The added costs of purchasing property

Buying property isn’t just the purchasing price, a number of hidden costs are associated. So don’t forget to account for these extra costs in your considerations. In addition to the cost of moving, a change in council rates, strata fees, the cost of any renovations and furniture, homebuyers face additional fees to complete the purchase of a property.

Stamp Duty

Stamp duty, a state tax imposed on the purchase value of the property or the market value, must be paid in order for the mortgage documents to be legal and to transfer the property. But since July first homebuyers no longer have to pay the stamp duty fee, if the property is purchased for below $600,000 – a considerable drop in those additional costs of buying property.

Legal Costs

To transfer the ownership of property, a solicitor, conveyancer or a settlement agent are required. They will perform property and title searches to ensure the seller is entitled to release the property, which may include checking the strata body corporate records.

Inspections

Building and pest inspections are an added cost, but one which may save you from further expenses in the future – particularly any major building work required. This amount will vary depending on the size of the property.

Agent Fees

First-home buyers don’t have to worry about paying any commission, since it is charged to the vendor of the property, most often as a percentage of the sale price. However, if you’re selling your current home to buy another property, you’ll probably have to take these fees into account.

Borrowing Costs

Lenders have application, valuation and settlement or loan approval fees that vary depending on the lender. Mortgage Brokers are familiar with these fees and can help you take them into account when choosing a lender that’s right for you.

Insurance

Depending on your loan-to-valuation ratio (LVR), you may be required to take out lenders mortgage insurance (LMI). Although the borrower pays for it, LMI is not insurance for the borrower; it protects the lender should you default on the loan. You will also need building insurance if you are not purchasing a strata property.

Guaranteeing your child’s loan

Rising house prices are making it increasingly difficult for the next generation to enter the market. An increasingly common way for parents to assist their children to enter the market is via a guarantor loan. Although there are significant benefits of this loan structure, it is important to understand how this can impact the parents’ financial position too.

Being a guarantor generally means using equity in the parent’s property as security for their child’s home loan. It can help a first-home buyer to secure finance for a property they can afford but may not have a large enough deposit for.

There are other significant advantages:

  • This structure allows the new purchaser to avoid paying Lenders Mortgage Insurance
  • Recent jumps in house prices have seen many getting priced out of the market as they can not keep up with the deposit requirements to get into the property. Guarantor loans avoid the need for large deposits as the parent’s property is used to secure the loan
  • You may be able to buy in a more desirable location and a home that better suits your needs. If you purchased on your own, you may need to go further out of the city or perhaps settle for fewer bedrooms

The Risks

Parents may want to help their child but it’s important that all risks are clearly outlined so they don’t go into the transaction blindly.

The main risk of guaranteeing the loan is that, depending on the structure of the guarantee, the parent could be liable should their child default on the repayments, either by taking over the repayment schedule or handing over a full repayment of the outstanding debt.

In the event you can’t make the repayments, the lender may also sell the home used as security. If this is still not enough, the lender may also require you to sell any other assets to meet outstanding debt.

If the parents need to borrow money for another purpose, the property used as the guarantee security cannot be used to secure further finance. It is already ‘tied up’ in the guarantor transaction.

Minimising The Risk

There are ways to minimise the risks. First and foremost, an exit strategy must be clearly outlined and agreed to by all parties. The goal would be to have the child repay as much of the debt as possible over a shorter timeframe so the parents security can be ‘discharged’ from the overall position. This will remove the guarantor portion and ensure the child is now financially standing on their own two feet.

Another way to avoid the risks of being a guarantor is to alternatively provide a monetary gift or private loan. This involves the parents borrowing money against their property in their own name, and then gifting these funds to their child. There are now pretty standard legal agreements that can be put in place to protect these gifted funds.

Another way to avoid the risk is to buy the property jointly between parents and child. This means all names are on the title and a certain percentage entitlement is stated. This does have some negative tax implications that need to be considered.

When it comes to guaranteeing a loan, it’s always sensible to speak to a professional. Every families financial situation is different so the strategy needs to be tailored to ensure all parties understand their risks and best way forward.

 

Spring clean your budget

Buying your dream home is one of the biggest and most exciting purchases you are ever likely to make. As house prices continue to grow, saving the necessary deposit is becoming harder and harder. You’d be surprised what a little Spring Clean can do to your savings over time.

Budgeting sucks, but neglecting to understand your outgoings will leave you further from your achieving your goals. When preparing your budget, it is important to consider your current financial situation by working out your priorities – how much you need for basic living expenses and if there is any little things that you can go without.

