More than a deposit: the upfront costs of a home loan explained

When you’ve spent many years saving up for a house deposit, it’s not uncommon to develop tunnel vision around how much you need to save to buy property. However, it’s important you’re aware of all the upfront costs associated with a home loan – not just the deposit.

Most experts recommend that home buyers save up a deposit of at least 20% or more. With property prices sky-high across capital cities and the regions, home buyers are typically focused on saving for this five- even six-figure goal. This means that come time to shop around for a home, first home buyers may be shocked at the multitude of additional upfront expenses and fees you must pay to purchase a property and take out a home loan.

Luckily, there are some fees and costs that home buyers may be able to avoid, if they do their research. So, let’s explore the upfront costs of a home loan outside of a deposit, and how to best avoid these charges where possible.

 

Biggest upfront costs of a home loan

Lender’s Mortgage Insurance

If you’re not seeking to save a 20% deposit, this is understandable given the cost of property in many areas. However, you will need to pay a home loan lender Lender’s Mortgage Insurance (LMI), as your loan-to-value ratio (LVR) will be above 80%. LMI is a premium you pay to the lender, due to the higher chance that you may default on the loan due to having a “smaller” home loan deposit. LMI is designed to protect the lender, but it is a one-off payment that the buyer must pay.

The cost of LMI depends on the value of the property and can climb into the tens of thousands of dollars range. For example, according to Genworth, at the time of writing, the LMI charged on a $750,000 property where a first home buyer owner-occupier has saved a 10% deposit ($75,000) for its purchase, would be $16,605.

One of the best ways to avoid paying LMI is to simply save at least a 20% deposit for a home. Unfortunately, this can be an unreasonable expectation for many Australians, especially if property prices rise. If you do not have the cash up front, LMI can be added to the total cost of the loan. Keep in mind that this option can work out to be more expensive over the life of a loan, as you’re increasing your loan amount, and therefore increasing the interest charged over time. In many instances it may be more affordable to pay the LMI premium upfront.

 

Stamp Duty costs

Like death and taxes, paying stamp duty is one of those inevitable costs you’ll need to face at one point or another. Stamp duty, or transfer duty, is a one-off tax that home buyers may need to make to their state or territory governments for property purchases or documents. Depending on the purchase price, it can cost you tens of thousands of dollars. If you are eligible to pay stamp duty, it must be paid up front to complete the home sale. Unlike LMI, it cannot be added to your loan.

It may be worth utilising Reduce Home LoansStamp Duty Calculator before you make a bid at the next auction, as you’ll want to know how much you could realistically need to pay, and have available in your savings, for stamp duty.

Luckily, for first home buyers, stamp duty is one of those upfront costs that may be avoided – depending on your state or territory. For many first home buyers, stamp duty exemption can apply, depending on the property value. You may find that you qualify for stamp duty concessions as well, in which a discount is offered on your duty costs due to being a first home buyer. Unfortunately for investors and next home buyers, stamp duty exemption and concession are typically reserved for first home buyers.

For more detailed information on whether you qualify for stamp duty concessions or exemptions, check your State Revenue website.

Inspections

You would never purchase a car without test driving it, and the same is true of a home purchase. This is where building and pest inspections come into play. It is recommended that home buyers pay for their own, independent building inspections and pest inspections. While this can be a costly endeavour, it’s worth considering organising this yourself as opposed to relying on any inspections performed by the seller.

It is not uncommon for a homebuyer to purchase a property, skip the inspections to save money, only to find they must now spend several thousands of dollars removing termites or rebuilding an outdoor deck. And if you’re looking to keep costs down, you may be able to combine the building and pest inspection in a packaged deal.

 

Conveyancing fees

Legal fees, also known as conveyancing fees, are fees that you pay a professional for the process of transferring your new property into your name.  This is an essential part of home buying, and you will likely seek legal expertise throughout the conveyancing process, from contract of sale to settlement.

