In this investment basics article, we consider the various costs associated with purchasing a property and what buyers need to be aware – and beware – of.
From mortgage to maintenance charges, capital gains tax to council rates, lawyers fees to stamp duty, the costs of purchasing a property add up and are generally significantly more than the purchase price agreed on between buyer and seller. There are even costs associated with selling your property. We outline some of the possible costs – region-dependent – of buying real estate.
To be ready to purchase a property you have probably already saved a lump sum for a deposit – a portion of funds used as security or collateral when renting or buying property. This will help to secure a mortgage if, like most investors, you are not purchasing a property outright. Usually at least 5% of the purchase price is required as a deposit though up to 25% can be necessary. For repayment mortgages, the larger the deposit, the lower your monthly mortgage repayments, but if you arrange an interest-only mortgage, which is available to overseas investors in some markets, monthly payments will be the same unless interest rates fluctuate.
Your mortgage is your loan arrangement to borrow the money required to finance your property purchase and is normally provided by a bank. Mortgages can be acquired on a variable rate (in line with the national central bank rate so they can go up or down along with that), fixed rate (you pay the same amount each month for a set period of years which remains steady even if the central bank raises or cuts its interest rates), or adjustable rate (the interest rate is fixed for a short initial term, usually low, before switching to the variable rate). It’s important to calculate the total cost of the loan throughout the lifetime of the mortgage and really consider how good a deal it is. Interest, capital and arrangement fees all need to be factored in.
Mortgage repayments are normally paid in monthly installments over a set term which can vary between 15 and 30 years. If the property is sold before the mortgage is repaid – which is often the case with investment properties – any outstanding money owed to the bank is repaid on sale of the property with the remaining equity kept by the seller.
When investing in a property that you intend to rent out, you may need a specialist buy-to-let mortgage. These can require larger deposits. For investors purchasing property overseas it is possible to arrange an interest-only mortgage. This can apply, for example, when buying property in the UK, and it means that only interest needs to be repaid. The full amount borrowed will then be owed at the end of a mortgage term. This limits how much money buyers put into a property. It’s always worth meeting with an independent mortgage advisor to discuss your mortgage options, especially if you are investing in a foreign market.
Valuation, Inspection and Surveying
When purchasing property you may have to have it valued, inspected or surveyed, often at the request of a mortgage provider and carried out by a professional. This comes at a price.
You will usually need to instruct a solicitor or licensed conveyor when buying a house to carry out all legal work. These fees vary. In the UK this cost ranges from GBP850 to 1,500 plus VAT. In Germany notary fees are usually between 1.2 and 1.5% – here you may also require translation services.
Stamp duty is applied to properties at varying percentages of the purchase price and according to where it’s located and the property type. This is a lump sum tax and is applicable to property in the UK, Australia and Singapore. Special rates sometimes apply to investors from aboard.
In the UK, stamp duty is paid on homes that cost GBP125,001 or more, while first-time-buyers pay no stamp duty on the first GBP300,000 for properties worth up to GBP500,000. In Singapore Buyer’s Stamp Duty is charged at 1% on the first S$180,000, 2% on the next S$180,000 and 3% on the remaining amount. Seller’s Stamp Duty can also be applicable on residential property and depends on the holding period. In Australia stamp duty is also a percentage cost of the purchase price of a property but varies by state.
There are often local taxes required to be paid while you own a property. These are usually assessed and collected by local authorities and are used to fund local services – they tend to be assessed annually and collected monthly and are usually calculated based on the value of the property – and sometimes the number of occupants. How much council tax will your property attract and is it the responsibility of the occupant or the landlord to pay it? Make sure this has been considered and if the occupant is paying it, build it into the rent or agree it up front.
Capital Gains Tax
This is the tax levied on the capital gains or profit accrued and applies when an investor sells their asset for a price higher than the initial purchase price. Not all countries implement a capital gains tax and most have different rates. In the UK capital gains tax is charged at 28% where the total taxable gains are above the income tax basic rate band. For anything below that limit the rate is 18%. Germany levies a flat capital gains tax known as the abgeltungsteuer which is 25% plus a 5.5% solidarity surcharge on the levied tax, though if a property is held for more than ten years, capital gains tax no longer applies. In Australia capital gains tax is the same as your income tax rate for that year.
Tax applies to rental income. There can be other taxes, too. German property buyers, for example, are subject to transfer taxes of between 3.5% and 5% of the property prices.
These are expensive and include management charges, maintenance fees, insurance, the cost of putting the property on the market for rent and finding a tenant then drawing up tenancy agreements, furnishing, utilities, and general wear and tear costs.
All of these costs will affect the potential for profit of a particular property investment and should be carefully considered when assessing the viability of a property prior to purchase. Costs are always going to be more than the sale price agreed and can vary significantly in different markets. Do your due diligence to ensure you are aware of any potential additional costs and are not left out of pocket.