While real estate is arguably the best tool for building wealth, it does come with some additional costs to consider, especially if you’re buying or investing in a home for the first time.
In Australia, it can be quite an expensive process to trade real estate, which is thankfully offset by the excellent growth in values that we have seen in recent decades.
However, when you are trying to buy a property and you are already stretched with what you can borrow, it is important to have a clear idea of what you may have to pay in addition to the cost of the property itself.
While it could be argued that stamp duty is not a hidden cost, you should definitely consider it as it adds significantly to the price you pay for a property.
In general, the stamp duty will be about 4% of the value of the property normally paid sometime around the time of settlement. However, the actual period in which it must be paid varies by state, as stamp duty is a state-based tax. The actual rate is also different for each state.
Fortunately, first-time homebuyers can often avoid these fees, as they are exempt if they meet certain criteria.
Transport costs and legal costs
The process of completing all the paperwork and facilitating the final transfer of funds is known as handover. When you buy a property, you normally hire a carrier (also known as a settlement agent) to help you with that process.
The cost of hiring a professional is usually around $1,000, but this number will also vary. In some cases it is possible to do this yourself, but it can be risky because you don’t want to make mistakes or slow down the process as you could incur additional costs.
When they borrow money from a bank, they usually like that you can make a deposit of at least 20%. This shows that you are someone who can handle money well, and it also provides a buffer in case of a fall in house prices or if you do not repay.
It is possible to borrow more than that 80% from a bank, but you must pay the Lenders Mortgage Insurance (LMI). This is a one-time insurance premium set up to protect the lender. This can be up to $10,000 in many cases and varies depending on how much you want to borrow, where the property is located, and the LVR.
Cost of loan application
There are also a number of bank / lenders that come into consideration when taking out a loan. Not only will you have to pay interest, but there are also things like loan application/start-up fees or types of transfer fees.
In a competitive credit environment, these costs can sometimes be reduced, but you should expect to pay around $500 for a standard loan type.
When applying for a loan, obtaining approval is normally dependent on a satisfactory bank valuation of the property. Here an independent appraiser will appraise your property to ensure that the price you have paid for it is reasonable. The cost to you is the price of the appraisal, 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 inspection of buildings and pests. This is in fact a check by a recognized professional who tells you that the property is structurally in order without any problems. These reports cost about $500.
After you have bought a home, you will almost certainly want to take out various insurance policies.
If you have a detached house, you will want some form of home insurance. If you buy a strata complex, it may be covered by the strata fees. If you are renting out the property, you may want to have rental insurance, otherwise you may need contents insurance as an owner-occupier.
You can also look into something like income insurance, which will help you if you lose your income and can no longer repay it.
Council fees and other levies
One expense that will continue to affect you every year is that of the municipality.
You are also forced to pay for water and the associated sewerage costs.
Before buying a property, you should always check with the municipality to see if there are any special charges that have not been mentioned, as there are cases where a municipality will impose a special charge in the case of major works to be carried out.
If you choose to rent out your property, consider the cost of hiring a property manager if you don’t take it upon yourself. Fees vary between states, but you can expect to pay somewhere around 5-10% of rental income.
However, the other hidden costs also come in the form of leasing fees and costs for things like property inspections and even administrative fees.
When you first rent a property through a property manager, expect to pay about three weeks’ rent in advance in fees and expenses for things like photography.
Strata Fees – Sinking Fund/Special Funds
If you buy a strata building, you will probably have to contribute to the strata fees, which are earmarked for the ongoing maintenance of the entire property or building.
There are also sinking funds, which are funds that are set aside for larger projects or maintenance of the future. In some cases, buildings will want to raise extra money for major projects such as building-wide renovations that can be very expensive.
Before buying any strata property, be sure to get a copy of the minutes of the general/annual meetings as this will outline the plans they may have. In addition, you can order a strata report that maps out all these costs.
In some parts of Australia, property owners are required to pay land tax each year. This also varies by state. We’re also hearing reports from some states, such as NSW, that are considering moving to a land tax or at least have the option to choose between stamp duty and land tax.