The hidden costs involved in purchasing
When buying a property you need to be considering all the hidden costs that you will have to pay, particularly if your deposit is not huge. While many are understandably focused on ensuring they have enough for that initial deposit outlay, usually a large sum amounting to some 5% plus of the purchase price, ignoring your other costs can easily erode this sum.
In fact, for some borrowers there are thousands of hidden costs involved in purchasing. This isn’t to say that these costs cannot always be avoided, nor that you should scrimp on the outlay, however every home buyer needs to be aware of what they will face financially prior to home ownership.
The first range of extra hidden costs you are likely to face will occur when you start looking to research for your investment property. These costs can be hard to determine and every home buyer is likely to approach research differently.
Some costs may come in the form of purchasing reports and research, or paying for access to different portals. Some of this research may be available for free, however often research houses such as propertyDATA.com.au can provide a one-off fee for a report on a suburb.
You can get a wealth of information for free, for instance, from www.propertydata.com.au.
These costs start as low as under $100 per report, but can span upwards significantly. Some research reports cost thousands of dollars. Remember to ensure you are getting value for money.
Buyer’s agent fees may also be a cost to consider. If you do decide to pay for a professional to find and negotiate the sale on your behalf you will be required to pay for the service. This could amount to several thousands of dollars or even a percentage of the resulting purchase price.
One raft of costs that few buyers will avoid are the pre-purchase inspection costs. This could include any number of reports that you pay for a professional to create, such as a valuation, a building inspection, a pest inspection or perhaps a strata report. While these can cost upwards of a few hundred dollars, they are likely to save you dearly in the long run if they do uncover something unsavoury about the home. Remember, you can always take the results back to the vendor and, reasonably, negotiate down the purchase price as a result of your findings.
Finance and conveyance costs
Depending on the amount of money you have as a deposit, you may see yourself needing to pay Lender’s Mortgage Insurance, or LMI. This cost can be paid upfront, or you do have the option of capitalising it into the loan. Either way, for those with less than 20% of the property value, LMI is a serious consideration as it can add thousands of dollars to the overall cost. Some buyers will opt to save for longer to avoid this, however in a fast moving market it may make financial sense to accept the cost and purchase, rather than chasing the growth.
Your financing will also see you charged for other costs. A small amount of stamp duty will likely be payable on the loan amount and you will also need to pay for mortgage registration costs and there may be other set up fees. Speak to your broker or lender to get an understanding of what these charges are.
Conveyancing fees, or legal expenses, are likely to also set you back a few hundred dollars unavoidably as they check through and make changes to the contract. This is a crucial part of the process that will ensure you are legally protected and understand your obligations under the signed contract. Speak to a solicitor or conveyancer early to get an understanding of the charges that you will need to pay. Other professionals to consider speaking to that may charge you include accountants and financial planners. If you opt to use these services ask for quotes in advance and prepare for the costs.
Hidden costs such as insurances can be crucially expensive. Every home buyer has a choice as to which, if any, insurance they decide to take out for their property and for themselves.
Often these will be taken out after settlement, however you are likely to need to have the funds to obtain them and continue the repayments. Effectively, insurance will cover you and your loved ones in case the worst happens. Not every property owner will want all of the available insurances, however it does pay to know your options.
Potential insurance policies to consider include:
- Mortgage insurance (also often called mortgage protection)
Not to be confused with LMI, mortgage insurance covers your repayments in the event of sickness or some other adverse event that causes hardship. Be sure to understand exactly what situations mortgage insurance covers you for and the process around claiming this policy.
- Life insurance: In the event of your own death it’s worth considering life insurance if you will leave behind family, particularly if your home is also their home. This will ensure that they remain able to pay back the mortgage if you do pass away.
- Income protection: If you are made redundant or are unable to work due to illness or injury there are a number of covers that can assist with a certain level of income. While you may not want to cover your entire income amount, and perhaps cover the bare minimum you could live on, it’s worth knowing what you would be covered for with this insurance.
- Home and contents insurance: While you have the option of having building insurance separate from contents insurance many home owners decide to bundle them together as it can be more cost effective. This can be costly, however if there is an issue where your property is broken into or a fire or flood occurs then many policies will cover you for replacements with the cost of a predetermined excess.
- Landlord’s insurance: Investors may want to consider this extra insurance if they are renting out their property. This will assist with any issues relating to tenants, such as arrears or malicious damage.
Of course, all policies vary so ensure you read the fine print and understand exactly what you are paying for.
Other hidden costs to be aware of
When purchasing a property you will also want to be aware of any connection fees relating to services and utilities that you will need in the property. While some services do not have an upfront fee there may be extra costs for facilities you already had in place, such as Wifi if you are required to use a different provider.
Remember that you will also face removalist costs, cleaning costs and the potential for minor renovations and furnishings on the other end of home ownership. While you can delay to put your personal stamp onto your new home, it’s worth factoring in the eventual cost of painting or altering the home. Some will find that they need to change aspects of the home immediately to allow it to suit their lifestyle.
- Research costs can be mitigated by using free online tools
- Finance and conveyancing is an inevitable part of the process
- A number of insurance policies are available – consider them carefully
- Connection fees may apply