Budget basics

  • Begin your budget by listing all sources of regular income. There are plenty of online resources and templates that you can use to start. Include everything from employment income, dividend income, interest earned on savings and potentially family hand outs from that loving Grandma!
  • Collect your bank statements, bills, accounts and other regular expense records to give you an indication of how much you spend each month. Be realistic with yourself. There is nothing to gain by putting your head in the sand.
  • List your outgoings (with large items first) by breaking them down into two sections: fixed and variable. Fixed expenses don’t change from month to month and include things like: car loans, rent, personal loans repayments etc. Variable expenses change regularly and include groceries, utility bills, eating out and entertainment. Don’t forget to add once off annual items like car rego, health insurance and annual memberships.
  • When reviewing your categorised expenses, assess if you can make any reduction to the non-essential items in the variable spending before addressing your fixed and more essential items.
  • Compare your expenses against your income to and work out where adjustments can be made. If you find that you are not left with as much as you wish, even the smallest changes can make a difference. Do you really need to buy 2 coffees a day? Cutting out that alone could save you $2,500 a year.
  • Give yourself a realistic timeline and encourage yourself to stick to your budget. If you have an exciting goal to achieve, the sacrifices are more than worth it.

If you feel it is all too hard, just remember that saving something is better than saving nothing!

Is co-ownership right for you?

Buying through co-ownership is quickly becoming a popular strategy for those hoping to enter the property market but without the capacity to do it alone. Through pooling resources with a friend or family member you can increase your buying power and enter the market sooner.

There are a number of other benefits to entering the market this way. A joint purchase can help ease the deposit and all costs can be split, such as stamp duty, legal fees and maintenance. However, there are a number of pitfalls that you need to be aware of when purchasing via co-ownership. Importantly, you need to understand the below before you enter into this type of purchase:

Timeline – It can take up to 10 years to realise significant growth from a property. Do you and your purchasing partner have the same overall goals and objectives?

Trust – Although you will only have to make repayments on your half of the loan, you are completely tied to the other purchasers’ financial conduct. If they fail to make their repayments, the bank will come chasing you for their half.

Borrowing Power – You may think you only have ½ of the debt to worry about, however in the banks eyes, they assess you as being responsible for the entire debt. This means that should you want to keep this property and purchase another one, you will need to show that you can service 100% of the debt against property 1 and whatever debt is required against property 2.

Utilising the Equity – A common strategy is to purchase a property then use the growth in its value (equity) over time as your deposit on your next property. This is all well and good; however having another person involved in approving the equity release could cause complications. What if you both want the equity at the same time and there isn’t enough?

Legal – Although the transaction may be made as ‘Tenants in equal shares’ this covers how much you own but doesn’t cover what should happen in the event of certain circumstances. A legal consultant can draw up an agreement between the two buyers outlining the following:

  • If one owner dies, does their half go to the surviving owner or their estate?
  • What happens in the event one owner wants to sell and the other doesn’t?
  • How do you determine ‘market value’ of the property at any point in the future?
  • If the property is a rental investment, who is responsible for repairs and maintenance? How are these costs covered?

The good news is these types of purchases are becoming more and more common so there are pretty standard legal docs that can be used. A few of the big banks also have designed lending products especially for this situation which make repayments easier to manage separately.

What is lenders mortgage insurance (LMI)?

Should Lenders Mortgage Insurance (LMI) be seen as an additional hurdle to enter the market or as an opportunity to enter the market sooner?

First things first, lets outline exactly what LMI is. This is an insurance policy taken out by the banks that protects them should you be unable to repay your loan. If you are trying to borrow more than 80% of the value of the property, LMI will be needed. It is a once off expense that is paid for at settlement of your property. It is paid by you, the purchaser, and traditionally funded by adding the cost of the policy to your total loan amount. However… just because it is an additional cost to your purchase, doesn’t necessarily mean that it is a negative.

LMI can help you enter the market earlier through allowing you to borrow a higher percentage of a property’s value. Taking time to save the additional cash to reach 20% deposit plus costs may mean that the property market has grown faster than you’re able to borrow. This has been a never ending cycle for many over the last 7 years of strong property growth in Melbourne and Sydney.

For first home buyers, particularly those struggling to save a deposit but more than comfortable to meet their mortgage repayments, it can be a key tool to break free of the rental trap.

It is important to be aware that LMI only covers the lender if you default on your loan payments and the lender is unable to secure the full outstanding debt still owing, when they sell your property. LMI does not provide you with any cover.

The bigger the percentage of the property’s purchase price you have to borrow, the greater the amount you’re likely to pay on insurance. So if your deposit is less than 20 per cent of the value of the property you will need to factor LMI into your home loan. In some cases, lenders may require LMI even if you have a lower deposit, depending on the type and style of property you’re purchasing – for example, some inner-city apartments or rural land.

All Brokers have access to lenders LMI fee calculators and can provide you with an estimate of what the additional cost will be. There are really only 2 companies that the banks work with to provide the insurance – QBE and Genworth. Some banks get cheaper policies due to the volume of policies they take out with their preferred insurer.