Calculating the Cost of a Home
Calculating the cost of a home
Many, if not most, people borrow at least some of the amount needed to buy a home. Repaying this loan is typically the most expensive aspect of owning the home.
ASIC provide a calculator that you can use to determine mortgage repayments for different types and amounts of loan. The calculator lets you work in two directions: you can input a given amount of money and then determine the periodic repayments for a given interest rate. Alternatively, you can determine how much you can afford as a repayment and then use the calculator to calculate the level of borrowing this repayment facilitates at a given interest rate.
It is a good to alter the interest rate payable in the calculator to determine the impact on repayments if interest rates rise. You must ensure that you can afford repayments at a higher interest rate than the one on offer, unless you know that you can fix the interest rate for the foreseeable future.
There are various ways to assess how much you can afford as a repayment. Housing affordability is often calculated by dividing the annual repayment for a loan into the annual income for the home owner. This gives a percentage: higher percentages indicate lower affordability.
For example, a potential buyer might decide that she can afford to dedicate 30% of her after-tax income to repayments. If she earns $50,000 (after-tax), this equates to $15,000. According to the calculator, on a home loan with an interest rate of 5%, she could borrow:
- $187,000 over 20 years;
- $212,000 over 25 years;
- $230,000 over 30 years.
If she increases her repayments to 35% of her after-tax salary, she can then borrow:
- $219,000 over 20 years;
- $247,000 over 25 years;
- $270,000 over 30 years.
Looked at from the other direction, a potential buyer can determine what the repayments are for a given sized loan, and then calculate the percentage of her income needed to service a loan of that size. Again, experience would suggest that you factor in an interest rate rise when deciding whether a loan is affordable.
In all Australian states and territories, stamp duty is payable on a property purchase. This can be a large expense which many first time home buyers, in particular, forget to factor in. For example, someone buying the median-priced property in Melbourne ($727,000 as of December 2015) will pay around $40,000 in stamp duty and related costs.
Happily, buyers who use debt finance are typically prompted by their lender to factor in stamp duty when they negotiate their loan agreement. Unhappy surprises on stamp duty are relatively rare.
Many lenders require borrowers to insure the lender against default. This is typically the case when the borrower borrows more than 80% of the value of the property being purchased. In such cases, there is a risk that the property could fall in value such that the full amount of the loan could not be repaid if the client sold the home.
The insurance is typically purchased at the time the mortgage is put in place. The amount of the insurance is often added to the amount borrowed, with the lender then passing the amount of the premium to the insurer. Borrowers should not be fooled by this cash flow, however: the premium is paid by the borrower, not the lender.
Premiums are typically somewhere between 1 and 3% of the amount borrowed.
Given that the mortgage insurance does not make the borrower any better off, many borrowers will seek to limit their formal borrowing to less than 80% of the value of the property. To do this, many people might source money from elsewhere (such as friends or family) in order to keep the balance of the mortgaged loan account below 80%.
Purchasing a property involves some legal administration. Mortgages need to be put in place, titles need to be conveyed from the previous owner to the new one, etc. Legal fees can range up to around $2,500 for a purchase.
Council rates vary from area to area, but they are typically charged using a formula, meaning that the level of rates payable for a property of a given value can typically be calculated prior to purchase – or at least a very good estimate can be attained.
Insurances (Buildings and Contents)
Most home owners need to insure the building and the contents of their home. There are various online calculators that can be used to estimate these amounts. As these are all provided by commercial operators with a view to getting people to increase the sum insured, clients may do better by speaking directly with one or more insurers and obtaining a particular quote.
If you have bought a home and not yet settled, then you should look to insure the building right now. This will assist you in case anything happens to the property before you finalise the purchase. Talk to your insurer about this form of insurance.
Body Corporate Fees
Where two or more properties share some expenses of holding the properties, these expenses are typically paid by a body corporate. Body corporates tend then to charge fees to the individual landowners who make up the body corporate. Again, these fees vary according to the property, but they are typically disclosed to purchasers prior to purchase.
The Hidden Costs of Buying a Home – realestate.com.au
Commonwealth Bank’s Upfront Cost Calculator – as the name suggests, this calculator gives an estimate of the cot of buying a home using debt finance.
Buying a Home – ASIC’s website for people thinking of buying a home. This is particularly designed for first home buyers.
If you are thinking about purchasing your first property, or even just working towards that goal, why not have a chat to us. We can help you with a strategy session to help you make an informed choice about your options, and get you to owning your on home that little bit faster.
This article is an extract from our 66 page eBook on Your Own Home. Click on the image to get a full copy for free.
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