Buying your first home is an exciting time and a major decision. It can also be a little overwhelming when trying to understand the actual amount you'll need to land your new home.
Forewarned is forearmed – so this handy guide will run you through some of the main upfront (and less obvious costs) involved.
The most apparent upfront cost. In most cases you can borrow up to 95% of your home’s value – but the more significant the deposit you can save, the better. 20% of the value is a good benchmark. Any less, and you’ll likely need to pay Lenders Mortgage Insurance (more on that below).
If you need to borrow more than 80% of the amount your property value, you will most likely need to pay Lenders Mortgage Insurance. LMI protects lenders against a loss if a borrower can no longer afford their loan repayments. It’s a one-off fee based on several factors, including the loan amount and ‘loan-to-value' ratio – generally valued at around 1-3% of your loan amount. While you don’t need to pay LMI upfront, it’s added to your loan, which accrues interest.
If you’re finding it difficult to raise the 20% deposit, it could be worth investigating a limited guarantee. A limited guarantee can allow a parent or close relative to guarantee the portion that makes up what you need for the deposit – no more. This means less risk for the guarantor compared to a traditional guarantee, and the guarantee might not be needed after a couple of years. This could save you thousands of dollars in LMI or save you years of saving.
Deposit aside, stamp duty will be your second upfront cost. The rate of stamp duty payable depends on the price of the propery, and the more expensive the property, the higher the rate of tax. Each Australian state levies stamp duty at different rates, but as a general rule of thumb, stamp duty can add 4% to the purchase price – though if you’re a first-time buyer, you’ll likely qualify for a grant or exemption (which varies according to state and territory).
You’ll need to cover various legal costs as part of the sale, which can include paying a conveyancer to legally transfer ownership of the property, property and title searches to ensure the seller is legally entitled to sell the property, and possible strata inspections and record checks. Depending on the complexity, legal fees can range from a few hundred to a few thousand dollars.
Building Insurance is compulsory, and while premiums can vary widely from state to state, you can reckon on costs of around $1,000 per year for home insurance, and about $500 for contents.
It’s worth undertaking one of these inspections before the sale, as it’s much cheaper to identify a potential problem beforehand (usually for a few hundred dollars) rather than paying large amounts to eradicate any issues after the fact.
While not compulsory, Consumer Credit Insurance is well worth investigating, as it provides some cover if you can't meet the repayments on your credit contract or loan due to losing your job or becoming sick or injured. Payments are made directly to the lender, and monthly costs vary depending on the size of the loan, your financial situation and other factors.