Buying A Home
Buying A Home is one of the biggest investments/purchases most of us will ever make in our life. It normally involves borrowing a large sum of money which is to be paid back over 20-30 years – a significant part of our lifetime. Despite that, many buyers go into this exercise without knowing what to expect or what to look for.
One of the most important aspects in buying a home is the cost/value. While no one will mind if they pay less than the home is worth, it is a different story to find that you have paid too much. Also, mortgage-lending institutions normally lend up to 90% of the value or cost of the home, whichever is the lower. For example, assume you are buying a home for $600,000 and hope to borrow $540,000. (You have made a $60,000 deposit from your own funds). If the valuer then determines the home that you are buying is worth only $540,000, the mortgage lending institution will only lend you $495,000 and you will have to find an extra $55,000 on your own or possibly lose the deposit you made on the house.
There are two simple ways to avoid this happening to you. The easiest way is when you have finally decided what house you are going to buy, find out from your mortgage lending institution who are the valuers on their panel, then select one of them to value the house before you make a deposit. Another way is when making a deposit, specify that if the independent valuation report done by the Bank is less than the agreed purchase price, you have the option of canceling the contract and getting a full refund of your deposit. If you adopt this option, ensure that the deposit will be held in escrow with an attorney or other such professional to avoid problems if a refund becomes necessary.
Another important factor to consider in purchasing a home is how much extra money you will need for closing costs. There are several costs involved in addition to the actual price of the house. Some of these include:
- Solicitors’ fees for the Deed of Conveyance which transfers the house to your name. It is based on the cost of the house and generally, it is 1.5% on the first $100,000; 0.75% on the next $400,000 and 0.5% on the balance. . (Shortcut if cost > $500,000 – Divide cost by 200 and add $2,000.)Don’t forget – add VAT @ 15%
- The Stamp Duty on the Deed of Conveyance. The first $850,000 of the purchase price is exempt. After that, it is 3% on the next $400,000; 5% on the succeeding $500,000 and 7.5% on the balance. The stamp duty is payable to the government and the rates stated here are for residential homes. (Shortcut if price > $1.750,000 – Calculate 7.5% of cost and subtract $94,250.)
- Solicitors’ fees for preparing the Deed of Mortgage. This is based on the amount of money you borrow and the rate is the same as in (1) above. This may be reduced by 50% if the same solicitor prepares both deeds.
- Stamp Duty on the Deed of Mortgage. Again, this is based on the amount of money you borrow and is payable to the government. The amount varies depending on the type of property (residential, land, etc.), purchase or refinance, and if the amount borrowed is larger than the purchase price. In the case of a purchase of a residence, it is often $2.00 per $1,000 (0.2%) assuming mortgage is for more than $850,000. (If less, then there is no stamp duty). In other cases, it is $4.00 per $1,000 (0.4%).
- Valuation fees which are usually between 1/3 to 1/5 of 1% of the value of the property, plus VAT @ 15%.
- Mortgage Lending Institution Fee (Varies between 1/3 – 2% of the amount borrowed).
- Mortgage Indemnity Fee. The calculation of this depends on several circumstances. It can be either 1.5% of the loan amount or 18.5% (of which 6% is a government charge) of the amount on which the mortgage indemnity is taken. Let the loan officer advise you on this.
Do not forget the house itself. There are many questions you have to ask yourself.
- What is the traffic like at rush hours (a.m. and p.m.)? Remember you will be in it for the next 20-25 years.
- Do all the plumbing fixtures work? If not, why not?
- Is the electrical wiring adequate for all you equipment? (e.g. fridge, stove, a/c, kettle, washer, dryer, etc.)
- Do you see any leak stains on the ceilings? If yes, it could mean that the roof needs repairs/replacing.
- Is there any evidence of termites? You may want to call an expert to determine this.
As you can see, there is a lot to be aware of in buying a home. Do not “Buy in haste and Regret in leisure”. Given below are 2 examples of the approximate closing costs involved in buying a home which we hope will be helpful.
|Mortgage||$900,000 (90%)||$1,800,000 (90%)|
|Amount Due From Purchaser||$100,000||$200,000|
|Legal Fees (Conveyance)||$8,050||$13,800|
|Stamp Duty (Conveyance)||$4,500||$55,750|
|Legal Fees (Mortgage)||$7,475||$12,650|
|Stamp Duty (Mortgage)||$1,800||$3,600|
|Mortgage Lending Fee (1.0%)||$9,000||$18,000|
|TOTAL Closing Cost|
|(Without Mortgage Indem.||$33,700||$109,550|
|TOTAL Closing Costs|
|(With Mortgage Indem.)||$47,200||$136,550|
The above costs/fees are estimates only and are likely to vary from case to case. The above information is believed to be correct as of the date of writing. Before you make any decisions however, you are advised to consult with a suitable professional such as an accountant, an attorney, a financial advisor, etc.