I came across this excellent article in Your Mortgage Magazine this week, and just know it will help plenty of you looking to get into your first home. I hope you enjoy it.
Owning your own home is a great dream. But don’t be fooled. It will require you to make some major sacrifices and finding a home requires discipline and effort, not to mention cash. But with some determination, you can get on the road to home ownership. We outline 11 basic steps which will help you achieve your dream.
Step 1 – Determine your budget
The first step towards home ownership involves a little introspection. You need to take a long, hard look at yourself and your finances and determine what you are planning in the years ahead and how much you can afford to repay.
How much can you afford?
There’s a handy Income and Expenditure Calculator on this site that can tell you the answer, but the calculations are pretty simple.
Know your expenses and income
Begin with your total monthly income. Add the after-tax income of you and your spouse (if applicable), regular income from assets which you will own after you buy a home, and any other income. This is your total monthly income. The next step is to determine your monthly expenditure. Don’t include your current rent if you are purchasing a home to live in. Subtract your total monthly expenses from your total monthly income and the number that you have is roughly what you can afford to repay each month on a loan. You also need to consider where your career is headed and whether any salary increases are likely. There are also family considerations. Are you or your spouse likely to need time off work to raise a child, which could eat deeply into your income?
Step 2 – How much can you borrow
Now that you know the total amount you can devote to mortgage repayments, you should determine how much you can borrow. This amount will vary from lender to lender, and many now offer online calculators that allow you to determine your borrowing limit. Your Mortgage offers different easy-to-use interactive calculators and tools that will help you model any complex mortgage and investment related scenario.
You can also ask mortgage brokers, (one of our team at Loan Wize can certainly help with this!) who will have a good idea of how much the lenders on their panel will lend to you based on your income, debts, assets, number of dependants and whether you are buying the property alone or with somebody else.
The costs you will face
The affordability calculator on this site calculates a very conservative estimate of the amount you will be able to borrow and the costs you will face depending on which state you live in.
You can also use the home loan repayment calculator to get an estimate of your mortgage repayments. The resulting calculations are based on the financed amount requested, the length of the loan term and the interest rate. However, the estimate is neither a quote nor loan offer and you’ll need to speak to a financial planner before applying for a home loan. Remember to set enough money aside for the deposit, which is usually a minimum 10 per cent of the value of the property. You also need to pay for stamp duty on the property, which will cost several thousands of dollars, depending on which state you live in.
Step 3 – Hunting for a home loan
Borrowers in the market for a competitive home loan need to educate themselves about the different available home loans. Additionally, borrowers need to familiarise themselves with the interest rates on these loans as well as the product features.
Which loan features do you fancy?
Borrowers need to decide which loan features they need. If you’d like the security of knowing exactly the amount of your repayments, then a fixed loan could be for you. If you think interest rates could fall in the future, then a variable rate might be more suitable.
Loans which offer redraw facilities are popular as they allow borrowers to repay more than the minimum regular mortgage repayments and withdraw surplus repayments. Some lenders offer free redraw facilities, others charge.
If you have surplus disposable income, then an all-in-one loan or 100 per cent offset account might be the ticket. Putting your savings and income into these accounts offsets the loan principal and reduces the interest you pay on your home loan. This can save thousands of dollars in interest costs over the term of a loan.
Once you’ve determined the type of loan that best suits your needs, it’s time to go mortgage shopping. You’ll need proof of income such as pay slips or recent tax returns, proof of your savings history and other documents that may be required by specific lenders or brokers.
Step 4 – Know the deals in the market
It’s important for borrowers to know what deals are in the marketplace in order to get the best deal. This is one time when advertising can be your friend. Ads on television and radio, newspapers and magazines such as Your Mortgage Magazine are great places to find out what deals lenders are currently offering. Be proactive and contact lenders directly about deals on offer. Whether it’s a lower interest rate, zero establishment fees, frequent flyer points or other value-adds, the more you know about the current home-loan market, the better your negotiation skills when it comes to asking your lender for more product features or a lower interest rate.
Don’t be scared to ask for more. The home loan market is very competitive and lenders might be prepared to haggle to win your business. And remember, if you don’t ask, you don’t get.
Step 5 – Get approval
Having found the best possible deal, it’s time to apply for a home loan, attend a loan interview and get approval. Make sure you have all the necessary documents ready for your lender or broker.
