Ep4: How much do I need to save to purchase a house?

Welcome to the Weekend Investor.

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I'm Max Lending, your industry insider, and we're lifting the lid on the finance market, guiding you on how to cut through the jargon, manage your finances and get investing into the property market.

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What an episode we have for you today, people.

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We get into the actual costs of buying a house, how much money you actually need.

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So as usual, grab a cup of coffee, get your notepad, and let's get stuck into it.

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Let's talk headline items.

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Now these are the items that you need to consider when buying a house.

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They're referred to by a lot of different names.

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Some people like to call them phantom costs, mysterious costs that you never thought about.

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But in the industry, they're actually called funds to complete.

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I know what you're thinking.

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You're going, Max, what are these items?

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Don't tell me I need to have saved more money than I assumed.

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Well, we're going to be going through.

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The items in quotation marks will be the deposit, the stamp duty costs, the legal conveyancing fees, lenders mortgage insurance costs, mortgage establishment fees, lenders property valuation costs, the building inspection costs, the certificate of currency costs.

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The list goes on.

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I feel for you guys because it's going to add up and you're going to be shocked.

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One thing you're not going to be saying at the end of this podcast.

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Is Max really sugarcoats it?

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So that was around about 8 items I just listed.

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You're going to start to get a picture of how much savings you're actually going to need and how important those savings are.

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Now I'm going to be blunt here.

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If you think that you can buy a house with $25,000, you are insane.

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Go check yourself into the mental hospital now.

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Because so many people think they can afford a house with pretty much no savings, you need a reality check, and I'm the guy to give it to you.

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Let's start with the biggest one of these costs, the deposit.

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When purchasing a house, a deposit is pretty much the most significant component of the transaction.

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It's usually around about 10% of the purchase price.

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If you're buying at auction, the deposit pretty much.

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Access the form of security for the seller.

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It indicates that you as the buyer committed to actually purchasing this and you're less likely to walk away.

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In most cases, if you bought at auction, the the seller has the right to keep the deposit.

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If you don't follow through, those funds are then transferred into what's called a escrow account.

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The deposit is typically placed in here, which is like a third party neutral account as such.

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And it ensures that both parties don't have access immediately to the funds until the deal is finalised or the deal is settled.

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The next second biggest cost is a real fun one for the state governments.

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It's called stamp duty and they absolutely love it.

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This is a big windfall for them for the purchasers.

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Unfortunately, it's a horrible cost.

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It's a massive, it's a massive cost.

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Stamp duty is the tax that is enforced by the state government and it's based on the purchase price of your property.

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This means that the amount that you'll need to pay will vary depending on the price of the property and the property's location.

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This is normally the second biggest upfront cost and unfortunately you cannot borrow the stamp duty costs against the house that you're purchasing.

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You have to have the money upfront.

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You can actually go onto the website of your particular state revenue office and use their online calculator there and it will give you an estimate of the stamp duty costs.

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Let's go through each state and see what the estimate stamp duty cost will be for an $800,000 purchase.

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In Victoria it's $45,000, in New South Wales it's $32,000, in Queensland it's $25,000, in South Australia it's $45,000 and in WA it's $33,000.

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That's a lot of money.

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Let's just quickly pause there for a second and talk about your LVR.

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Now your LVR will determine how much you will need to actually put in.

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We went through this in detail in episode one on what is an LVR and how it can affect your interest rate.

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So go back to listen to that episode if you want a detailed explanation.

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But as a quick refresher, the LVR stands for the loan to value ratio.

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An 80% LVR means that you're putting in 20% of the value of the property in your money, and 80% of the value of the property will be coming from a bank loan.

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Next up is lenders mortgage insurance, also known as LMI.

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If you get a 20% deposit together, you usually don't need lenders mortgage insurance, but if you purchase above 80% LVR, then LMI is going to be payable.

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Again, go back to episode one.

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If you want to know in detail about what LMI is, this is not going to be an upfront cost as such, but LMI is normally capitalised on top of your loan.

