STAMP DUTY
What is Stamp Duty?
Stamp duty (also known as transfer duty) is a one-off tax you pay when you buy property. It’s charged by state or territory governments on the transfer of property ownership, and the buyer usually has to pay it. In other words, when you purchase a house, apartment, or land, the government will charge you a percentage of the purchase price as an additional tax. Stamp duty is important because it’s often one of the largest upfront costs in buying a home – it can amount to tens of thousands of dollars, so you need to budget for it early on.
How is Stamp Duty Calculated? (and Why It Matters)
Stamp duty amounts vary widely depending on the property price, the state or territory, and even the type of property. Each state/territory sets its own rates and formulas. Typically, the higher the purchase price, the higher the stamp duty. Many states use a tiered scale (for example, you might pay a low percentage on the first chunk of the price and higher percentages on portions above certain thresholds).
There’s no single Australia-wide rule, so the cost on a $500,000 home could be anywhere from around $8,750 in one state (e.g. Queensland) to about $23,928 in another (e.g. Northern Territory). That’s a big difference! This variability is why it’s crucial to check your own state’s rates or use a stamp duty calculator when planning your purchase. Stamp duty usually must be paid shortly after settlement (within a few months of buying), and you generally can’t avoid it – if it’s not paid, the property transfer won’t be completed. You can find more details on specific state-by-state stamp duty rates here.
Exemptions and Concessions (Saving on Stamp Duty)
The good news is that first-home buyers and certain other buyers can sometimes get a discount or exemption on stamp duty. Each state has its own schemes to help new buyers.
For example, in NSW as of recently, first-home buyers pay no stamp duty on homes valued up to $800,000, and get a discounted rate on homes between $800,000 and $1,000,000. Other states have similar concessions (with different price cut-offs). Some states also offer relief for other situations – like if you’re transferring property between spouses, or receiving it as an inheritance, etc. These concessions can significantly reduce or even eliminate your stamp duty, which can be a huge boost if you’re a young buyer scraping together a deposit. Always check the latest rules in your state – you might save a lot of money if you qualify for an exemption.
Lender’s Mortgage Insurance (LMI)
What is Lenders Mortgage Insurance (LMI)?
Lenders Mortgage Insurance (LMI) is not a government tax – it’s an insurance policy, but it’s closely related to your property purchase if you have a small deposit. In simple terms, LMI protects the lender, not you. If a borrower (you) can’t repay the home loan and the property sale doesn’t cover the remaining loan, LMI covers the lender’s loss. LMI is usually a one-off premium that applies when you borrow more than 80% of the property’s value (i.e. your deposit is less than 20%). From a young buyer’s perspective: if you don’t have a big deposit, the bank will ask you to pay LMI. This could be an upfront cost or, more commonly, it can be added on top of your loan.
When is LMI Required?
Most banks and lenders require LMI if your loan-to-value ratio (LVR) is above 80%. That means if you have under 20% deposit. For example, if you’re buying a $500,000 property, 20% deposit is $100,000. If you have less than that (say $50k, a 10% deposit), expect to pay LMI. The logic is that with a smaller deposit, you’re borrowing more and are statistically a higher risk to the lender. LMI can be quite expensive – often 1%–5% of the loan amount, on a sliding scale. The smaller your deposit (and the bigger your loan relative to the property value), the higher the LMI percentage. It can easily run into thousands of dollars. Remember, this cost doesn’t benefit you (it’s not like home insurance); it purely protects the lender. But it does help you get the loan with a lower deposit, which is why many buyers opt to pay LMI and get into the property market sooner rather than later.
How Stamp Duty and LMI Impact Affordability
Both stamp duty and LMI can significantly affect how much cash you need and what you can afford:
- Stamp Duty: Since stamp duty is paid upfront around settlement time, it effectively increases the amount of savings you need to buy a property (unless you can add it to your loan – which usually isn’t possible for owner-occupiers). For example, if you budget $600,000 for a home, don’t forget you might owe, say, roughly $20,000+ in stamp duty on top of that. If you’re eligible for a first-home buyer exemption, that $20k is an extra amount you don’t have to come up with – which could be the difference that makes the purchase feasible. Stamp duty can also reduce how much of your savings can go toward your deposit. A large stamp duty bill might mean you end up with a smaller deposit (and possibly needing LMI) because you had to spend a chunk on the tax. In short, stamp duty is a huge upfront cost that can delay when you’re able to buy, unless concessions apply to you.
- LMI: Lenders Mortgage Insurance doesn’t have to be paid upfront in cash (it can be financed into your loan), but it still affects affordability. If you choose to add LMI onto your loan, your loan balance increases, which means you’ll have higher monthly repayments and pay more interest over time. If you pay it upfront, that’s money out of your pocket at settlement (money that isn’t going toward your deposit or other costs). In either case, it’s an extra cost of buying a home when you have a small deposit. On the flip side, LMI can enable you to buy sooner. Rather than waiting additional years to save a 20% deposit, many young buyers decide it’s worth paying a few thousand in LMI to get into the market now. It’s a trade-off: you’ll owe more and your borrowing costs are higher, but you might jump on a property deal earlier.
Other Common Acquisition Costs
In addition to stamp duty and LMI, there are several other costs to consider when buying a property. Here’s a list of common acquisition costs along with typical cost estimates in Australia:
- Building and Pest Inspections: Professional inspections to assess the property’s condition and identify potential issues before purchase.
- Loan Application and Establishment Fees: Lenders charge fees for processing your home loan application and setting up the mortgage.
- Mortgage Registration Fees: A fee for registering your mortgage on the property title, charged by the government.
- Title Search Fees: Costs for verifying the property’s title and ensuring there are no encumbrances or legal issues.
- Bank Valuation Fees: Lenders require a professional valuation of the property to determine its market value.
- Settlement Fees: Administrative and processing fees related to the final settlement of the property purchase.
This content is based on information obtained from sources believed to be reliable and accurate at the time of publication, but we do not make any representation or warranty that it is accurate, complete or up to date. We accept no ongoing obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice, and do not constitute financial product advice.
We do not provide tax agent services. The information provided in this article should not be relied upon to satisfy liabilities or obligations that arise, or could arise, under a taxation law or to claim entitlements that arise, or could arise, under a taxation law. You should seek professional tax advice to understand your tax liabilities, obligations and entitlements.