Procedures vary from lender to lender, but it is likely you will be issued with either a ‘home loan guarantee certificate’ or a ‘pre-approval certificate’. This means that, subject to a few conditions, your home loan either has been, or will be, approved when you find the property you want to purchase. One of the main conditions is often a valuation of the property to ensure a buyer isn’t paying too much for a property.
Loan approvals don’t last forever. They typically are valid for around six months, but sometimes up to 12 months. If you find your pre-approval has expired or is about to, contact the lender or broker and see if it can be extended or if you have to re-apply.
Step 6 – Finding your home
Now that you know your budget, it’s time to determine how much ‘home’ it’s likely to buy you and in which suburbs you can afford to live in. The real estate section in newspapers, local papers and real estate agents are all useful sources of pricing information.
Once you have settled on an area, you should tell a few real estate agents what you are looking for. Remember, real estate agents are employed by the vendor, so make sure you do your own research as well.
Home Price Guide
In terms of getting comprehensive comparative sales information, it’s hard to go past the Home Price Guide, available from Australian Property Monitors (APM), a joint venture between HWW Limited, the publishers of Your Mortgage Magazine, and John Fairfax & Sons.
The Home Price Guide list sales details of individual residential properties. Each standard guide lists monitored sales in the previous 12 months in the postcode of your choice. If the property you are purchasing is in the database, you can see how much the current owners paid for it, whether it has been put to auction since it was purchased, and in some cases what the highest bid at an auction was.
Step 7 – Don’t forget building inspections
Anyone buying a home should have it inspected for faults. Make sure the property you buy isn’t a dud – and there are plenty out there, especially in cities where housing stock can be very old and run down.
There are number of different inspections to be made depending on the type of property, including:
- building inspections
- pest inspections
- electrical inspections
- strata inspections and
- a land/property survey
These inspections are likely to cost anywhere between $200 and $600 each. Don’t baulk at the cost. It is vital that you find out about any hidden nasties like damp, shifting foundations, faulty wiring and plumbing. Then you can factor in the cost of repairs to the purchase price or decide to drop the deal altogether.
Step 8 – Making an offer
Ater your inspections, if you’re still satisfied with the property, it’s time to make your next move. While it is important to be cautious in approaching price negotiations, don’t be too inflexible. After all, you want this property. The last thing you want is someone beating your best bid by a few hundred dollars, knowing that the property is worth much more.
Private sale offer
The most common way to buy property is by private treaty or sale through a real estate agent or directly from the owner. If a property isn’t going to auction, you are saved from the stress of auction day, but are then faced with the daunting question of how much should you offer. If a home price tag says $250,000, this may not be how much the vendor really wants. Many agents say that it’s usually wise to make a lower offer within 5 per cent of the asking price, although this percentage can increase in a slow market. The most common tactic is a verbal offer to the seller’s real estate agent.
Alternatively, a sales summary can be prepared by your solicitor and forwarded to the vendor. A sales summary contains the date of the offer, the address of the property, the offered purchase price, the deposit amount and the balance to be paid, details of your finance, any special conditions and the proposed settlement date. Once your private-treaty offer is accepted and you’ve accepted the sale contract, it’s time to pay the 10 per cent deposit. This is typically given to the real estate agent, who holds it on behalf of the vendor in a special trust fund until the sale is finalised.
Deposit bonds are increasingly being used at auction and private treaty to replace a cash deposit. Home buyers buy the bond from insurance companies for as little as 1 per cent of the deposit. The bond is a guarantee issued by an insurer, guaranteeing the vendor payment of the initial deposit on purchase of the property. Borrowers initially pay only for the bond and delay payment of the full deposit amount until settlement, when they are required to pay the full purchase price.
Exchange of contracts
Contracts are normally formally exchanged between the potential buyer and the seller at the time the deposit is paid. In most cases, the solicitor or conveyancer representing each side does the exchanging. Once this has occurred, borrowers are legally bound to proceed with the purchase of the property, unless a special condition is breached that is listed in the terms and conditions of the contract. These should be explained to borrowers prior to money changing hands.
Bidding at auction
If the home you crave is being sold via auction, it is critical that you have pre-approval finance. You also need enough of a deposit or a deposit bond.
