When we’re thinking of buying a property sometimes we can focus on just the amount required for the deposit. But there is a lot more to paying for a property than that.

What is “cash”?

• The money you have in your wallet, which isn’t going to get you far when buying a property so you can exclude this (!),
• The net CREDIT balance in all of your bank accounts. For instance you may have a transaction account, which your salary gets paid into, you pay bills from, have an ATM card and draw cash out of. You may also have a savings account, and
• The balance in a term deposit that is not locked in for a fixed period of time, i.e. a high interest earning account such as an ING account or similar.

What are “liquid assets”. In this case liquidity has nothing to do with a state of matter such as water, but instead refers to how easily an asset is converted to cash.

• The simplest example is shares, which are traded on a stock exchange and can be sold for cash as quickly as you can call your broker, and
• A term deposit locked in for a fixed period of time that is either maturing soon or the contract can be broken early for a penalty fee.

So go ahead and add up all of the cash and liquid assets you have and then let me tell you how that hard earned money will be spent when you buy a property…

1. Firstly you need a deposit. Nowadays financial providers will tend to lend you up to an 80% LVR, but sometimes 90% if you take out Mortgage Insurance (MI) and/or have a guarantor. But beware, MI is very expensive.

I would like to quickly explain how MI works. Going back to our $500,000 property, if you only have a $50,000 deposit your mortgage provider can charge you insurance in the event you default on your repayments. On a mortgage of $450,000 you could pay around $8,820 of insurance (about 2% of the loan).

You can either pay the MI upfront (which means you need $58,820) or add it into your mortgage, which may seem like a good idea as the additional monthly payments aren’t that much (for e.g. $67/month) but you end up paying interest on the MI and over the life of a 30 year mortgage you could pay almost three times the amount of insurance!

2. Next we have lots of purchasing costs that can really add up: lawyers or conveyancers fees, property search fees, building and pest inspections, mortgage and associated fees etc. I would budget for another $5-10k on top of your deposit, and more so if you do this for a number of properties you try to buy along the way.

3. Then comes the big hitter, Stamp Duty. Stamp Duty is charged on the value of the property by the state government for transferring the property from one owner to another. Stamp Duty varies from state to state, generally increases in proportion with the value of the property and concessions may be given for first homeowners. Using our example of the $500,000 property and lets say we’re in NSW, the stamp duty would be almost $18,000, or 3.6%.

4. And then finally, after the deposit, stamp duty and purchasing costs, do you have any more money left over? What you can do with this will be discussed in later posts.

In summary, to buy a $500,000 property, we need to have $128,000:                                                                               $100,000       20% deposit                                                                     $  10,000        purchasing costs                                                           $  18,000        stamp duty                                                           $128,000

 

If I had $100,000 and thought to myself, “well I’m ready to go, that’s my 20% deposit for a $500,000 property”, in actual fact I can only afford to buy a $400,000 property:                                   $  80,000        20% deposit                                                                     $   7,000        purchasing costs (assuming we economise)           $ 13,500        stamp duty                                                          $100,500

 

This analysis tells us what value property we can buy, but it does not tell us what value property we can afford to pay mortgage repayments on.

Coming soon… 2. What mortgage payments can I comfortably afford?