What are the real costs of buying a home?

Many home buyers, especially those purchasing for the first time, think that the cost of a home starts and finishes with the purchase price. However, this is not the reality!

It’s important to know what fees you may be up for before you make your purchase. You’ll need to work out which fees apply and prepare a budget so you know you’ll have the funds to complete the purchase.

When you come on board as an Aurora Finance Group customer, we’ll develop a simple matrix applicable to your needs, which sets out all the indicative costs of the property purchase. We do this in a way that you’ll learn what’s involved and will be able to make an informed and confident property purchasing decision.

There are 2 types of costs you’ll need to consider:

1. Upfront property costs

The deposit

A deposit is paid to secure your interest in the property so that the vendor knows you’re serious about the purchase. Generally the amount you’ll be asked to pay is between 5% and 10% of the purchase price. If you want to pay a greater amount, they you can contribute more funds at settlement.

Building inspection and pest inspection

It’s recommended that home buyers engage a qualified professional to conduct a building inspection and a pest inspection. The purpose of a building inspection is to provide advice regrading any home defects or problems that exist within a building and which are not normally inspected by the purchaser. A pest inspection is for the detection of wood destroying insects. Reports generally contain information on current and past infestation to a building and the type of damage that has or is occurring to the property. Some service providers can do both inspections at the same time. A report can cost from $300 to $1,000.

Buyer Agent

A Buyer’s Agent will work with you to find the property you want and they’ll handle all the property search, negotiation and due diligence on your behalf. The cost for such a service is generally 1% to 3% of the purchase price.

Your upfront legal costs

To ensure you know what you’re purchasing, it’s highly recommended that you seek legal advice regarding the Contract of Sale and the Vendors Statement and it’s just as importatnt to know what’s not in the documentation as well as what’s included. Because the purchase of a house is such a big decision, it’s important that you engage an experienced, well-qualified legal representative who can advise you on exactly what you’re proposing to purchase. Fees often start at $600 and can be as high as $2,000.

Adjustments

Adjustments are made at settlement so that the purchaser can reimburse the vendor for any accounts the vendor has paid in advance such as council rates, land tax, water rates and Body Corporate fees.

Government duties

Government duties generally consist of 3 fees; the mortgage registration fee, the transfer fee and the duties payable on the land. If you buy a home for $400,000 in NSW and you’re not a First Home Buyer, you’ll pay approximately $13,766 in duties, that’s 3.44% of the purchase price. In Victoria, the fee is approximately $17,565, for non-First Home Buyers or 4.39% of the purchase price.

Insurance

The lender will not settle the loan if you don’t have home building insurance. It’s advisable to take out insurance from the day you receive a formal approval from the lender. As the purchaser, you need to cover yourself in case the vendor does not have insurance. When you move into the home, it’s advisable that you get contents insurance. If you’re an investor, then you’ll also need to consider landlord insurance.

Moving costs

You can undertake the move yourself to reduce these costs, or, if you want to take much of the stress and time out of this task you can engage a professional removalist company. If you engage a professional company allow at least $500 to $1,000 or more.

Utilities connection

You need to ensure that the utilities are connected when you move into your home so that you can immediately use the power, gas and phone. You’ll need to allow approximately $200 to have the services connected.

2. Financing costs
 

Loan application or establishment fee

The lender will charge you a one-off fee to establish the loan. This fee will sometimes include the lender’s legal fees, the valuation fee and document preparation fees. Fees can be in the range of $0 to $1,000 or more.

Property valuation fee

In most instances, the lender will engage a valuer to value the property and supply them with a report. Generally the valuation fee is included in the application fee. However, some lenders will charge you a separate valuation fee. The cost is generally $200 to $300. For properties in excess of 1 million dollars, the valuation fee may be in the vicinity of $1,000.

Lender’s Mortgage Insurance (LMI)

LMI is an insurance premium paid by the borrower to protect against the risk associated with providing the borrower with the loan in the event that the borrower defaults, i.e. this insurance covers the lender not the borrower. By using LMI, lenders are able to pass on this risk to a mortgage insurer. It enables the lender to offer a greater loan amount to the borrower who then needs a smaller deposit.

If you default on your loan the LMI covers the lender for any difference if the property is sold for less than the outstanding loan amount. It also covers other costs such as selling and marketing costs.

If you can verify your income via payslips and tax returns and you want to borrow more than 80% of the purchase price, you’ll be charged LMI. If you’re self-employed and cannot supply income details you’ll be asked to make a legal declaration indicating your income. In this instance, you’ll have to pay LMI if you borrow more than 60% of the purchase price.

Settlement fee

The lender may charge you a fee for their legal representative to be present at settlement. However, most lenders cover this charge in the application fee. The indicative fee is $250.

Rate lock fee

This is a fee you can pay if you want to lock into the current fixed rate. However, with some lenders the rate lock is effective from when you submit the application and with other lenders it becomes effective when your application is formally approved. Also, some lenders want payment of the fee when you submit your request for a rate lock. Generally the fee is 0.15% of the amount that is fixed. So, if you fix a loan of $350,000 and request the rate lock, then the fee will be $525.

Security guarantee

If you have a guarantor who’s offering an additional property then you may be charged this fee which is approximately $200 per borrower named on the loan. You may also have to pay an additional valuation fee to have the guarantor’s property valued.

Loan package fees

If you select certain loan products such as professional packages with a standard variable rate loans they may incur an annual fee. This fee will be deducted from your loan amount at settlement. The fee is generally from $300 per annum and is charged in advance.

Other cost
 

Income protection insurance

Income protection insurance replaces regular income in the event of a temporary or permanent disablement due to sickness or accident, and ensures that expenses such as your home loan can continue to be paid during your absence from work. It’s important to consider how you’d pay the mortgage if you had no income. This insurance is an annual fee which is determined by your job and income.

Another option to consider is to have insurance that covers only your mortgage repayments, Mortgage Protection Insurance.