While private treaty sales allow a cooling-off period in which buyers can conduct inspections, auctions don’t usually allow for a cooling off period. Your bid is binding, so make sure you really want the property before you raise your hand. Most important of all is to not exceed your maximum spending limit. Inspections on homes up for auction need to be done prior to the bidding stage. Get a copy of the conditions of sale and the vendor’s statement well in advance of the auction and have your legal representative check the terms and conditions.
There are usually two types of auctions: on-site auctions and in-room auctions. To bid at either, either express interest to the auctioneer before the auction begins, or simply raise your hand, call a bid, or use any other type of gesture or signal to the auctioneer. The name which you give the auctioneer before the auction is the name which will go on the contract and it cannot be changed later. When bidding for another person, advise the auctioneer in writing beforehand. Most properties for sale by auction have a reserve price, which is a minimum price the owners are prepared to accept for the property. The reserve price is not made public until the bidding exceeds it. Once the reserve is reached, the property will generally be sold to the highest bidder.
Step 9 – Legal legwork
Once you’ve found the property and you have the contract, it’s important that you check the contract carefully to ensure that everything about the property is understood and that there will be no legal surprises after you have purchased it. Signing a contract without a lawyer looking at it first is madness. If you want to make any changes to the contract, now is the time to do it.
You also need to arrange conveyancing, which is the transfer of property title from one person to another. Most people employ a solicitor or conveyancing expert. The services of a conveyancing specialist cost up to $1,500 and the fee will usually include survey, building and pest reports. Many practitioners, however, offer conveyancing services for as little as $600. Conveyancing fees cover all the costs of the transfer of property, except for stamp duty, and most conveyancing firms will give you a free quote. Some buyers do their own conveyancing. Do-it-yourself conveyancing kits are available from the Law Consumers Association in Sydney, Legal Kits of Victoria in Melbourne or the Consumer Law Reform Association in Brisbane. These kits provide a comprehensive guide to the ins and outs of property conveyancing. The DIY approach will save you a considerable amount of money, but it is worth bearing in mind that you will be legally accountable for any mistakes that you make. The more prudent option may be to pay for a professional.
Step 10 – The waiting game
Take a deep breath and relax, you’ve earned it. The pace slows a little now as you wait for your legal team to do some tyre-kicking. For the next six weeks, sometimes less and sometimes more, your conveyancer or lawyer will make enquiries about the property. Survey and drainage diagrams will be examined, government departments will be written to, heritage orders will be inspected and council checks will be performed. In other words, the work is usually out of your hands. A kind vendor may grant you additional time if you are having difficulty meeting the agreed deadline but don’t count on it. The chances are that the property is also costing them money (through their own mortgage repayments or lost interest) and they are under no obligation to give you more time. This is the time when buyers and vendors usually get an attack of the jitters. Buyers keep their fingers crossed that everything about the property will be fine and will run according to schedule, and the vendor is praying that the sale goes ahead and they can get their hands on cash.
Step 11 – Settlement at last
Settlement day is the day that you or your representative meets with the vendor to swap your cheque with their title of ownership. Cherish this moment, because with most people this certificate will quickly go to your lender, unless you are lucky enough to purchase the property outright. Government departments need to be notified of the change in ownership, and this is typically taken care of by your solicitor or conveyancer. You should have the building insured at the time of settlement otherwise some lenders won’t lend you money. To remove any ambiguity, a safe course of action is to insure the property as soon as you exchange contracts.
Enjoy the feeling
Congratulations, you are now the proud owner of your new home and you’re ‘in the property market.’ No more being looked down upon by property owners. Buying your first home is a major achievement and it involves time and effort. Invest those factors, and the payoffs could be huge. Mistakes will be made and lessons will be learnt, but isn’t that what life is all about?
It can be confusing to know whether to get a variable rate or fixed rate mortgage, and what features are important. That’s why it’s important to not only check the right rates, but make sure that you’re getting the right features in your home loan.
We would love to catch up with you if you are considering buying your first home. Having an appointment with Jon or Tammy will provide you with some real clarity in regards to your borrowing capacity, your required deposit, the most suitable loan product for your needs, and ultimately give you some real peace of mind around your buying decision. Give us a call to discuss your situation.