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When adding up how much money you need to become a property investor, the deposit is a good place to start. Not only is the deposit the most substantial cost, but its size determines whether you have to budget for the additional cost of Lenders Mortgage Insurance (LMI).
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A deposit above 20% of the property purchase price will save the cost of LMI and may open the door to better home loan terms, but it’s still possible to enter the market with a smaller deposit.
A deposit above 20% of the property purchase price will save the cost of LMI and may open the door to better home loan terms, but it’s still possible to enter the market with a smaller deposit. There is a range of lenders offering low deposit home loans. Be careful to calculate the costs of these loans over the long term as the interest rate and fees can vary considerably between lenders.
How much LMI you have to pay also varies between lenders. Many factors like your loan type and whether you’re buying off the plan can have an effect. Expect it to go up in stages that correspond to loan size and Loan to Value Ratio (LVR).
As a rough guide, presume around $19,500 in LMI based on a property value of $800,000 and a 10% deposit (Source: Genworth LMI premium estimator). Speak to your Yellow Brick Road local representative for a more accurate quote and the details about how LMI policies differ between specific lenders. Another upfront mortgage cost is the loan establishment fee for the processing of documentation. Not all lenders charge this fee, and some will waive it for specific mortgage products. Your lender may also require a valuation to assess what your property is worth. The cost will vary depending on the property’s location and whether a detailed inspection is required. It’s wise to carry out your own building and pest inspection as part of your due diligence.
Ongoing fees on top of your mortgage repayments may include monthly service fees or an annual fee for administering the loan. A discharge fee might apply when you pay off your loan in full, early exit fees if you pay off your mortgage in advance, and fixed-rate break costs for breaking a fixed contract. Switching fees, portability fees, redraw, and late payment fees are some of the possible charges you may encounter – depending on which lender and product you choose. Your Yellow Brick Road mortgage broker will help you minimise these fees by finding you the best value home loan.
Now let’s look at what other expenses you should be budgeting for outside of mortgage specific fees.
- Conveyancing and/or legal fees: the preparation of legal documents like settlement agreements and the transfers of property title.
- Stamp duty: the final figure depends on variables like which state or territory you live in, the value of the property, and whether it is an investment. Use the Yellow Brick Road Stamp Duty Calculator to get a basic estimate of what you might have to pay.
- Mortgage registration fees: charged by state and territory governments to register the property as the security on a home loan.
- Building and Landlord insurance: be sure to have landlord insurance in place when you exchange contracts to protect yourself from the cost of potential property damage while the seller is moving out.
- Useful reading: How to Properly Insure Your New Home
- Land tax: an annual fee charged in many states and territories based on the size of the land on which the property sits.
- Council rates: another annual fee, with rates varying from state to state.
- Utilities: where there are no separate meters the landlord pays for the utilities, such as water usage if the property is in a unit block.
- Body corporate: this fee applies if you have bought into an apartment, townhouse, duplex or multi-resident lot. It will be higher the more there is to maintain, such as pools, gyms and undercover garages.
- Property management and maintenance: these costs will vary according to whether you use a Property Manager and how much repair and maintenance is required to keep the property in a tenantable condition. Keep in mind these costs are often tax-deductible.
- Useful reading: 6 Ways to Check if Your Property Manager is a Good One