This in-depth guide will help you buy a house in 2020, whether you are a first home buyer or a seasoned investor.
In this comprehensive guide we will cover:
Let’s get started.
This in-depth guide will help you buy a house in 2020, whether you are a first home buyer or a seasoned investor.
In this comprehensive guide we will cover:
Let’s get started.
What is borrowing power?
Borrowing power is an important concept to understand when defining your budget. Your borrowing power is the amount of money a bank or lender will loan to you. Lenders will go through different parts of the application before approving your loan. This includes checking that your savings is enough to cover the deposit and upfront expenses and your income can cover the ongoing repayments. Your income is the primary factor in determining your borrowing power.
Things that are taken into consideration include:
How can you increase your borrowing power?
Most banks and lenders will loan based on if they believe you can repay your mortgage reliably. They evaluate this through different criteria, and being able to improve these will increase the amount they are willing to lend you. These include:
How much should you borrow?
Just because you have a million-dollar borrowing power doesn’t mean you should buy a million-dollar house. Depending on your financial situation, borrowing at your maximum capacity may leave you with no wiggle room financially. Your income may only cover your expenses and mortgage with no savings. This becomes problematic if something unexpected happens to your situation, or the interest rates rise and you are unable to afford the repayments.
In general, borrowing less than your maximum capacity offers you the flexibility of a buffer and being able to overcome any hiccups that may occur. Each situation might be different however. If you are at the beginning of your career and expect to have increasing income without any children, sometimes it might suit you to borrow your maximum capacity.
How much savings should you have?
Your savings are something that the banks consider when assessing loan applications. The higher your savings are, the more likely your loan will be approved. Generally, the banks want to see at least 5% of the property price in savings and may be higher depending on the property and loan. The LVR or loan to value ratio is the percentage of the property’s value compared to how much you need to borrow. The lower the LVR, the easier it is to get your loan approved, since there is lesser risk for the bank. With a 20% deposit or LVR of 80%, you won’t need to pay for lender’s mortgage insurance (LMI).
LMI is insurance that is put on top of your loan to cover the bank if you default on your mortgage. LMI is designed so that you are able to buy a home with less than 20% deposit, whilst also mitigating the risks for the bank. The less of a deposit you have, the more you may need to pay for LMI, and it may help you in the long run to save for a 20% deposit instead. Different lenders and banks will approach LMI differently, and sometimes it can be waived entirely depending on the circumstances.
Other than the initial deposit, your savings may also be needed to cover the upfront expenses of buying a home. These expenses may include:
It is important to budget and plan accordingly so that your savings can cover all the costs of buying a home.
Can I buy without a deposit?
Ideally, the banks want to see you have a deposit before they lend, however there may be some situations where you can buy without a deposit saved up. Having a good credit score and reliable income can let you borrow with lesser deposits, but you may also be able to borrow with a guarantor loan. If you are buying your first home, you may be able to use your parents or family as guarantors where their property will act as a security for your loan, removing the need for a deposit.
Now that you have an idea of your budget, let’s have a look when you should buy.
The property market has its cycles and it’s impossible to predict the perfect time to buy. With so much uncertainty, often times people are subject to thinking emotionally and fear of missing out plays a big role in people not buying the right property. The contrary is also true, with some people being too cautious and missing out on good opportunities.
Should you always buy if you have the chance?
Buying a home is a big commitment. Consider your personal situation. Are you buying because you are investing in an asset that you will sell in a few years or because it is your dream home that you can see living in for a long time? There may be many different reasons to buy a home and sometimes it might not always be the best choice. Renting can be a completely viable option and can sometimes end up benefitting you more financially.
We break down the details of buying vs renting in an article, but in general, the costs of buying and selling a home adds up if you are planning to move a lot. Renting may offer flexibility and diversifying your investments with potentially higher returns, whilst owning your own home will offer stability and passive capital growth over time.
Rentvesting may also be an attractive option where you buy an investment property whilst rent somewhere else less than what you are getting from the investment.
What is the best time to enter the market?
When making any big decision, it is important to not get too emotionally attached. You may even feel pressured to buy a home as soon as possible from parents, your friends or the media. However, it’s ok to take your time and do your research on the current market. Interest rate changes and market fluctuations happen all the time and it’s incredibly difficult to predict when it’s going to be at an all-time low.
Looking at the big picture can be a big influencer in your decision. Sometimes you could be looking for an apartment in the city near work and live there for a few years until you change jobs. Sometimes you could be looking for a house in the suburbs to start a family and settle down. If you plan on living in your home for a long time, these short-term market fluctuations won’t matter in the long run.
Sometimes, new incentives may also pop up, such as the new homebuilder grant. Although these are a nice bonus, it shouldn’t be the primary deciding factor when you’re buying your home. The best time will always depend on your own situation and if you’re financially ready to make this big commitment.
When buying your home, there are a few questions to ask yourself. Sometimes compromises have to be made and your criteria may not always be satisfied.
