21 April 2016

How much will it cost me to purchase a property?

How much will it cost me to purchase a property?

A property purchase is made up of three basic costs:

  1. A deposit
  2. Stamp duty
  3. Solicitors fees

Once you have decided to invest in property, understanding your budget from the beginning will put you on the right path to a successful investment strategy.

While the purchase price of the property you have your eye on will determine the size of your loan, it is vital to take into consideration the upfront costs associated with purchasing an investment property, some of which may vary from purchasing an owner occupied home. When drawing up your budget, you will need to include three things: the deposit, stamp duty and solicitor’s fees.

Investment Property Deposit

In general, a deposit of 10% of the property price is required as a deposit. If you own an existing property, such as your primary residence, you can use equity to fund the deposit instead of saving the cash required. But if you decide to buy your investment property by accessing equity, you should be aware that accessing this equity may attract its own fees and charges.

Having a larger deposit will generally give you a greater chance at being approved for finance, and give you a greater range of options in terms of lenders. Having a deposit of 20% or more may also mean you can avoid paying LMI (Lenders Mortgage Insurance). There are some lenders that will consider a 5% deposit but be aware that there may be other requirements such as showing genuine savings or a higher LMI premium.

Stamp Duty for any Investment Property 

Stamp Duty is a government tax applied to all property purchases. The cost of stamp duty is determined by the purchase price of the property, the location of the property, and the purpose (eg, owner-occupier or investment). Each state and territory has its own rules about the amount of stamp duty to be paid.

As stamp duty can represent a significant addition to the purchase price, it is recommended that you make use of a stamp duty calculator with your specific details before finalising your budget. Be aware that while there are some exemptions from stamp duty as a first home buyer intending on living in the property, stamp duty is always payable on investment properties.

Solicitors Fees for Property Investment 

Although you may have purchased property previously, it is important engage a solicitor with the purchase of each new property. The solicitor you use must be registered to operate in the state that you plan to buy your investment property. As contracts of sale also change from state to state, choosing the right solicitor will help you to minimise any risk associated with the transaction.

While stamp duty and solicitor’s costs vary somewhat, as a general rule of thumb you should allow for a minimum of 15% of the purchase price as upfront costs, 10% for the deposit and 5% split between stamp duty and solicitor’s fees.

Here is how it works: the purchase of a $500k investment property will require $50k for a 10% deposit and roughly $25k for stamp duty and solicitor’s fees – making it a $75k upfront investment.

This article is provided for general information only and does not constitute personal advice, as it does not take into consideration your personal circumstances. Please consult a licensed tax or financial advisor before making any decision to invest.