re spending your life savings on purchasing property it makes sense to protect it. While building insurance is a compulsory requirement from your lender, there are other insurance policies that you should consider.
For example mortgage protection insurance will ensure your mortgage repayments are met should you fall seriously ill. Income protection insurance will also help pay the bills should you be hit by an accident, major trauma or illness.
Buying a home is fundamentally a legal process so the help of legal experts, namely conveyancers and solicitors is critical. They will be an invaluable part of property negotiations and can help you through the paperwork. However remember they will charge a fee so make sure you factor this in. Some conveyancers will charge a flat fee while others will charge a sliding fee based on the properties sale price. Make sure you discuss fees and charges before you engage their services.
Building, Pest and Strata
Having a building and pest inspection carried out on any property is usually a requirement by the lender but they are well worth investing in regardless.
If you are considering purchasing a unit or apartment, it is also in your best interest to have a strata inspection conducted – that is a report on the assets, liabilities and financial position of the apartment complex.
While having a building, pest or strata inspection completed on the potential property will cost you initially, it could be an invaluable safeguarding against buying a lemon.
Expect to pay around $400 for a building or pest inspection and around $200 for a strata report.
Council Rates and Strata Fees
Once a seller hands their property over, you immediately inherit all of the attached council and strata fees.
While both owners of houses and units are obliged to pay council rates, it is only owners of units or apartments that will have to incur strata fees.
Strata fees cover the property’s grouped maintenance and building insurance fees and are collected by the building's owners' or manager. These fees are ongoing costs that will continue to absorb your finances, generally quarterly, even after your initial property purchase payment, so it’s important to incorporate these into your ongoing budget.
The scope of strata fees will vary considerably depending on the age of the building, facilities, and location but you should expect to pay around $70 to $80 for the lodgement of application.
This can be one of the biggest extra expenses you will need to pay when buying a home so it is really important you factor this in when you are budgeting.
Stamp duty is effectively tax on the land, and the amount will vary depending on where you want to buy and how much the property costs. However some states, such as Victoria, provide concessions to first home buyers that can significantly reduce the impost caused by this tax. Sometimes the concessions can be up to 50 per cent of the overall tax, depending on the state and criteria, so it should not be overlooked.
For example if you were buying a property in NSW that cost you $520,000 you will be charged approximately $18,890.00 in Stamp Duty fees. If you were spending the same amount on a home in Queensland you would have to pay an additional $9450.00 in Transfer tax. These fees can really add up so make sure you factor them in early.
Having a Little Bit Extra
You may have done all your research and been prepared for all the major hidden extras, but you should always set aside a little bit extra for those expenses you are not expecting. Expenses like moving fees, utility connections, mail redirection etc.
Everything Adds Up
It is really important to consider all the extra costs that can / will apply to your property purchase otherwise the settlement time can be extremely stressful.
As a general rule if you factor in an additional 5-7% of the purchase price, on top of your deposit it should be approximately enough to help you cover the hidden extras.
Refinancing your Loan
As you will likely have equity built up in your home loan, you might be able to access this to cover the deposit for your new home. This is done through a simple refinance with your mortgage lender.
However, before you choose to refinance, you might want to ask yourself whether you are happy with your current home lender or if there are better deals you could find elsewhere. LJ Hooker Home Loans can help compare home loan products and help find the best one for you.
Perhaps you would like to tie down a more competitive interest rate to save you money in the long run. Alternatively, you might find you want to switch to a fixed rate loan rather than variable.
It's important to remember refinancing your loan can result in fees, so you will need to factor this into your budget.
Alternatively, you could look into bridging finance to fund the gap between your old home and your new one. This can be expensive and place pressure on you to find a home within the bridging period. This is usually a temporary loan that only lasts for a few months.
If you've got your eye on a home that is more expensive than your current one, it's likely you'll need to borrow more to fund the difference.
This means you'll need to reassess your borrowing capacity with a lender and discuss how changes in your financial circumstances may affect the amount you can borrow. LJ Hooker Home Loans will help find the right loan for you.
Searching for a Home
Once you have a figure in mind for how much you want to spend on a home, you can begin your search. Fortunately, there are many tools on the internet to help you do your due diligence before buying your second home.
Keep an eye on price reports from local Real Estate Institutes and other property researchers to find the best areas to buy.
It also pays to get in contact with a real estate agent who can stay on the lookout for properties that meet your taste and your budget.