You’ve done your sums, prepared your deposit, and completed a mortgage calculation. You know how much you can borrow, how much you’ll pay, and what will be left over for furniture, renovations, and a big blow-out house party.
The only thing left to do is make an offer and get your home, right? Not quite, as those home ownership costs are probably a lot steeper than you realise.
In this blog, we’ll look at 7 lesser-known homeowner costs, helping you to prepare for your big purchase.
Before we look at the home ownership costs that you aren’t expecting, let’s address the one that you are: the mortgage payment.
Every month, fortnight, or week, you make an agreed-upon mortgage payment with your lender. The payment constitutes the interest and the principal—interest-only mortgages are also available but principal and interest loans are more common.
The “principal” goes toward clearing the balance while the “interest” is what the bank charges to provide the loan.
Let’s assume that you have a $500,000 mortgage with a 5.5% interest rate and a 25-year term. Your repayments will be $3,070 a month and over the course of the 25 years, you’ll repay $921,131, $421,131 of which is interest. It sounds like a huge sum considering the relatively low-interest rate, but that’s because the 5.5% is charged annually, and 25 years is a long time.
To reduce the repayments and total interest, you can reduce the loan term or increase the monthly payment. Every month that you make a full repayment, you’re meeting your interest obligations. If you overpay anything, all the additional cash will go toward your principal.
In this case, an extra payment of just $100 a month will save you $31,537 in total interest. Increase it to $500 and you’ll save nearly $120,000.
Now that we’ve discussed the often-unexpected cost of interest, let’s address some other costs you might now know about.
Stamp duty is an asset tax charged on property purchases. The amount you owe is typically charged as a percentage of the final sale, but it depends on location and status. For instance, first-time buyers in many states are not charged stamp duty if the value is below a certain amount ($600,000 in Victoria and $650,000 in NSW, for example).
There is also a scheme in NSW known as First Home Buyer Choice, whereby buyers can pay an annual property tax instead of stamp duty.
If you don’t qualify for any exemptions, you could be charged 4-5%, equating to a fee of $40,000 or $50,000 for a $1 million purchase.
The rates are subject to change and are usually tiered. In NSW, for instance, it’s $1.25 on every $100 for non-exempt sales up to $15,000 but this jumps to $44,095 plus $5.50/$100 for sales of $1,089,000 or more.
Lenders Mortgage Insurance (LMI) is a type of insurance that covers the lender if the mortgage balance is not paid. For instance, if you fail to meet the payments and the lender is forced to sell at a loss, LMI will pick up the shortfall.
Although it covers the lender, LMI is paid by the borrower.
LMI is paid as a one-off fee at the point of settlement, but it can also be bundled in with the mortgage payment, in which case it accrues interest. However, it’s typically only required on deposits of less than 20%.
Building and Pest Inspections: Ensuring Optimal Property Condition
A building and pest inspection is essential before you agree to buy the property. The price you pay varies based on the company you hire and the size of the property, but it could save you a fortune in the long run.
Inspectors will check for pest infestations, structural issues, and anything else that could impact your investment or lead to costly fees down the line.
Council rates are a type of property tax used to cover public services and infrastructure. Everything from local support programs to beaches and parks are funded by these rates.
The amount you pay depends on your location, but it’s usually between $25 and $30 a week.
Many lenders insist on home insurance before finalising a mortgage. The cost varies depending on the size, location, and property value, as well as the type of insurance you choose.
The most basic type of home insurance is known as buildings insurance, which covers the cost of repairing the building itself. You can also purchase contents insurance, which protects the value of personal property in the event of a fire, theft, and other damage. If you want complete peace of mind, both types are recommended.
In Australia, the average cost of buildings and contents insurance is around $3,000, but it differs greatly from location to location, with the average in Victoria being much less than the average in North Queensland.
If you own a property in a complex, you will be charged strata fees, which go toward the upkeep of the building. These are handled by Body Corporates, who form a Strata Committee to deal with issues and financing.
There are three types of strata fees:
These fees vary from around 0.2-1.2% of the property value.
When you rent, your landlord is responsible for maintenance and repairs; when you buy, it’s all on you. Many experts recommend keeping at least 1% of the property value per year to cover repairs.
It’s fair to say that home ownership costs are much higher than many Australians realise. In fact, assuming you pay strata fees, need LMI, and purchase a house worth around the national average, you could be hit with an extra $1,400 upfront plus $16,329 per year, and that’s before you consider the $40,000+ you may need to pay in stamp duty if it’s not your first home.
There’s clearly a lot to consider, but there are also many ways to relieve these costs and ensure the process of buying a home runs smoothly. Contact one of the experts at Fox Home Loans today for advice on buying a new home and dealing with these costs.