The cost of conveyancing fees will depend on the legal proceedings themselves but may generally be a few thousand dollars. It may be worth doing your research and comparing conveyancers instead of choosing the first one you’re referred to.

 

Mortgage registration fee

Purchasing a home is not as simple as winning at the auction then being handed over the keys. You will also need to pay for additional administrative factors, such as mortgage registration – which allows buyers to check any claims that may still exist on the property.

The cost of this fee will depend on the state and territory in which the property is located and is typically paid during the settlement process. According to Finder.com.au, mortgage registration fees may cost:

  • ACT: $155
  • New South Wales: $147.70
  • Northern Territory: $152
  • Queensland: $197
  • South Australia:$176
  • Tasmania: $141.07 to register
  • Victoria: $112.40 (electronic), $121.40 (paper)
  • Western Australia: $181.30

Home loan fees and costs

Unless you have the funds available to buy a home outright, it’s likely you’ll need to take out a home loan to pay for the property purchase. However, some home loan lenders can charge several mortgage fees upfront, and throughout the life of the loan.

This means it is crucial that you compare mortgage costs as part of the upfront costs associated with home buying, so you can best choose an option that suits your budget and financial situation.

The most likely home loan fees and costs you’ll incur are:

  1. Interest charges – The interest rate charged on a home loan is a major influence on the overall cost of the loan, and the higher the interest rate, the higher your ongoing home loan repayments. Consider comparing a lower-rate lender, like Reduce Home Loans, when researching your best home loan option.
  2. Upfront fees – Some lenders may charge you upfront fees, such as loan application fees, when you apply for a mortgage. However, some may waive this fee for some borrowers – especially refinancers if the lender is trying to get them on their books.
  3. Ongoing fees – It’s not just the interest rate you’ll need to pay, as some lenders also charge ongoing mortgage fees. These may include monthly fees, annual fees, redraw fees, late payment fees, portability fees, and more. Some lenders may waive some of these fees for their customers, so it’s important you compare your options. For example, the Reduce Home Loans Economizer Variable 60 home loan does not charge a monthly fee or annual fees.
  4. Exit fees – You’d think that refinancing or paying off your home loan would mean the end of fees, but there may be some costs involved.  This may include discharge fees, and even break fees if you leave a fixed period early. Keep in mind that if you do refinance a home loan, you may need to pay additional costs, like a valuation fee.

 

Removalist costs

Don’t forget that at the end of the day, if you are choosing to live in the property you have purchased, you will likely need to pay for a removalist. The cost of moving into your new home will depend on the size of the home, the extent of the contents, and the distance between the first and new home. Removalists’ costs can easily climb into the thousands of dollars range, so be sure to compare your options carefully.

 

Ongoing costs of purchasing a home

Now that you’ve familiarised yourself with the additional upfront costs associated with purchasing a property, you’ll have a better understanding of how much to budget for and save when it comes time to sign on the dotted line.

It’s worth keeping in mind that homeownership can often involve several ongoing costs as well, outside of the ongoing costs of a mortgage listed above. These ongoing costs may include:

  • Land tax
  • Council rates
  • Utilities, such as water and electricity
  • Home insurance and/or contents insurance
  • Strata levies, if applicable
  • Ongoing maintenance and repairs

Arguably the biggest ongoing cost associated with home ownership are your mortgage repayments. Therefore, one of the easiest ways to stay on budget and find an affordable property is to compare your home loan options carefully and not just stick with your childhood bank. You may find that there are lenders offering lower interest rates or fewer fees than a home loan with your childhood bank. Consider comparing interest rates, fees, and any features offered, when choosing your first or next home loan.

For more information on finding a competitive home loan rate, or to speak to one of our Reduce Home Loan experts, please don’t hesitate to contact us today.

 

Any statements are general in nature and do not take into account your financial personal situation, objectives or needs. You should consider whether any statement/s is suitable for you and your personal circumstances. Before making any financial decision, consider your circumstances and the product disclosure statement.

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