Hidden costs of buying a house
10 overlooked new home expenses that could add thousands to your purchase price.
You've found your dream place, organised your finances, set the auction date in your calendar - but have you considered the hidden costs of buying a house?
In all the excitement of buying what is likely one of the biggest purchases you’ll ever make, it’s all too easy to overlook all the extra expenses involved in buying a property. And these can quickly add up to a substantial amount, which will impact how much you can afford to pay for the property.
“Stamp duty is the biggest killer,” says buyers’ advocate Nicole Jacobs from Whitebox. Although this state government tax can amount to tens of thousands of dollars – even taking into account recent discounts applied to properties valued at less than $1 million – Nicole says a surprising number of buyers fail to factor in the extra cost when working out how much they can afford to pay and how much they need to borrow.
But it’s not just stamp duty. Nicole says even careful buyers have been known to forget additional costs such mortgage insurance, building inspections, and building and contents insurance in the rush to snag the perfect property.
While these expenses might seem incidental, Nicole says they are crucial to protect what could be your largest asset. For instance, a building inspection that costs a few hundred dollars could save you tens of thousands if it identifies a problem with the property before you sign the contract of sale.
1. Stamp duty
The state government charges land transfer duty, more commonly known as stamp duty, when property changes hands, and the amount is calculated on a sliding scale based on the value of the property. While there are some exemptions (first home buyers pay no stamp duty on property purchases up to the value of $600,000) and discounts (in place until 30 June, 2021, on purchases up to $1 million) , stamp duty adds a substantial amount to the cost of buying a home. A non-first-home buyer purchasing a house at Melbourne’s median $941,000 house price, would need to pay close to $40,000 duty. The State Revenue Office has an online calculator that takes into account your personal situation, purchase price and other factors.
2. Loan application fees
When you apply for a loan many banks and financial institutions will charge a loan application or establishment fee to cover the cost of processing and admin. Fees vary according to the provider, but generally start at around $150. You may be able negotiate a waiver with your lender.
3. Mortgage insurance
If you have less than a 20 per cent cash deposit, your lender will likely require you to take out mortgage insurance to cover them for any losses in case you can’t settle your loan. The cost of the policy can be paid as a one-off, upfront fee or added to your loan but can be several thousand dollars, depending on the size of the loan.
4. Ongoing loan fees
As well as the set-up fees, some lenders charge monthly or annual fees to cover the administration and servicing of your loan. The amount will vary depending on the lender and the type of loan you have but $10 a month is fairly typical. If you arranged your mortgage with a discount or package, your lender may charge an annual fee of up to $300.
5. Lender’s property valuation
Lenders often engage the services of an independent valuer to visit a property and assess whether or not you’re paying a reasonable price. The cost will vary but can amount to several hundred dollars.
6. Mortgage registration fee
The state government charges a one-off mortgage registration fee of $116.80 when a home loan is established to register a property as security for the loan. This allows future buyers to check any claims against a property.
7. Buildings insurance
It’s essential to have buildings insurance in place from the day you sign the contract of sale – don’t wait till you take possession. If disaster, such as a fire or storm damage, should strike between when you sign on the dotted line and when you take possession, you could face a lengthy legal battle over who is responsible to cover the cost of the damage – especially if the vendor has let their own buildings insurance lapse.
RACV’s head of home insurance, Kirsty Hayes advises taking out buildings cover as soon as you sign the contract and to ensure you cover the rebuild value (not the market value) of all the buildings on your property, including any sheds and garages. Make sure you account for the cost of rebuilding, meeting current costs such as higher energy efficiency standards, as well as demolition and debris removal. RACV’s Home Buildings Calculator can help you do the sums.
8. Contents insurance
Don’t forget you also need to insure what’s inside your new home. Contents insurance not only covers personal belongings but also rugs, carpets and window furnishings as well as important household items like washing machines and fridges too. RACV’s contents calculator can help you estimate the value of your possessions to ensure you are properly covered.
9. Conveyancing and legal fees
Transferring the ownership of a property title from one person to another is a complex undertaking involving a raft of legal and administrative requirements, which is why you’ll need to engage the services of a solicitor or conveyancer. A conveyancer will review the contract of sale for any errors or red flags, undertake title searches to confirm the property is legally owned by the vendor and that there are no debts or liabilities attached to it, and help organise supporting documents needed by your lender for settlement.
Since October 2018, it’s no longer possible for people without legal qualifications to do their own conveyancing work as all Australian residential property transactions must be processed through the Property Exchange Australia (PEXA) online transaction system by a qualified legal practitioner.
While conveyancing can cost upwards of $1500, depending on the complexity involved, it’s money well spent as expert legal advice can help you avoid all sorts of pitfalls and unexpected expenses - even losing the property and forgoing your deposit.
Kellie Benda, chief operating officer at conveyancing.com.au, an RACV partner company that provides specialist conveyancing advice online, recommends engaging a conveyancer sooner rather than later to avoid costly mistakes.
She cites one example where a million dollar-plus house had been built on top of an easement, giving water authorities the right to demolish the home if they ever need to access water assets. “If the easement breach was disclosed in the contract of sale, but you failed to read the documents before signing, you have no right to end the contract on such grounds,” says Kellie.
In other instances, buyers have been caught off guard by a requirement to contribute to the vendor’s land tax bill if the property had been recently been rented out.
10. Building inspection
Whether you’re looking at an existing home or a brand new build it’s important to have it inspected by a qualified building inspector. Dan Watts of RACV partner Rapid Building Inspections says for pre-existing homes, a professional building assessment will check for signs of major and minor defects, as well as identifying any safety hazards, structural problems, hidden moisture issues and presence of termites or other pests.
For a new home Dan says it’s important to get a professional inspection to check the quality of construction and give you peace of mind that you’re getting what you paid for.
He says a professional inspection of a three-bedroom house costs around $560 but can save you from buying a property lemon or, if repairs are necessary, you may be able to use the inspection report to negotiated a reduced price. Dan says in one instance an inspection found termite damage to the floor, wall and roofing timbers that would cost tens of thousands of dollars to repair. The buyer was able to use the report as leverage to lower the asking price.
RACV Home Insurance is issued by Insurance Manufacturers of Australia Pty Ltd, ABN 93 004 208 084, AFS Licence No. 2227678. This information is general advice only, so before making any decisions please consider your own circumstances and the relevant Product Disclosure Statement. For a copy, please visit racv.com.au.