How we determine our budget is based on the price of the property that we are looking to purchase. Few buyers are actually aware of all the potential costs to buy a house. In this article, I want to provide the most complete guide to all the costs to buy a house. From before you even purchase to when you actually make the purchase that you should be aware of before purchasing property.
Cost of Searching for Property
Rarely do we even consider the cost of the search for property. The cost of the petrol and the time spent searching for property adds up. An article by Savings.com.au quoted research conducted by NAB research that showed the average first home buyer spent 44 hours looking for their first property even before even making an offer. Those 44 hours is time not spent with your kids watching their Saturday morning sports games. Time not spent conversing after weeknight dinners.
Upfront Costs to Buying A House
Deposit
The deposit is the lump sum paid to finalise the exchange of contracts. In the legal sense, it represents your intention to purchase. Generally, a 10% minimum requirement, although you can negotiate a lower amount prior to exchange. A deposit means something different to your lender.
To your lender, a deposit represents your skin in the game and your risk to the bank. A deposit in theory is the equity that you present to your bank as collateral for the bank to lend you money. You are the custodian of the property until your debt is paid off. The deposit generally needs to be at least 20% of the value of the property at purchase. If less, it will attract Lender’s Mortgage Insurance (LMI). LMI is a one-off and non-refundable premium placed on the top of your home loan. If you are a skilled professional that meets specific criteria. You can have your LMI waived as the bank sees you as a less risky bet.
Lenders Mortgage Insurance
LMI is calculated on the Loan to Value Ratio. If you can only provide an 18% deposit, the LMI will be proportionately lower than if you could only provide a 10% deposit. There are other avenues to avoid LMI, but all are focused on providing something of value as collateral. If you are a first home buyer, if your family does not have the cash to gift/lend to you and believes that you can pay your mortgage they may choose to go guarantor meaning that you do not require a deposit at all as they have provided property as collateral. This is full of risk and depends on each individual’s circumstance.
Transfer Duty/Stamp Duty
The way transfer duty will be charged in New South Wales will be overhauled. Where first-home buyers will be able to choose whether to pay a stamp duty or an annual land tax. This is part of an overall transition from a transactional tax to a broad annual land tax. There are incentives and concessions for first home buyers to enter the market which is based on their income, the region of purchase, and the price of the property. They will have to meet these requirements to be eligible for these concessions.
Conveyancing and Legal Costs
A solicitor will review a contract of sale on your behalf to ensure that there are no unreasonable terms to protect you. Upon the exchange of contracts either a solicitor or conveyancer will initiate the process of the transfer of the deed of title. This will include organising the time to pay the transfer duty, organise with the bank the payment of the funds to the vendor to conclude the settlement process. They will advise you on other costs during the process of the registration of title. Generally, these costs are nominal when compare to the other costs.
How much these costs are is depended on each individual professional but can amount to thousands of dollars. Be mindful that you may incur a cost to review the contracts of sale even if you are unsuccessful in the purchase. It’s best to ask your legal professional first to get an idea of what they will charge you for. Determine whether it’s a package or an hourly rate.
Sometimes within contracts, properties may include an obligation to comply with certain requirements. The most common example is a non compliant swimming pool. The costs of bringing the pool up to standard can be thousands of dollars and are required by law to be completed within three months from settlement. Perhaps you can negotiate the cost of compliance from the sale price, but if the property is sold at auction. It may not feel like you got it at a discount. These costs are generally not amortised over the term of the loan. This means that the purchaser will have to bear the brunt of these costs by taking money away from the deposit.
Mortgage Establishment Fees
These are the cost of the privilege for the lender to lend you money while there are hundreds of other lenders out there. Typically they are based on the loan size and can be waivered as part of a promotion.
Strata Report and Pest and Building Inspection Report
As a minimum, you should purchase one of these reports and have them reviewed by a legal professional. These reports can be provided by the vendor, be wary of free reports since you are a third party who has not paid for the report, your ability to rely on the information in a court of law is forfeit. It’s best to pay for the report. If you have your own builder or trusted building inspector. I’d strongly suggest employing them as you can ask them to look at specific features of the property that you may be concerned about such as dampness, or structural damage. A vendor’s inspector might not be so thorough. Especially if the person that is paying them is trying to sell the property.
Specialised Opinion
This cost depends on your intentions for purchasing property. If you want to build a brand new house. You may want an architect to provide you with guidance on what can be done on the site within council planning instruments. If you were looking to build into the attic, you may need a structural engineer to guide you on what needs to be done to ensure it is safe. If you wanted to do a renovation, a strata expert could help you determine whether and how you could get the works past the Owners Corporation. The cost depends on the skill level of each professional. Many require a fee to visit onsite and quote a job. Others will refund the amount of the quote is approved.
Time
As stated before time is a cost that is rarely accounted for. You must consider the time taken to inspect, then negotiate, dealing with a real estate agent. The time spent selecting your conveyancer, mortgage broker, and buyers agent and then the time spent speaking with your advisors.
Buyers Agent
A buyers agent should save you the time, stress and money in purchasing property. It is a cost of purchasing property that more than pays for itself. As you can get immediate access to an inner circle of trusted contacts that can give you early access to properties. The relationships built over years and years of purchasing mean the relationship that you believe you have with your agent is never the same as a buyers agent. A buyers agent will light the path in the acquisition process of property by avoiding the common pitfalls that many buyers fall into. As you do not have to learn the hard way from you mistakes about how to properly purchase property. Your buyer’s agent will ensure that you are making a safe purchase.
Relocation
To move to your new home could cost you thousands of dollars depending on the nature of the things that you are moving and how much of it you have. If you have a grand piano, you will need a specialist removalist. Alternatively, you could choose to do it yourself but you would need to account for the additional time, physical strain, potential injury, and likely breakages.
Opportunity Cost
This is always a consideration that pops up at the final steps of securing a property. “What if there is a better property around the corner?” Fortunately in terms of these particular costs to buy a house. There is nothing that you can do to avoid it. You make a decision based on what you want to achieve with the information that you have in front and around you. Hope it’s the right decision but at the end of the day. You need to make a decision and then live with the consequences; good or bad.
Vacancy
This cost of purchasing property only really applies to investment properties. Most tenants realise that if their rental property has been listed for sale, there is a likelihood that they will be given a termination notice from the new owner (lease depended). Some tenants may choose to leave the premises before finding out, meaning that at settlement you may find yourself with an empty rental property. The time taken to lease the property will cost you more the longer it takes. You will have to dip deeper into your pocket to pay the mortgage.
In conclusion, when considering your budget for purchasing property. It’s important to consider even the small insignificant costs. As these small costs to buy a house can add up and amount to a figure that you are uncomfortable paying or need to borrow more money to afford.
N.B. I have not included mortgage repayments as they are ongoing costs
Alexander Gibson
There are more costs to holding property, find out what they are. Book a call