Buying a home is typically the most expensive purchase you’re ever going to make. The thing that makes property a powerful investment is that you can borrow a large portion of that cost from a bank. However, there are still a number of other costs that home buyers need to be aware of before they start their search for a property, as those costs could impact what they can afford.
While banks are prepared to lend a large portion of the value of a property, they still like to see that a borrower is able to contribute 20%. That deposit shows them that the borrower is capable of managing money effectively, and it also protects them in the event they do default.
It is possible to borrow more than 80% of the value of the property; however, you will likely be required to pay lenders mortgage insurance (LMI). LMI is a one-off upfront premium that is put in place to protect the lender.
The cost itself varies, depending on how much you are looking to borrow, the LVR and even the location of the property. This can be a sizeable amount and needs to be factored in prior to starting your property search if you have only a small deposit.
To have your loan application formally approved, one of the conditions is usually that the property undergoes an adequate bank valuation. This gives the lender an indication that you have paid a fair price for the property.
There are different types of valuations a lender will require in terms of how the property is valued. However, as the borrower, you will need to pay those costs. These fees are also on top of any loan establishment or application fees.
When you are approved for a loan and ultimately settle on the property, you need to immediately start thinking about looking after that property. The first thing you will need to do is to make sure you have the right types of insurance in place.
The most important is normally home and building insurance as this will cover the structure itself. If you are buying a freestanding home, this will be your responsibility. If you’re buying into a strata complex, this might be recovered in the strata fees. On top of this, you can also consider contents insurance or rental insurance if the property is for investment purposes.
If you’re buying an investment property, it is easy to forget about the upfront costs associated with property management. A property manager can be a valuable resource in helping you take care of your asset while also making your life a lot easier. However, you will need to pay them for various services.
Property managers charge their fees based on a percentage of the rental income, usually somewhere between 5 – 10%. There are several other upfront costs as well, such as the letting fee, which is normally two weeks’ rent, the cost of getting professional photos done, and various other admin costs. You should expect to receive no rental income for around two months after taking into consideration the upfront fees and the monthly payment cycle most property managers use.