Buying a home is one of the most exciting and confronting moments in your life. While the blizzard of paperwork can seem overwhelming, don’t get caught up in the magnitude of the task. Take it one step at a time. There’ll be many people on your journey to help you, including your financial adviser, solicitor or conveyancer and a professional real estate agent keen to help you make the right purchase.
Save for your deposit
This is an essential first step. You’ll prove to yourself you have the financial capacity and discipline to meet your mortgage repayments. Lenders are looking for at least 10% of your requested loan amount to be covered by a deposit, although ideally it should be 20%. If you have less than 20%, your lender will insist on you taking out lender’s mortgage insurance (LMI). This protects them from you defaulting on the loan but costs you tens of thousands of dollars over the lifetime of a loan.
Alternatively, you could seek a loan guarantee. Usually banks insists only parents provide this. Lenders will offer up to 105 per cent of a property’s value in these circumstances. Ask a financial adviser about this option.
Know your expenses
Lenders will focus on your earnings, longevity of employment and monthly expenses for the 12 weeks leading up to the loan application. Banks used to lenient on this aspect of an application, but no more. The recent banking royal commission roasted them for their lack of diligence.
Carefully manage your outgoings and be honest with yourself. Pay off as much debt as possible and don’t swap jobs just before seeking a loan or while it is being considered. That could send you back to square one. Don’t crush your cash flow by buying a car, as that will drag down the amount of money a lender will give you. Lastly, apply for your credit rating to show your lender when the time comes.
Understand what you can afford
Many banks and lenders have basic online calculators that will give you an idea of what you might be able to afford based on your income and outgoings. Exclude your current rent (obviously!) in the calculation. The answers from these calculators won’t be gospel but they’ll give you a decent idea of what you can afford. Their results will be influenced by the term of the loan and interest rate. Be aware, interest rates rise and fall, especially over the normal loan period of 25 or 30 years.
Talk to a lender
With a good idea of what you can afford, it’s time to approach a bank, lender or mortgage broker to start firming up the numbers and get a sense of the style and location of property you can afford. They’ll all ask you to state income, outgoings, debts and their repayments, assets, dependents. Mortgage brokers represent a number of lenders, including banks, and provide the widest range of options. Make sure you understand their charging model clearly.
There are an array of products, interest rates and services to choose from. If you don’t use a mortgage broker, then your own research is essential. When you are ready to apply, make sure you have all your documents ready, such as pay slips, credit file, bank and credit card statements, electricity bill and so on.
Decide on your loan
A number of options are available. Two of the basic choices are loans with a fixed or a variable interest rate. A fixed rate locks you in to a set repayment schedule. You can lose out if rates go down but win when they go up. A variable rate means you’re playing the financial markets. Your repayments will vary over the months and years as the interest rate ebbs and flows.
Another choice is to take an interest-free period for perhaps five years, which gets you into the market even though it might be a financial stretch right now. Be sure to understand the ramifications of these loans down the track.
Be honest with yourself. Don’t try to borrow more than you can pay back, or a world of pain awaits you.
When a lender pre-approves your loan, which can take around six weeks, they’ll issue you with a pre-approval certificate or a home loan guarantee certificate. These mean you may bid or buy a property knowing the lender will support you up to the limit of the promised loan.
Conditions come with this. The lender may insist on lender’s mortgage insurance, which protects them from you defaulting. They’ll also value your prospective purchase to ensure you haven’t paid too much. Pre-approvals usually last six months, so it’s time to get your skates on!
In all likelihood, you won’t have gone through this entire process without having some idea of what and where you want to buy. Scour real estate websites and talk to agents about pricing trends in your desired area to get a good idea of how far your budget will stretch and how hard you can bargain. Great agents will be a huge help but remember they work for the seller, not you. You can also find research online to validate your own assessment.
Warm up your legal team
As you house-hunt, contact a solicitor or conveyancer to let them know you’ll require their services. It’s best to talk to them early in the process as they can be tremendously insightful. Their role is to help you navigate all the legal documentation, title searches and tax requirements. Don’t do the legal work yourself unless you’re qualified. It’s not worth the drama and risk. A conveyancer will charge around $2000 while a solicitor might be 50 to 75 per cent more. Be aware DIY conveyancing kits are available and while they’re thorough, you’ll be up for every legal error.
Property in your sights
Your first actions once you find a property is to ask the agent for a Contract of Sale and seek a building inspection. A vendor will often have their own. Smile, take it and thank them… and get your own done. Check the electrics and inspect for pests, too. Get your legal team on to challenges such as a land or property survey (for a house) or a strata inspection (for an apartment), and giving the Contract of Sale a thorough going-over.
Start talking money
If everything is in order, feel free to make an offer. The agent must pass it on to the vendor. You can do this regardless whether the sale is by private treaty or auction. But don’t insult the vendor. Go in at around 5-10% below the asking price and see what comes back. If the property has been on the market for a long time, feel free to go in a little harder. The vendor may be desperate to sell. If the home is going to auction, you might be able to pre-empt that with a decent bid. Otherwise, you’ll have the stress of bidding against others.
Putting down a deposit
When a bid is accepted or you win the auction, it’s time to pay the deposit. This usually goes to the agent and your solicitor or conveyancer will ensure it’s held in a trust account, where it will earn interest while the transaction proceeds.
There is an alternative form of payment called a Deposit Bond, which is a guarantee of funds. Effectively, no cash changes hands. But watch out – agents and vendors don’t usually like them. The Contract of Sale might specifically refuse to accept them. Your solicitor should be on the alert for this. If you intend to use a Deposit Bond, let the agent know in advance. It can get ugly at an auction if a Deposit Bond is refused, as your bid is legally binding and you’ll have to find the cash.
Lender checks your choice
At this stage, your lenders will inspect the property to make sure they are confident you’re not paying too much. If you are, then they’ll not have the security (your prospective purchase) against which they’ll cover the loan amount and you may have to find more money to make up the difference, or forgo the sale and lose your deposit. This is a real watch-out and where your early research pays dividends.
Your legal team should be completely happy with the content of the contracts and they will oversee this exchange. There should be no turning back at this point.
Legal eagles swoop
A full investigation of the property will now commence by your conveyancer or solicitor. They will look for any easements on the property, a heritage listing or any other issues related to council compliance orders that the vendor has not stated upfront. This can take weeks and is a little stressful but there’s not much you can do at this point. Actually, there is one thing…
Get the property insured
You should get insurance for your new home from the day you own it. The moment the ownership of the property is yours, the vendor’s insurance will lapse. So, get that organised beforehand.
Pop the champagne
Settlement means that your legal team will pay the vendor and the title of ownership will revert to you. You won’t be able to frame it because the bank will hold it. Your solicitor will notify various authorities so the sale is lodged properly. You’re officially the owner of a new home!