TIPS FOR BUYING
A NEW HOUSE
Buying a home is exciting but nerve-racking because this will
probably be the most important, and expensive, purchase you will ever make. Understanding
the process will help you avoid problems and rely less on luck to make the right
decisions. It takes time to find and buy a home so dont try to rush it or you may be
caught out!
Warning: buy in haste and repent at leisure
Renting vs. Buying
Owning your own home is the great Australian dream but its not always the most economical
route. Renting may work out cheaper than buying if:
You are buying in an area where there is limited potential for capital growth, such as
in a heavy industrial area
You are buying at the top of the property market because property values usually fall
soon after
You are renting in an area where home prices are expensive
Making extra repayments saves you thousands
If you owe $80,000 on your home loan at 7% and are paying it back over 30 years at $532
a month, paying an extra $88 each calendar month ($20 a week) will slash the term to 20
years and save $43,000 interest. Once the term of the loan has dropped to five years there
may be better ways to invest surplus cash, such as superannuation, trusts, term deposits
or shares.
Ten steps to buying a home
Plan and research properties and loans
Save a deposit (aim for 10-20 per cent)
Arrange possible finance (loan pre-approval)
Start lookingcheck out the market
Choose a property but dont fall in love with it yet!
Check the condition of the property
Formal loan application and approval
Legal checks and requirements
Exchange of contracts (deposit cheque required)
Settlement and moving in!
Finding the right home loan
These days there are almost as many loans to choose from as there are homes to buy, so
finding the right one for your needs can be confusing. Many borrowers mistakenly believe
that the best mortgage is the one with the most added features, such as credit cards and
offset accounts.
Traditionally, this type of mortgage will have a slightly higher interest rate or
set-up charge, so if you dont really need those features, why pay for them? A "no
frills" mortgage with a simpler structure and lower fees may be a better option for
you.
The key to finding the "best" mortgage is defining your own needs to
determine the type of loan you should be looking for - finding it is the easy part.
Home loan checklist
Answer the following questions and make a simple checklist of the lifestyle needs your
mortgage must satisfy. You could save thousands of dollars over the life of your loan:
Do you want the flexibility to make additional repayments or pay out your loan early?
Would you prefer the predictability of fixed loan repayments?
Would you like a redraw facility or the ability to suspend payments on your loan while
you start a family?
Will you be making weekly, fortnightly or monthly repayments?
How much deposit do you have? Will you need mortgage insurance?
Can you use an existing property as security for a home-equity loan?
Types of home loans
| Fixed rate interest rate |
a loan where the interest rate and
repayments are set for a pre-arranged term |
| Standard variable interest rate |
a loan where your repayments may rise or
fall at the discretion of the lender, often in line with official interest rate changes.
May include special features such as a redraw facility |
| Basic variable interest rate |
as above, but without extra features |
| Discounted variable loans |
the standard interest rate is reduced or
discounted for an agreed initial period |
| Honeymoon rate |
a loan offering an attractive introductory
interest rate for a fixed period, usually twelve months. Find out what interest rate your
loan reverts to when the honeymoon is over and if any restrictions apply during the
honeymoon |
| Mortgage offset |
an account similar to a normal transaction
account but the interest it earns is channelled into your home loan. This is tax-effective
and helps pay your loan off faster |
| Home equity loan |
a type of home loan that lets you access a
line of credit using the equity you already have in your home as security |
| Principal and interest loan |
a standard type of loan where your
repayments are calculated to include the amount of money borrowed plus interest |
Note: more complex mortgages sometimes have an establishment or application
fee levied to cover the cost of setting up the loan. Some lenders may waive application
fees for some customers - be sure to ask if you are eligible for a fee waiver
What can you afford?
Before you can calculate how much you can afford to pay for your home, you first need
to work out the total cost of the purchase. As a general rule, the total cost of purchase
is around five per cent of the price of the home, and includes legal and government
charges, loan establishment and administration fees and mortgage insurance if you are
borrowing more than 80 per cent of the propertys value. Stamp duty is calculated as a
percentage of the purchase price, so the more expensive the home, the higher the total
purchase cost will be.
Purchase Costs
On top of your deposit, you will need to have an additional five or six per cent of the
price of the home to cover purchase costs such as:
| Legal Cost |
solicitor or conveyance fees
inquiries or disbursements ie. title and other searches |
| Inspections |
property and pest inspection
identification survey
strata records inspection (if applicable) |
| Government charges |
stamp duty on transfer
stamp duty on mortgage |
| Financial costs |
lenders application or establishment fee
valuation fee
mortgage insurance, if applicable |
| Miscellaneous charges |
adjustment of council rates
insurance - fire and perils, contents |
| Moving costs |
removalists
connection fees for services
carpet cleaning
changing locks
urgent repairs |
The four things lenders look for before approving a loan
Capacity - can you afford to repay the loan?
Character - are you a good financial risk? Do you have a history of repaying your
debts?
Collateral - is the property you are buying adequate security for the money you are
borrowing?
