Here's a quick guide at the cost breakdown for purchasing a property including first home buyers
Buying a home comes with a few hidden costs, as a first home buyer there are some concessions and grants available that can provide cheaper access into the property market. Banks look at the total available funds you have to put towards a purchase, the term for this is "Funds to complete". Most people have an awareness that they need a deposit, but you need a little more to complete a purchase.
When purchasing a property you need funds to cover a deposit, stamp duties, government transfer fees, bank/lender fees and solicitor/conveyancer fees. There may be other fees applicable to your situation but as a rule of thumb these are the bare basics.
In Australia, banks prefer borrowers to have a 20% deposit in cash, you can borrow with less than a 20% deposit but there's a catch. If you don't have enough money for a 20% deposit I'll mention later in this article. The deposit may come from many sources such as savings, net proceeds of sale of a house or asset, a family gift, or a family guarantee.
So now you need a loan...because you already have a 20% deposit you need to borrow the remaining funds to complete the purchase. In this scenario, the expression used to describe the loan is an 80% Loan to Value Ratio (LVR). What is LVR you may ask?
As an example if you're purchasing a $500,000 property in Victoria, Australia and you had a 20% deposit of $100,000, you would need to borrow a loan of $400,000.
$400,000 (your loan) ÷ $500,000 (the property contract price or valuation) = 80% LVR
So the bank makes a deal with you, they lend you the $400,000 but in return they will hold a mortgage over the property as security until the debt is paid and closed out (i.e. your 80% LVR Loan)
You need funds in addition to the deposit to pay for the stamp duties, fees and charges. Using the example of a first home buyer in Victoria, Australia purchasing an established property you would actually need approximately $105,000 to cover the deposit, fees and charges. Check with the government at the time of preparing to purchase as there can be other grants or concessions for new buildings and construction. Below is an indicative cost breakdown
Now if you're not eligible for first home buyer grants or concessions, in the same example, you would need to pay $21,970 in stamp duties meaning you would need to have access to approximately $100,000 deposit + $26,500 = $126,500
When the time comes to buy a property, I would strongly recommend seeking advice from your team of professionals which include a solicitor/conveyancer and a mortgage broker at a minimum and accountant or financial adviser if you have one. You should also check State Government's State Revenue Office and even the Federal government policies to see whether there are any current grants or concessions you may be eligible for. They also have tools to accurately calculate the stamp duties applicable to your purchase.
Having a 20% deposit and an 80% LVR Loan will generally allow you to have access to a large variety of banks and lenders, providing much better choice of products, sharper interest rates and cheaper monthly repayments and fees to better serve your needs and objectives - not the bank's.
I don't have a 20% deposit?
For less than 80% Loan to Value Ratio (LVR) you're still able to purchase a property but you'll need to pay Lenders Mortgage Insurance. Lender's Mortgage Insurance is a once off premium you pay if you have less than a 20% deposit, it can be capitalised onto the loan. It insures banks, not you the borrower.
Below is the same example of a first home buyer purchasing an established house in Victoria, Australia. With stamp duty concessions, you could potentially purchase a $500,000 property with only $65,000 but, they pay ~$8,200 in LMI. This example gives you access to the market with less funds upfront but you pay LMI and you might not have as much choice in lenders and interest rates and monthly repayments will typically be higher.
Remember there's always other expenses with new homes like moving costs, furniture and white goods, and the car always breaks down when we least expect, so cash buffers are king! Try not to run it too tight and I'd always recommended having an emergency fund!
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