Some homebuyers and investors make the mistake of concentrating on the price of the property alone.
They complete their calculations on the property's potential sale price and what the mortgage repayments or weekly rent are likely to be.
But many fail to include all of the other costs associated with buying property, which can leave them out of pocket in the lead-up to settlement as well as cause unnecessary financial headaches.
So, in this article, we'll outline all of the upfront and ongoing costs associated with buying property to ensure you understand the true cost of investing in real estate.
1. Purchase price
The biggest expense is, of course, the purchase price of the property, which is likely to be financed via your own savings or equity as well as a mortgage.
While some lenders will ask for a deposit of 10 per cent, the Australian Securities and Investment Commission says aiming for a deposit of 20 per cent or more of the purchase price, plus enough to cover added costs, is a good goal.
Across Australia, state governments also have a variety of first homeowner grants which you may qualify for making finding that deposit a little easier.
2. Loan application fee
As if lenders don't make enough money from borrowers during the lengthy mortgage periods, many also charge a loan establishment, up-front, start-up or set-up fee.
It is generally a one-off payment to your lender when your loan commences.
Fees can vary depending on your provider and will cover things such as credit checks, property appraisals and basic admin.
3. Government fees
In Australia, the purchase of real estate attracts quite a significant state government tax, which can leave a big hole in your pocket if you haven't budgeted for it.
Stamp duty is a land/property transfer tax applied by all Australian state and territory governments and is one of the most largest upfront costs you’ll have to pay.
It can vary greatly depending on where your property is located and is calculated as a percentage of the sale price – so the higher the price, the more stamp duty you pay.
Mortgage registration and transfer fees also apply and differ from state to state.
If you’re a first-time home buyer, visit your state government website to see if you’re eligible for stamp duty concessions.
Also, depending on your personal circumstances, the value of the property and the type of property, you may be exempt from paying stamp duty so be sure to do your research.
4. Legal and conveyancing fees
When buying property, it's important to engage a real estate conveyancer or solicitor who specialises in conveyancing.
They’ll prepare the documentation and conduct the settlement process on your behalf.
The costs will vary depending on the property you buy and the person you use.
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5. Lenders mortgage insurance
Another big cost when buying real estate can be lenders' mortgage insurance (LMI) if you don't have a big enough deposit.
LMI is a type of insurance that protects the lender (not you) from borrowers who can’t repay the loan.
If you have a deposit equal to or more than 20 per cent of a property’s purchase price, generally you won’t be asked to pay this insurance.
Under this amount, however, means you'll generally have to pay LMI, but this can be capitalised on top of your loan so you don't necessarily have to pay for it upfront.
6. Inspection reports
Building, pest and strata inspection reports will alert you to structural problems or defects that may not be visible — asbestos, termites, electrical, ventilation and plumbing faults and the like.
A strata report, if you’re buying a townhouse or apartment, can also tell you whether the property is well-run, well-maintained and adequately financed.
7. Moving costs
If you have purchased an owner-occupied home, then following settlement you'll need to move into the property.
Moving costs can vary depending on how far you need to travel as well as how many big strong moving people you hire to help you shift into your new home.
8. Loan repayments
After your mortgage has been successfully established and you've shifted into your new home or have secured tenants, you need to start repaying your borrowed money.
You can generally choose to repay the loan weekly, fortnightly, or monthly.
Depending on whether the property is owner-occupied or rented, you'll need to consider whether to have a principal and interest loan or an interest-only one.
9. Interest charges
The biggest cost of all is the interest charges on the home loan, which can end up being many times the original sale price of the property if the mortgage is repaid over 30 years.
Of course, if the property is an investment, the weekly rent will generally cover the interest charges so you don't have to dip into your own pocket.
Given the significant impact that interest charges can have on the home loan, it's always a good idea to compare what different lenders can offer and check out the comparison rate.
You can generally choose a fixed or variable interest rate or a combination of the two.
This is worth some research as it can make a big difference to your repayments, particularly if interest rates move up or down.
While these are the major upfront and ongoing costs of owning real estate, there are a few other ongoing expenses that you should also budget for:
- Strata fees for communally managed properties
- Council rates
- Utility costs — water, gas and electricity (if owner-occupied)
- Building, contents or landlord insurance
- Any optional home improvements or renovations
- Property maintenance and if you’re leasing out your property — property management fees.
While there are several costs associated with buying property in excess of the sale price alone, by understanding what these are and budgeting for them from the outset, then every homebuyer and investor can sit back and watch their asset grow in value over time.