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We've also got legal and conveyancing fees.

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This one's often.

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Forgotten about If you purchase a house, you need a solicitor or a conveyancer.

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No way around it.

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Unfortunately, they will go through the purchase contract for you and will also do all the legal requirements for you.

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This is to review your contracts, perform the checks on the title, ensure that everything is actually in order on the title.

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Ensure a smooth transfer of the property from the seller to you.

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They'll coordinate the payment of the stamp duty to the applicable state revenue office or the territory, and they'll draft up the settlement documents.

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This is normally gonna cost you about $500 at the cheapest, and on the high end about $2000, but best to budget about $1500 for your conveyancing costs.

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These are your pretty much your major costs that you're going to incur.

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The next few that we're going to go through are smaller in dollar terms, but they need to be considered.

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So we'll whiz through these.

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OK, we've got the valuations.

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Lenders often engage the services of a valuation firm to inspect the property that you want to purchase.

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I won't go into detail on the different types of valuations, but if they pass this cost on to you, it's approximately going to be $250 for a property valued under $1 million.

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We've got the mortgage application fees now.

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These are the fees your bank charges to set up your loan.

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If they charge them, they range about 200 to $500.

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If you want to be smart about it, ask if they can be waived because most banks can actually like waive those.

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There are the mortgage registration fees, another fee that's enforced by the state or territory government.

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It will depend on the state that you're in, but pretty much budget about 100 to $200 for that.

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Insurance.

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Nearly all banks will require you to have property insurance.

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This is also known as the certificate of currency.

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The next one I want to mention is a building inspection.

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This report you should do prior to making an offer on any property.

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This report will cost about $550 and it details the condition of the house and any potential problems it may have.

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Now that we've gone through the headline topics.

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You know what time it is.

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That's right.

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It's time for us to go through the numbers and calculate the overall cost.

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Keep in mind, we're going to be using an example based on an $800,000 property purchase.

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Let's say we go for an 80% LVR.

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That way we can get a lower interest rate that's available by the banks and we avoid the additional LMI cost.

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If you've got a pen and paper at home, follow along and we'll do the sums together.

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Our deposit was 10%, so based on an $800,000 property purchase price, that's an $80,000 check that we need on auction day.

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The LVR, we wanted an 80% LVR, so we've already paid 10% deposit, so we're going to need another $80,000 to make up a total of a 20% deposit.

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Stamp duty, if you remember, Victoria was around about $45,000.

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NSW was about 32,000.

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So let's take the worst case scenario and we'll go with Victoria's figure of $45,000.

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Legal and conveyancing fees.

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Let's take the $1500 average figure.

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LMI, we're going to avoid this because we're paying the 20% deposit cost.

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The mortgage establishment fee was about $400.

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The lender's property valuation was about $225.

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Our building inspection report set us back $550 and our building insurance that we're going to need to take out on the property is probably going to cost us about $1000.

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Now let's bring out the old fashioned Max lending calculator, put these figures in beep, beep, boop, boop and it's a grand total of 200.

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And 8100 and twenty-five dollars.

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Wow, wow, wee wow.

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That is a shock to the system.

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You still standing?

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Maybe it was best that I told you guys to sit down before I gave you that figure.

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That's a lot more than your current twenty-five $1000 saving that you had in the bank that you thought was enough to buy a house, wasn't it?

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I've got faith in you guys though, so just knuckle down, start saving.

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Before you know it, you'll be ready to get into the housing market.

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Thank you for listening to another episode and as always, you stay classy and I'll see you at the next one.

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If you have a question that you would like answered on the show about budgeting, mortgages or finance, then drop us a line either via our socials.

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e-mail or website.

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Details available in the show notes.

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Any opinions and views expressed in this program are just that, opinions.

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All information is general in nature and should not be seen as financial, economic, legal, investment, accounting or tax advice.

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This program makes no representation or warranty as to the accuracy or completeness of any information contained in this program.

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You should consult a professional advisor in relation to your own personal circumstances.