The Hidden Costs of Getting a Mortgage
The price of your property isn’t the only thing you need to consider when getting a mortgage. There are many hidden costs of getting a mortgage that may trip you up.
So you’ve scrimped and saved, and you finally feel ready to apply for a mortgage. You may even have your eye on a couple of houses.
Mortgage checkers can help you to figure out how much you can borrow. The same goes for your conversations with lenders.
However, neither cover the hidden costs of getting a mortgage. The value of the property alone isn’t the only cost you must consider. In fact, home ownership can cost thousands more dollars than you realize.
You need to know about these costs before you can answer the question “how much can I afford to spend on a property?”
So what are the additional costs involved in buying property? Here are a few for you to consider.
Lender’s Mortgage Insurance
If you’re looking to borrow 80% or less of a property’s value, you don’t have to worry about Lender’s Mortgage Insurance (LMI). However, it’s an issue for everybody else.
Lenders use LMI to protect themselves when offering high-risk home loans. If you borrow more than 80%, you present a higher risk of defaulting on your loan. LMI gives your lender a buffer, so they don’t lose as much as they might if you can’t meet your repayments.
Typically, LMI costs several thousand dollars. The exact figure depends on the price of the property, and how much you’re borrowing. Each lender uses different calculations to come up with their own figures too.
You can pay LMI upfront, but some lenders allow you to add it to your mortgage. Either way, it’s a huge, and often unexpected cost.
Reconsider if you’re thinking of paying it upfront. You could spend some more time raising a bigger deposit, allowing you to avoid LMI altogether. Furthermore, you’ll make a larger dent in the loan’s principal. As a result, you pay less interest over the loan’s lifetime.
Capitalising LMI onto your loan costs even more. You’ll have to pay interest on the LMI, raising the hidden costs of getting a mortgage even more.
Stamp duty is another one of the hidden costs of getting a mortgage many people overlook. It’s particularly damaging to first-time buyers, who may not realize that it exists.
The amount of stamp duty you pay depends on the following factors:
- The property’s location, as each state has different stamp duty laws
- The cost of the property
As a general rule, the more the property costs, the more you’ll pay in stamp duty. The fee can extend into the tens of thousands of dollars. For example, it’s not uncommon to pay stamp duty of $50,000 or more on a property that costs $1 million.
Though it’s one of the largest hidden costs of getting a mortgage, not everybody has to pay it. First-time buyers, in particular, may find that they can avoid it. For example, first-time buyers in Queensland, Victoria, and New South Wales don’t have to pay stamp duty, as long as their home costs less than $500,000. Research your state’s stamp duty laws to see if you’re eligible for a reduction or exemption.
Unfortunately, you usually can’t avoid stamp duty when buying additional homes. That same $500,000 property may cost you up to $20,000 extra in Victoria, or over $8,000 more in Queensland.
When you buy a property, you sign a legal contract. Not only do you enter into a legal agreement with the seller, but you also need to inform the local council of the transaction. Most buyers can’t handle this legalese themselves. As a result, they draft conveyancers in to the job for them. This is a good idea, as a solicitor will spot issues that you may overlook. They’re also needed for more complex ownership structures.
Unfortunately, these legal fees are one of the hidden costs of getting a mortgage. Expect to spend approximately $1,800 on your conveyancer.
It’s a cost that’s worth absorbing because of the expertise a conveyancer offers. Making mistakes when you go it alone could cost you thousands more dollars later on.
You should not buy a home without carrying out an inspection first. It’s not enough to take a quick look around during your viewing. Only qualified building inspectors know exactly what to look out for.
Building inspections are one of the hidden costs of getting a mortgage. However, they can also save you money. An inspection that uncovers structural damage, or a pest problem, works in your favour. You can use it as a negotiating tool if you’re still interested in buying the house. Alternatively, it may ward you off an expensive property that would have cost thousands of dollars to repair.
The inspection doesn’t cost a huge amount. You should get everything you need for $600. Still, that can seem like a lot when combined with the other hidden costs of getting a mortgage.
You also don’t have to get one, which leads to some people deciding to spend the money elsewhere. Just know that you’re taking a risk if you don’t get an inspection. You have no legal recourse if you discover an issue that wasn’t found before you made the purchase, after settling.
Establishment and Application Fees
Lenders have to deal with a lot of administrative work for your home loan. Unfortunately, many of them will pass the costs of this work onto you. Some lenders charge a fee for lodging an application, which can sometimes be as much as $600. They may also charge fees for “establishing” the loan. This is the process of getting all the paperwork in place so you can access the money. Combined, these fees may total up to $1,000.
However, not all lenders charge these fees. Some waive them entirely, especially if they believe you’ll be a stable long-term customer. Others allow you to capitalise the fees onto your mortgage, though this does mean you’ll pay interest on the fees.
Either way, this is one of the hidden costs of getting a mortgage many buyers forget about. Your choice of lender plays a crucial role here. Don’t be afraid to shop around if one lender tries to charge extortionate application fees. You may find that other lenders will waive the cost entirely to bring you on board.
Lenders create more hidden costs of getting a mortgage with registration fees. Much like the previously mentioned application fees, these costs are related to setting up the mortgage.
Registration fees differ depending on the state. In Queensland, you’ll usually pay less than $200 to register your mortgage. However, you may pay less in other states. It’s not a huge fee, but it’s another cost that you could do without.
There are also transfer fees to consider. This is the cost of transferring the property’s title into your possession. Again, the price of this varies depending on the state. You’ll pay exactly $138.80 when buying a property in New South Wales. However, you may end up spending thousands of dollars in registration fees elsewhere
If you aren’t working with a buyer’s agent, you may struggle to find information about your property. In particular, you may need data about the location and recent property sales.
Several organisations offer suburb reports, which keep you up to date with the latest property trends. Unfortunately, they don’t come free. You may have to pay up to $150 to access such reports, and they’re often released on a monthly basis.
The good news is that a buyer’s agent should provide you with access to the information in these reports. As a result, they’re often only one of the hidden costs of getting a mortgage for those who’re buying without professional help.
A fixed-rate loan may help you to save money. It may allow you to take advantage of a low national interest rate for several more years than one with a variable rate.
However, fixed-rate loans come with a catch in the form of break fees. They offer less freedom than their variable rate equivalents. They lock you into the mortgage contract for several years, and you’ll usually have to pay a fee of several thousands of dollars to break it.
This may not seem relevant at first. However, it means that you can’t buy a new house, or refinance with a different lender, during the fixed period without paying the fee.
Each lender has its own formula for determining break fees. You may also get lucky and not have to deal with them at all.
Nevertheless, think about the pros and cons before getting a fixed-rate loan. Avoid them if you intend to change or refinance your mortgage in the first couple of years.
Utility and Council Rates
Usually, a small cost, utility and council rates still come as a nasty surprise to some. This makes them one of the hidden costs of getting a mortgage.
Typically, the seller will pay these costs until the end of the current quarter. However, you’ll have to pay the seller for the period of that quarter when you occupy the house.
Of course, you’ll then go on to pay the rates yourself for every quarter that follows.
So many people get tied up in saving for their deposits and forget about the hidden costs of getting a mortgage. They can catch you unaware, and add thousands of dollars to the cost of buying a home.
Itemise each cost you anticipate before you start your house search. This allows you to budget for the real cost, rather than just the deposit.
There are other ways to mitigate the cost of buying a home as well. A good buyer’s agent can help you to get a better price on a property, or show you properties that cost less than you expected.
Contact Cohen Handler today to find out how we can help you to get a home for less.