When we purchase either a main residence or investment property, we should not just focus on the initial purchase figure. There are other 'hidden' fees involved in the purchase and all these costs should be factored into the overall buying budget.
Here are the most common of the fees that the buyers should be familiar with:
1. Lenders mortgage insurance
Generally, buyers are required to have at least a 20% cash deposit before they can secure a home loan. But today, with the availability of lenders mortgage insurance, this amount has been reduced to a manageable 5%. To take advantage of this, a borrower will need to pay for lenders mortgage insurance (“LMI”), which provides insurance in circumstances where the buyer is unable to continue making their mortgage repayments. The borrower is able to either pay this amount upfront or spread it across the entire life of the loan.
Approximate cost: A few thousand dollars, depending on the property’s value and how much you decide to borrow. For example, for a property valued at $800,000, borrowing $700,000 could cost the borrower about $10,000 to $15,000 in LMI fee, whereas borrowing $750,000 will see the premium jump to $30,000 plus.
2. Stamp Duty
Stamp duty, also known as land transfer duty is a tax enforced by state governments whenever a buyer purchases a property. This fee needs to be paid upfront within a certain period of time after settlement day. The fees vary from state to state, but it can cost a buyer tens of thousands of dollars, depending on how much the property was purchased for. Stamp duties are generally more expensive for investors than homeowners, and unfortunately, it’s not a tax-deductible expense, though it can be added to your cost base when you sell the property.
Approximate cost: Costs differ in each state and territory’s jurisdictions. For example, in NSW, if the property value is $600K, the stamp duty cost is $22,490. If the property value is $1.2M, the stamp duty cost is $51,490 for 2018/2019 income year.
3. Conveyancing and legal fees
A number of experts will need to come on board to assist a buyer in securing a property. After obtaining a mortgage or a pre-approval for a home loan, you will need funds to pay a solicitor or conveyancer to handle the legal side of purchasing a property. Not only will they prepare all the necessary legal documents but they will submit them and make sure everything is done correctly and by the enforced due date. Furthermore, they can assist with the property’s change of title on settlement day.
Approximate cost: Legal costs can vary from a few hundred dollars to approximately $2,000. Be sure to get an estimate of costs in writing prior to engaging their services.
4. Mortgage application fee
Mortgage application fees represent the cost of establishing or opening your home loan with a lender.
Approximate cost: It costs between $300 and $750. It’s worth asking your lender (bank) whether they will consider waiving this fee, as many are known to do so under certain conditions and circumstances in order to get your business.
5. Pest and Building costs
Prior to finalising the purchase of a property, it’s advisable to look out for any problems. Warning signs can include pests on the property, unstable building foundations, dampness, a sinking roof and a subsiding floor. These are all best assessed by a qualified pest inspector, and a building inspector or surveyor, who have the experience to determine where the problem sits on a risk scale, and how much rectifying any problems will cost you.
Approximate cost: Up to $1,000
6. Home, contents and landlord insurance
In most states and territories, building insurance is legally required to be in effect from the date you sign the contract, or from the settlement day. Just to be safe, investors should shop around for a landlord insurance policy that will take effect on settlement day.