So you’ve worked long and hard and you’re ready to take your first step towards the new home of your dreams. Now comes an entirely different set of hurdles to jump: beyond the purchase price of the property, what exactly makes up the upfront cost of a home loan?
What are the major upfront costs in purchasing a home?
When you first buy a home, there are few major upfront costs to consider. These are the costs you are probably already aware of or have started to account for and include:
- Home loan deposit - The recommended amount for a house deposit is 20% of the property value. There are other options with a smaller deposit and higher loan-to-value ratio, designed for those who do not have the full 20% deposit ready.
Of course, in the rare event that you are buying a property outright, you will be paying the full property purchase price.
- Stamp duty - Stamp duty is the tax upon property purchases by the Australian government for transferring ownership. Obligations vary from state to state and are dependent on the value of the property. This can be calculated with a stamp duty calculator. Recipients of the First Home Owners Grant (FHOG) may be exempt from stamp duty.
These are likely to be your two biggest upfront costs when buying a house. They can be reduced if you, for instance, are a first-time buyer taking advantage of the FHOG (which can only be used for first-home buyers and is not valid for investment property) or you are opting for a Guarantor Loan where no deposit is required.
In the case of a Guarantor loan, a loved one or family member can use the equity in their property as security for you to borrow against. This increases your borrowing power and allows you to save on an initial deposit.
Other, smaller, upfront costs can include:
- Home loan application fees
- Legal fees
- Conveyancing fees
- Property valuation
- Property inspection (including pest inspections, building inspections, etc)
- Depending on the type of property, there may be levies (if it is a strata property or community scheme)
- Relevant insurances
- Survey report
- Council and water rates
These are just the costs that come from your property purchase. Speaking to a home loan specialist will help you work out which upfront costs to account for in the purchase price of your property. For the prices that continue after the initial purchase, read on.
Check out our upfront costs calculator to calculate how much you can expect to pay.
Are there any additional costs to keep in mind when buying a house?
When buying a house, you aren’t just looking at the purchase price.
It’s important to keep your home loan repayments front of mind, as these will factor into your ability to pay off your home in the long haul.
Though this is not an upfront cost, it’s one of the many reasons that it’s not enough to have a large deposit without any savings to demonstrate.
Make sure you have a savings plan that accounts for the chance that interest rates will rise and your home loan repayments will increase.
Using a repayments calculator can help you work out what your regular repayments will be and what difference you can make by making additional or extra repayments (if allowed by your home loan).
Can I get a home loan with no deposit?
You can get a home loan with no deposit, although the home loan applications process may take more work.
The most common types of no deposit home loans are:
- Guarantor loans — This is where a family member or loved one uses equity in their property as security against your home loan.
- Gifted deposit — This is where you receive money from a family member or loved one to either wholly or partially form the deposit on your home loan. Roughly 60% of Australians receive financial contributions towards their first time property purchase. If you have been gifted a deposit, be prepared to show evidence that you are a capable saver: this means evidence of genuine savings (money in a savings account), a good credit score (no outstanding credit card debt), and evidence that the money was received as a gift.
Otherwise, you will need some deposit to get a home loan. While 20% is the recommended deposit, there are low deposit home loans available as well.
How much deposit do I need to buy a home in Australia?
The recommended deposit in Australia is 20% of the property’s value.
However, beyond this, there are low deposit home loans allowing you to put down a minimum 5% deposit.
There are also home guarantee schemes that can allow for lower deposits in very specific circumstances (like for single parents, requiring a minimum 2% deposit).
How does my deposit impact my loan amount?
The bigger your deposit is, the less money you will need to borrow.
It stands to follow that the more money you are able to use as a deposit, the lower your loan amount will be. Conversely, the smaller your deposit, the larger your loan will be.
What is LVR?
LVR is the loan-to-value ratio of your home loan. That is the amount that you borrow to the amount of deposit that you have paid. In refinancing, this can also refer to your home equity.
Home loans with an LVR of under 80% (a deposit of 20% or greater) tend to be seen as lower risk by lenders, lower interest rates. You tend to have more home loan options with a higher deposit.
Home loans with an LVR of above 80% can do the reverse. It can be harder to gain approval, and interest rates can be higher.
Does my upfront deposit impact my interest rate?
The amount of deposit you pay can have an impact on your interest rate (though other factors also impact this as well)!
If you pay a small deposit, a home loan lender may view your loan as higher risk. It can come with higher interest rates. This comes hand in hand with higher repayments.
Conversely, a larger deposit may reward you with lower interest rates. This can mean your loan attracts less interest, provided it is paid off in the same (or shorter) loan term.
How much are home loan repayments in Australia?
Home loan repayments in Australia vary largely based on the property value, the details of the home loan (like the interest rate and loan term), and the size of the home loan deposit.
Before you commit to a home loan, it’s important to assess your financial situation to make sure the repayments are in your price range. This is especially important as interest rates can fluctuate and you’ll need to be able to make your repayments even if they increase.
The average mortgage in Australia at time of writing is just over $600,000. Depending on the home loan term, whether you make additional repayments, if you refinance at any point, you’ll be able to plug your mortgage into a repayments calculator to work out what your individual home loan repayments will be.
If you are on a fixed rate home loan, your interest rate will be set for a pre-determined time (usually between one and five years). On a variable rate home loan, the interest rate on your home loan will follow reserve bank movements.
Like with many loans, often introductory offers do apply. Make sure to check the comparison rate for a realistic look at the interest rate you’ll be paying on your home loan.
What is LMI?
LMI is shorthand for lender’s mortgage insurance, and it is a fee paid as insurance to your home loan lender. It is paid when your house deposit is below the recommended 20% in order to minimise risk.
How much is lender’s mortgage insurance in Australia?
Lender’s mortgage insurance may vary depending on a few factors. These can include:
- LVR: The higher your loan-to-value ratio, the more LMI you may be set to pay. This is because higher loan amounts tend to be riskier for home loan lenders.
- Loan amount: The more money you borrow, the more you may pay in LMI. Bigger loans tend to have longer loan terms and higher monthly repayments, so lenders may require higher levels of LMI.
- Investor or owner-occupier: Some lenders may see owner-occupiers as low risk and therefore charge a higher premium to those purchasing investment property.
- Employment status: If you are not employed full time, you may face higher LMI premiums and be viewed as higher risk.
- Profession: Certain professions may be able to get a low deposit home loan without paying LMI. These tend to be medical professions (like doctors and nurses), or those in legal, finance, engineering and accounting professions.
- Provider: There are multiple LMI providers on the market, and their premiums will vary. It might be worth shopping around to find an option that works for you.
Some lenders will also apply discounts to LMI for first home buyers, for example. Use a Stamp Duty and LMI Calculator to find out how much your lender’s mortgage insurance could be.
What is stamp duty?
Stamp Duty is an government tax in Australia that is paid on the purchase and transfer of a property. Each state has different obligations and regulations around stamp duty.
It is a one-off fee and is paid on both owner-occupier homes and investment property. It is payable within 2 weeks and 3 months of settlement, dependent on which state of Australia you are in.
First home buyers accessing the First Home Owners Grant (FHOG) may be exempt from stamp duty.
You also do not have to pay stamp duty if you inherit a property, no matter the value of the property. Gifting property will incur stamp duty.
How much is stamp duty?
The higher the value of the property, the more stamp duty you will incur.
The amount of stamp duty you will pay can be worked out with a stamp duty calculator, with the disclaimer that most of these calculators will not factor in stamp duty exemptions.
