While property has proven itself to be arguably the best tool to build wealth, it does come with some additional costs that you do need to consider, particularly if you’re a first-time homebuyer or investor.
In Australia, it can be quite an expensive process to transact property, which is fortunately offset by the excellent growth in values that we’ve seen over the decades.
However, when you’re trying to purchase a property and you’re already stretched with what you can borrow, it’s important to have a clear idea of what you are potentially going to have to pay on top of the cost of the property itself.
While it could be argued that stamp duty is not a hidden cost, you certainly have to factor it in as it adds significantly to the price that you’re paying for a property.
Generally, stamp duty will be around 4% of the value of the property that is normally paid somewhere around the time of settlement. However, the actual time period of when it needs to be paid varies for each state as stamp duty is a state-based tax. The actual rate is also different for each state.
Fortunately, first home buyers can often avoid this cost as they are exempt if they meet certain criteria.
Conveyancing and legal fees
The process of finalising all the paperwork and facilitating the final transfer of funds is known as conveyancing. When you buy a property, you normally hire a conveyancer, (also known as a settlement agent) to help with that process.
The cost of hiring a professional is usually around $1,000, but again this number will vary. It is possible to do this yourself in some instances, however it can be risky as you don’t want to make any mistakes or delay the process as you could incur further costs.
When borrowing money from a bank, they usually like to see that you’re able to provide a minimum 20% deposit. This shows them you are someone that can handle money well, and it also provides a buffer in the event of a house price fall or if you default on your repayments.
It is possible to borrow more than that 80% from a bank, however, you will be forced to pay Lenders Mortgage Insurance (LMI) which is a one-off insurance premium put in place to protect the lender. This can be upward of $10,000 in many instances and varies depending on how much you are looking to borrow, where the property is located and the LVR.
Loan Application Costs
There are also a number of bank/lender fees that come with taking out a loan. Not only will you have to pay interest, but there will be things like loan application/setup fees or types of transfer fees.
In a competitive lending environment, these fees can at times be reduced, but you should expect to pay around $500 for a standard type of loan.
When applying for a loan, getting approval is normally subject to a satisfactory bank valuation on the property. Here, an independent valuer will value your property to ensure the price you paid for it is reasonable. The cost to you is the price of the valuation which is normally around $400.
Building and Pest Inspection
In most states, a standard clause in the offer and acceptance form is subject to a satisfactory building and pest inspection. This is basically a check by a licensed professional that tells you that the property is structurally sound without and issues. These reports will cost around $500.
After you’ve purchased a property, you will almost certainly want to take out various types of insurance.
If you own a freestanding home, you would want some form of home insurance. If you are buying into a strata complex, this might be covered under the strata fees. If you are renting the property out you might want rental insurance, otherwise, you might need contents insurance as an owner-occupier.
You can also look at something like income insurance, which would assist you in the event you lost your income and were unable to make the repayments.
Council rates and other levies
One cost that will continue to hit you each and every year are those from the council.
You are also forced to pay for water and the associated sewerage costs as well.
Before buying a property you should always check with the local council to see if there are any upcoming special levies that have not been mentioned as there are instances where a council will issue a special levy in the event of some major works that need doing.
If you choose to rent your property out, you will need to factor in the costs of hiring a property manager if you are not going to take this on yourself. The costs vary between states, but you can expect to pay somewhere around 5-10% of the rental income.
However, the other hidden costs also come in the form of leasing fees and charges for things like property inspections and even admin fees.
When you first lease a property through a property manager, expect to pay around three weeks rent upfront in fees and costs for things like photography.
Strata Fees - Sinking Fund/Special Funds
If you buy into a strata building, you are likely required to contribute to the strata fees, which goes towards the ongoing maintenance of the entire property or building.
There are also sinking funds, which are funds that are put aside for larger projects or futures maintenance. In some cases, buildings will look to raise additional money for large projects like building-wide renovations that can be very expensive.
Before buying a strata property, be sure to get a copy of the minutes of the general/annual meetings as this will outline the plans they might have. Additionally, you can order a strata report that will outline all these costs.
In some areas of Australia, property owners are required to pay land tax each year. Again this varies by state. We are also hearing reports of some states, such as NSW, that are looking at transitioning to a land tax or at least having the option of choosing between stamp duty and land tax.