What are the potential purchase costs when buying property?
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Things to consider when buying your first home
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The Deposit
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Loan to Value Ratio
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Lenders Mortgage Insurance
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Stamp Duty Concessions
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Fees
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The Lender
The Deposit
The deposit for your first home can come from a number of sources: A gift or inheritance, the sale of an asset, genuine savings, or the First home owners grant. Different lenders have different policies regarding the source of your deposit. Generally, the bigger the deposit, the more flexible they are. If you only have a small deposit, most lenders want it to be genuine savings shown over a 3 month period.
Some lenders may also consider the rent you have paid over a 6 month period.
Your deposit will determine a number of things: The LVR of your loan and also the LMI payable.
Loan to Value Ratio
Your deposit determines the LVR. If you have a 5% deposit plus costs, your LVR will be 95%. In other words, you are borrowing 95% of the value of your home and putting a 5% deposit towards your purchase. If you have a 10% deposit plus costs, the LVR will be 90%. In other words, you are borrowing 90% of the value of your home and putting a 10% deposit towards the purchase and so on. The lower the LVR, the lower the risk in the eyes of the Lender. This higher the LVR, the higher the risk.
Lenders Mortgage Insurance (LMI)
Any deposit less than 20% of the value of the property will incur Lenders Mortgage Insurance (LMI). LMI does not provide protection for you as the borrower but is a type of insurance that covers the bank or lender in the event that a home buyer was unable to repay their home loan and the property was sold by the bank at a loss.
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The cost of LMI can range from $1000 to $20,000 or more depending on the size of your deposit and how much you need to borrow. The LMI amount can be paid upfront or added to your home loan.
Most people don’t save up 20% and usually want to get into a property with around 5-10% deposit. In this case, the borrower wouldn’t pay the LMI upfront but simply add the insurance cost to the loan amount. This is called capitalizing the LMI. For example, if they had a 50K deposit for a 500K purchase. LVR is 90% so LMI is applicable. The LMI premium is $7,920 which is added to the loan.
The final loan amount is actually $450,000 + $7,920 = $457,920 (with the LMI capitalized).
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LMI is not always the enemy - Why? Well, firstly it allows you to get into a home sooner and start paying off your mortgage instead of renting. Secondly, if you are an investor with a 20% deposit, instead of buying 1 property at 80% LVR, you could purchase 2 properties with a 10% deposit on each at 90% LVR. This allows you to accumulate more property, and start your journey towards wealth creation.
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Stamp Duty
Stamp duty or Land transfer duty is the tax you pay to the Government when you purchase a block of land or an established property. Every time this property is sold, the purchaser will need to pay Stamp Duty to the Government.
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If you are a First Home Buyer, you may be eligible for a stamp duty concession or exemption – First Home Owners Rate of Duty. To be eligible for the FHOR of duty, there are thresholds to be aware of. Click on your State on our Stamp duty Exemption page to find out what the thresholds are in the State you live in HERE
If you decide to buy a property in value over the thresholds in your state, you will have to pay either a concessional rate of duty or the full duty depending on the purchase price.
Fees
There are a number of different fees to be aware of when purchasing a property. Firstly, when you find something you like, you will want to conduct a building inspection before making an offer as well as a pest inspection to check for termites etc. These are both out of pocket expenses that must be paid upfront by the buyer before you sign the contract.
Secondly once you have had your offer accepted, you may have to pay for a valuation upfront. Many of the main lenders offer free valuations, but if you are going with someone a little more boutique, you will likely pay upfront.
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As part of your finance application, there may be further fees payable to the lender such as application fees and settlement fees. Sometimes these can be waived so speak to your broker about this prior to submission.
There are also government fees which include Land Transfer fees and Mortgage Registration fees, then there is stamp duty if you are not a first home buyer or if your purchase is over the threshold amounts set by the government in your state.
Finally you will need a good settlement agent who will charge you a conveyancing fee. They will act on your behalf and ensure the settlement is executed as planned. They are an important part of the process so make sure you find a really good one. All of these fees (except stamp duty in some cases) form the Funds to complete. These must be made available on settlement on top of your deposit. If there is any shortfall come settlement time, the sale could fall through. It is part of your settlements agents job to ensure there are enough funds to complete prior to settlement.
Please see fees outlined below:
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Funds to Complete (approximately)
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Building inspection - $300
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Pest Inspection - $300
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Valuation - $300
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Application fee - $250
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Settlement fee - $600
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Land transfer - $250
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Mortgage registration - $180
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Conveyancer / Settlement agent - $800 - $1,800 depending on complexity
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Stamp duty - $1000 - $20,000 plus depending on loan amount.
Note: Stamp may be applicable if you are not a first home buyer or the property value is over the threshold in your state)
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Calculate your stamp duty below, or contact us and we can give you a full cost analysis.
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The Lender
Finally, there are many things to consider when choosing a lender: Some lenders offer to capitalize your LMI, and some do not. Some lenders capitalize LMI & charge you a higher rate as the risk is higher. Other lenders charge you a higher rate if your Loan to Value Ratio is high ie above 90% LVR. For example 90% LVR could offer a rate of 3.69% whereas a 95% LVR might be more like 4.89% or higher. Finally, some lenders will offer you a high LVR, with no LMI but charge a higher rate still – 5.00% +
Some lenders have great post-settlement variation processes, allowing you to transition to a lower rate once you have paid off some of your loan, whilst others, do not.
With so many considerations, it can be overwhelming buying your first home. This is why it is best to talk to your Mortgage Adviser, as they can help you work out which is the best option for you.
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