Buying your first home? Prepare to pay $15,000 before moving in

Buying your first home? Prepare to pay $15,000 before moving in

RateCity investigates the real cost of buying a home.

July 30, 2010

There is sometimes more than meets the eye when it comes to the cost involved when buying a home and taking on a mortgage. Aside from saving for the deposit (which is generally 5 to 10 percent of the purchase price), you will need to outlay additional money for costs before you even buy the house, during the home loan process and then once you have purchased the property, including:

  • Stamp duty: this property tax will depend on which state the property is in, if you are a first home buyer or not, the value of property, your loan amount and whether you will live in the dwelling or rent it out. For instance, if you are a NSW first home buyer purchasing a home valued at $300,000 with a loan size of $270,000, stamp duty will cost you nothing however you will still be up for registration and transfer fees of approximately $295 and if you are not a first home buyer it will cost you approximately $9285. Whereas in Victoria using the same details it could cost you over $12,300 regardless of whether you are a first home buyer or not. For a $300,000 property and a $270,000 loan size, the current national average cost of stamp duty for a first home buyer is $4647 and non first home buyers is $9736.
  • Conveyance fees: depending on the conveyancer or solicitor the cost usually ranges from $600 to $2500 (average $1550). Ask them to disclose the cost upfront so you know what you’ll be up for.
  • Building and pest inspections: building inspections range from $250 to over $2000, depending on the size of the property. Pest inspections can cost between $200 and $400.
  • Mortgage establishment fees: this will depend on the lender and the amount you borrow. The average cost is $666 which includes application fees, legal fees, valuation fees and administration charges.
  • Lenders Mortgage Insurance (LMI): if you borrow more than 80 percent of the purchase price you will need to pay LMI which is usually an upfront fee. For example, for a $300,000 mortgage borrowing 90 percent ($270,000) LMI would cost about $3800.
  • Removalist fees: moving will cost you between $200 to around $1500 depending on how far you have to travel, whether you do it yourself or hire removalists and how many trips are required.
  • Home and contents insurance: depends on a number of factors including the price of your home, location, value of your properties contents and the insurance company. The cost can range anywhere from $700 to thousands. It’s recommended to sign up for insurance straight after the cooling off period and before settlement because if the house burns down for instance it’s your responsibility.
  • Council Rates: calculated based on the value of your home multiplied by the rate in the dollar (which is determined by the council according to their revenue and total capital improved value of properties in the area). For instance if your property is valued at $300,000 and the council rate in the dollar is 0.42 cents, your rates will be $1260.

The total cost estimated for a first home buyer before the outlay of buying a property is about $15,000 and for non first home buyers it’s about $20,000! Before you fall off your chair, there are ways of reducing the cost.

  • First Home Owner Grants (FHOG): depending on which state your property is in, you may be eligible for a FHOG. For instance in NSW you could receive $7000 to use towards purchasing your home and fees involved. Visit www.firsthome.gov.au for more information.
  • First Home Plus Scheme: some states offer an exemption from stamp duty which could save you a significant amount of money. For example in NSW you may receive an exemption of stamp duty of up to $17,990.
  • DIY: drastically reduce costs by investigating ways of doing things yourself. For example, purchasing your own conveyancing kit for around $200 could save you hundreds. However, there can be some risks involved so make sure you do your research beforehand.
  • Become your own removalist: hire a truck and do the moving yourself. Truck rental varies but usually around a couple of hundred dollars per day.
  • Compare home loans online to find a mortgage with a low interest rate and low fees which will make the costs involved with buying a home well worth it.

 

 

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Learn more about home loans

What fees are there when buying a house?

Buying a home comes with ‘hidden fees’ that should be factored in when considering how much the total cost of your new home will be. These can include stamp duty, title registration costs, building inspection fees, loan establishment fee, lenders mortgage insurance (LMI), legal fees and bank valuation costs.

Tip: you can calculate your stamp duty costs as well as LMI in Rate City mortgage repayments calculator

Some of these fees can be taken out of the mix, such as LMI, if you have a big enough deposit or by asking your lender to waive establishment fees for your loan. Even so, fees can run into the thousands of dollars on top of the purchase price.

Keep this in mind when deciding if you are ready to make the move in to the property market.

How much is the first home buyer's grant?

The first home buyer grant amount will vary depending on what state you’re in and the value of the property that you are purchasing. In general, they start around $10,000 but it is advisable to check your eligibility for the grant as well as how much you are entitled to with your state or territory’s revenue office.

What is a low-deposit home loan?

A low-deposit home loan is a mortgage where you need to borrow more than 80 per cent of the purchase price – in other words, your deposit is less than 20 per cent of the purchase price.

For example, if you want to buy a $500,000 property, you’ll need a low-deposit home loan if your deposit is less than $100,000 and therefore you need to borrow more than $400,000.

As a general rule, you’ll need to pay LMI (lender’s mortgage insurance) if you take out a low-deposit home loan. You can use this LMI calculator to estimate your LMI payment.

What is an ongoing fee?

Ongoing fees are any regular payments charged by your lender in addition to the interest they apply including annual fees, monthly account keeping fees and offset fees. The average annual fee is close to $200 however there are almost 2,000 home loan products that don’t charge an annual fee at all. There’s plenty of extra costs when you’re buying a home, such as conveyancing, stamp duty, moving costs, so the more fees you can avoid on your home loan, the better. While $200 might not seem like much in the grand scheme of things, it adds up to $6,000 over the life of a 30 year loan – money which would be much better off either reinvested into your home loan or in your back pocket for the next rainy day.

