The upfront costs of purchasing property
Whilst property investors and home buyers were once able to borrow the entirety of a property’s value, recent years have seen banks tightening their lending criteria and restricting their loan-to-value ratios in an effort to mitigate risk. For first-home buyers and aspiring investors, taking the time to save up a home deposit has therefore become an essential step in getting a foot on the property ladder. But what upfront costs are first-time buyers actually facing?
How much deposit do I need?
The initial costs of purchasing a property will depend on a number of factors, from the price of the property being purchased to the buyer’s investment strategy and the lender’s individual policies. Contrary to popular belief, first-time buyers don’t always need a full 20% deposit, and many banks are willing to accept a deposit of as little as 5% with Lender’s Mortgage Insurance in place. Providing you have a strong credit history, evidence of genuine savings, and a steady income, most banks will be willing to lend up to 95% of the property value for home purchases, and 90% of the property value for investment purchases. Below, we take a look at two key examples of how property price and investment strategy can impact the upfront costs of purchasing property.
Strategy One: purchasing an investment property
For buyers looking to purchase an investment property that they don’t plan to live in themselves, most lenders will have a maximum loan-to-value ratio of 90%. Taking into account the additional cost of Lender’s Mortgage Insurance, the investor will require a deposit of around 12%. They will then need to factor in the additional expenses of stamp duty and settlement costs, which includes items such as settlement agent fees, the cost of pest and building inspections, and title charges. The stamp duty costs will vary between different Australian states, but the below case study takes WA as an example.
Example 1 – Let’s say an investor is looking to purchase a property valued at $450,000. In this case, the 12% deposit would amount to $54,000. Accounting for the costs of stamp duty ($15,390) and approximately $4,000 in settlement costs, the buyer would be looking at an upfront cost of around $73,390.
Example 2 – In contrast, if an investor is looking to purchase a property worth $550,000, they would require a 12% deposit of around $66,000. Taking into account the stamp duty ($20,140) and the $4,000 in settlement costs, this would result in an upfront cost of $90,140.
Strategy Two: purchasing an owner-occupier property
As we have seen above, the value of a property can significantly impact the upfront costs required for purchase. However, these costs will also be determined by the buyer’s intention and strategy. If, for example, a first-home buyer is purchasing a property that they intend to live in as opposed to an immediate investment property, the rules and costs associated with the purchase will change considerably due to differences in loan-to-value ratios and the buyer’s potential eligibility for the First Home Owner’s Grant (FHOG).
For home loans, the majority of lenders will set their maximum loan to-value ratio at 95%. Once Lender’s Mortgage Insurance is factored into the cost, buyers will therefore require a deposit of around 8% in order to purchase the property, although some lenders will accept a lesser deposit of 5%. So, how would these differences influence upfront costs?
Example 1: Using the same example as above, if a home buyer is looking to purchase their first owner-occupier property for $450,000, the 8% deposit required would amount to around $36,000. The major difference here, however, comes in the costs of stamp duty. If the applicant is going to occupy the property as their principal place of residence for at least six months, they may quality for the FHOG, meaning they will be eligible for considerable stamp duty concessions. This can significantly reduce the buyer’s costs, taking the required stamp duty costs in the above example to around $3,838. With the settlement costs of roughly $4,000 factored in, this would result in a reduced upfront cost of $43,838.
Example 2: If, on the other hand, the first-home buyer was looking to purchase a $550,000 property, their situation would change again, as they would no longer be eligible for the stamp duty concessions included in the FHOG. Factoring in the full stamp duty costs ($20,140), an 8% deposit of $44,000 and the settlements costs of $4,000, they would require total upfront funds of $68,140 for the purchase.
Financing your investment
As a first-time buyer preparing to invest in property, your investment strategy will play a huge role in determining your financial needs. Whether you’re purchasing your first home or buying your first investment property, enlisting the help of a mortgage broker is a great way to ensure your loan and property strategies align.
As specialists in investment property finance, the mortgage brokers at Momentum Wealth understand the importance finance plays in supporting your property investment journey. If you’re looking to get a foothold into the Australian property market through an investment property or your first home, our mortgage brokers can help you find a loan solution that meets your needs and supports you in your long-term investment goals. If you would like to discuss your property finance needs with one our specialist mortgage brokers, organise an obligation-free consultation with the Momentum Wealth team today.