Capital - what you already own.
How much deposit do you need?
The usual deposit is 10 per cent of the purchase price, but the more deposit you can
save:
the better property you can afford
the less you need to borrow
the less your mortgage repayments
the less likely you are to incur mortgage insurance premiums
Mortgage Insurance
Mortgage insurance protects the lender NOT the borrower against losses incurred if you
default on your loan. Mortgage insurance is usually charged when the loan to value ration
(LVR) is greater than 80 per cent, i.e. when you are borrowing more than 80 per cent of
the value of the home.
Income Protection Insurance
Income protection insurance offers optional cover for the borrower. Policies are
tailored to meet your specific needs and are designed to meet your mortgage repayments if
you are unable to, for example if you lose your job or are ill for an extended period.
The 25 per cent rule
Most lenders wont allow your loan repayments to be more than 25 per cent of your total
income, although this rule may be relaxed for higher income earners. So if your total
monthly income is $2,400 your loan repayments must be no more than $600.
| Tip >> |
Avoid over-extending yourself financially.
It is far better to be in a position where you can still borrow a few extra thousand
dollars if something unexpected happenswhich it often does |
Did you know?
It takes most people 2-5 years to save a deposit
Finding the right people to lend you the money may take at least three months
If possible, start researching loans and property prices a year before you want to buy.
What to buy
Your new home doesn't have to be a house, in fact in many cities around Australia
living in smaller properties: apartments, townhouses or studios are becoming popular
because they can be more affordable, newer and better located than some more traditional
homes. Before choosing the type of home you want to buy, consider your lifestyle and
budget then ask yourself these questions:
Does the area and community suit my lifestyle?
Does it have easy access to facilities such as schools, transport, workplace, shops,
parks and recreational facilities?
Does it have the outlook I wantwater, trees, a city view or a sunny garden?
If the answer to these questions is yes then consider proceeding with legal and
structural checks of the property. If not, tell the agent what it is you dislike about the
property so they can steer you towards more suitable homes next time.
When to buy
Like most other markets, the property market has its ups and downs. If you know when
and why property prices are on the move you will have a better idea of when is the best
time to buy your home.
The ideal time to buy is:
Just as interest rates begin to fall. Prices are likely to rise soon after as more
buyers enter the market and take advantage of lower interest rates
When home prices are low i.e in a depressed market
When inflation is high or rising as prices are likely to increase faster
| Tip >> |
Look for properties that have been passed
in at auction. This means that bidding did not reach the vendors minimum (reserve) price
for the property. You may be able to negotiate down on price and avoid an auction bidding
war. |
Where to buy
Ask any real estate agent what most buyers are looking for in a home and the answer you
will hear is: location, location, location. The best way to find a home in your ideal
location is to draw up a list of facilities and features that meet your needs.
Beware!
Are property prices rising or falling in the area?
o Hint: Check property price trends in the area with
the Real Estate Institute of Australia.
Are there negative factors such as jails, factories, sewerage works, proposed major
construction, new road developments?
o Hint: Call the local council for more information and
recent sale prices of homes in the same street.
Is the area noisy?
o Hint: Investigate flight paths, railways, busy
streets and intersections, fire or ambulance stations, bars and sportsgrounds in the
vicinity. Visit the property at different times of day and night and ask neighbours if
they are bothered by noise in the area.
Caveat emptor - let the buyer beware
Inspections and Legalities
There are no warranties for home buyers so to protect yourself have the property
checked out before you finalise the purchase. Get specialist advice from a legal
consultant or conveyancing service and a building consultant before you sign any
contracts. Store this information in a fireproof container or safety deposit boxit will
make it easier to resell you home later on.
Hint: To keep legal costs to a minimum, get property inspections done before proceeding
past the first basic legal steps.
What to inspect
Property inspections should assess all accessible parts of the property, reporting on
problems in these areas:
hazards (e.g. loose handrails)
dampness (e.g. leaking roof)
movement (e.g. cracks in walls)
pests (e.g. timber pests)
finishes (e.g. deteriorating paint)
services (e.g. old water pipes)
compliance (e.g. unapproved building work)
amenity (e.g. steep driveway)
New or old, inspections are a must
New properties and properties that have been renovated recently are just as likely to
have serious problems as old homes so dont skip the property inspection. A building
consultant can detect incomplete or defective work on new homes and locate relevant
documents verifying council approval and quality of workmanship.
Also obtain the following information about your builder:
licence number
insurance
defects liability period
details of any warranties and guarantees for equipment and materials used in the home,
including appliances.
Buying a unit? Check this out first
Body corporate records, including the history of maintenance and provision for future
expenditure. Compare this information with the actual property inspection report for an
accurate indication of expenses you may have to share in the future
Fire-rating, particularly in older apartments as it may be inadequate and is expensive
to fix
That noise minimisation between properties is adequate
Building conditions against council requirements if it is an older property that is
being converted to strata title
Surveyors reports if unsure about the ownership of a unit, garage, car space or store
room.
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