Example: Anna is tossing up between two different mortgage products. Both have the same variable interest rate, but one has a monthly account keeping fee of $20. By picking the loan with no fees, and investing an extra $20 a month into her loan, Josie will end up shaving 6 months off her 30 year loan and saving over $9,000* in interest repayments.

What is a comparison rate?

The comparison rate is a more inclusive way of comparing home loans that factors in not only on the interest rate but also the majority of upfront and ongoing charges that add to the total cost of a home loan.

The rate is calculated using an industry-wide formula based on a $150,000 loan over a 25-year period and includes things like revert rates after an introductory or fixed rate period, application fees and monthly account keeping fees.

In Australia, all lenders are required by law to publish the comparison rate alongside their advertised rate so people can compare products easily.

How do I refinance my home loan?

Refinancing your home loan can involve a bit of paperwork but if you are moving on to a lower rate, it can save you thousands of dollars in the long-run. The first step is finding another loan on the market that you think will save you money over time or offer features that your current loan does not have. Once you have selected a couple of loans you are interested in, compare them with your current loan to see if you will save money in the long term on interest rates and fees. Remember to factor in any break fees and set up fees when assessing the cost of switching.

Once you have decided on a new loan it is simply a matter of contacting your existing and future lender to get the new loan set up. Beware that some lenders will revert your loan back to a 25 or 30 year term when you refinance which may mean initial lower repayments but may cost you more in the long run.

What are the pros and cons of no-deposit home loans?

It’s no longer possible to get a no-deposit home loan in Australia. In some circumstances, you might be able to take out a mortgage with a 5 per cent deposit – but before you do so, it’s important to weigh up the pros and cons.

The big advantage of borrowing 95 per cent (also known as a 95 per cent home loan) is that you get to buy your property sooner. That may be particularly important if you plan to purchase in a rising market, where prices are increasing faster than you can accumulate savings.

But 95 per cent home loans also have disadvantages. First, the 95 per cent home loan market is relatively small, so you’ll have fewer options to choose from. Second, you’ll probably have to pay LMI (lender’s mortgage insurance). Third, you’ll probably be charged a higher interest rate. Fourth, the more you borrow, the more you’ll ultimately have to pay in interest. Fifth, if your property declines in value, your mortgage might end up being worth more than your home.

How much money can I borrow for a home loan?

Tip: You can use RateCity how much can I borrow calculator to get a quick answer.

How much money you can borrow for a home loan will depend on a number of factors including your employment status, your income (and your partner’s income if you are taking out a joint loan), the size of your deposit, your living expenses and any other debt you might hold, including credit cards. 

A good place to start is to work out how much you can afford to make in monthly repayments, factoring in a buffer of at least 2 – 3 per cent to allow for interest rate rises along the way. You’ll also need to factor in additional costs that come with purchasing a property such as stamp duty, legal fees, building inspections, strata or council fees.

If you are planning on renting the property, you can factor in the expected rental income to help offset the mortgage, but again it’s prudent to add a significant buffer to allow for rental management fees, maintenance costs and short periods of no rental income when tenants move out. It’s also wise to factor in changes in personal circumstances – the typical home loan lasts for around 30 years and a lot can happen between now and then.

Will I be paying two mortgages at once when I refinance?

No, given the way the loan and title transfer works, you will not have to pay two mortgages at the one time. You will make your last monthly repayment on loan number one and then the following month you will start paying off loan number two.

Does Australia have no cost refinancing?

No Cost Refinancing is an option available in the US where the lender or broker covers your switching costs, such as appraisal fees and settlement costs. Unfortunately, no cost refinancing isn’t available in Australia.

Can I change jobs while I am applying for a home loan?

Whether you’re a new borrower or you’re refinancing your home loan, many lenders require you to be in a permanent job with the same employer for at least 6 months before applying for a home loan. Different lenders have different requirements. 

If your work situation changes for any reason while you’re applying for a mortgage, this could reduce your chances of successfully completing the process. Contacting the lender as soon as you know your employment situation is changing may allow you to work something out. 

Can I get a home loan if I am on an employment contract?

Some lenders will allow you to apply for a mortgage if you are a contractor or freelancer. However, many lenders prefer you to be in a permanent, ongoing role, because a more stable income means you’re more likely to keep up with your repayments.

If you’re a contractor, freelancer, or are otherwise self-employed, it may still be possible to apply for a low-doc home loan, as these mortgages require less specific proof of income.

Will I have to pay lenders' mortgage insurance twice if I refinance?

If your deposit was less than 20 per cent of your property’s value when you took out your original loan, you may have paid lenders’ mortgage insurance (LMI) to cover the lender against the risk that you may default on your repayments. 

If you refinance to a new home loan, but still don’t have enough deposit and/or equity to provide 20 per cent security, you’ll need to pay for the lender’s LMI a second time. This could potentially add thousands or tens of thousands of dollars in upfront costs to your mortgage, so it’s important to consider whether the financial benefits of refinancing may be worth these costs.

Is there a limit to how many times I can refinance?

There is no set limit to how many times you are allowed to refinance. Some surveyed RateCity users have refinanced up to three times.

However, if you refinance several times in short succession, it could affect your credit score. Lenders assess your credit score when you apply for new loans, so if you end up with bad credit, you may not be able to refinance if and when you really need to.

Before refinancing multiple times, consider getting a copy of your credit report and ensure your credit history is in good shape for future refinances.