The many different options:
Buying land and building your home
Building your home how you want it and where you want it can be very appealing for most people. This method can have some risk however, as the expenses aren’t always fixed. Things don’t always go according to plan, and changes are always constantly made throughout. This might add extra to your budget and also delay construction, meaning it’s hard to have a fixed date to move in.
House and land packages are also becoming a more popular option, where you buy a plot of land from a developer and build a house by a project home builder. As they are building multiple lots, this could potentially be cheaper than seeking out your own home builder.
Buying an existing property
The most common way to buy a new home is to buy existing. You know exactly what you’re getting when you are buying existing. Financing is also a lot simpler with existing property, as lenders favour existing property. If you are buying an older house, make sure you conduct proper inspections and that you are aware of any major defects, as repair costs can be very expensive.
Buying and renovating
Buying an old house, repairing it and then selling it for a profit is also an option a lot of investors consider. It can be a bit of work and can carry the risk of repairs being much more than anticipated, resulting in not much profit or even a loss. However, with proper research, ‘house flipping’ can be very profitable. Sometimes, a knockdown rebuild could even be an option, especially if you like the location.
Buying an apartment
Some people prefer apartment living, as it can be a more convenient lifestyle. If you want to live in or near the CBD, apartments are sometimes the only option. When buying an apartment, be wary of the noise levels, as sometimes the layout leaves your bedroom directly next to someone else’s living room and there isn’t much noise cancellation. Buying apartments also tend to yield less capital growth compared to a house with land. However, they often yield higher rents compared to similarly priced houses.
Buying a townhouse
Townhouses can be compared like a mix between an apartment and a house. They are built on smaller blocks of land and are usually smaller in size than a house, but larger than apartments. They often offer convenience in the form of amenities similar to apartments, but less privacy than houses, as you are usually living with other townhouses with common walls.
Buying off the plan
Buying off the plan has a bad reputation. You will often hear horror stories of banks undervaluing the finished property and the buyer having to come up with the difference, sometimes more than 10% of the initial deposit. This happens quite often, as the banks need to be conservative with their valuation to mitigate their risks. However, with the right research you can often find good deals. Much like buying something online, you can’t physically check the item. You build trust through reading reviews. In the same way for off the plan, you have to check the reputation of the developer. Go through their past projects and dig up anything that has been said negatively about them. Not all projects are equal, you can spot something that looks cheap, similar in the same way you can go on wish.com and pick up something cheap with poor quality. Do your background research on the developer, their reputation for developing good projects is worth more than screwing buyers out of a quick buck.
Private sales are conducted through a real estate agent, or directly from the owner. Don’t feel pressured or persuaded to buy based on what they say. Take your time and ask questions. Negotiation is key in finding a balance between what the owner is looking to sell their property for and what you’re willing to pay. Knowing why they are trying to sell can give you a lot of bargaining power. Remember that value is subjective and to establish a base price to start negotiating from.
Asking questions always helps. Don’t hesitate even if they seem basic. General questions might be:
‘Why is the property for sale?’
Knowing why the property is for sale will help you determine how desperate the owner is to sell and thus how much room there is to negotiate.
‘How long has it been on the market for?’
In general, the first 4 weeks of marketing a property is the most important. The initial interest starts to fizzle out after this period and it becomes more difficult to find buyers. Knowing how long the property has been on the market for can help indicate if the property is overpriced or if there are any other problems.
‘Is this the first time it’s been on the market?’
Similar to the previous question, some properties may be listed multiple times. Perhaps the owner couldn’t sell the house the first time or they decided they didn’t want to sell for a lower price. Maybe they didn’t like their first real estate agency. There could be a wide variety of factors it is on the market again.
‘Are there any issues with the property?’
It might be a straightforward question, but there may be certain things you are not aware or haven’t noticed about the property. It’s important to ask the agent if there are any issues which may affect your decision. Whilst you shouldn’t rely purely on the information from the agent and should do your own independent research with your building and pest inspection. Most agents will act in good faith and being upfront about any issues since finding out anything down the line causes much bigger problems.
‘What was the original asking price?’
Finding out the original asking price will help you determine a fair offer to make. Sometimes the property is highly sought after and other offers are being made. Having this information helps you be fair but also competitive.
Buying at an auction might seem scary as you are seeing yourself go up against many different people who want the same property. Buying at an auction also works a bit differently compared to a private sale and we’ll have a look at a few differences. Most auctions have a reserve price, where it is the lowest price the seller is prepared to accept. This amount is unknown to the buyers and if it is not met, the sellers are not bound to accept the highest bid. If you are the highest bidder and the reserve is not met, you are first in line to negotiate with the seller.
The benefits for the seller to conduct an auction include:
Disadvantages for selling a home at an auction include:
Knowing these pros and cons helps you, the buyer, in deciding whether auctions are an option. Having different buyers bid on a property can help determine if the price is fair. Before going to an auction, it’s important to do you research. Here are some tips and things to be aware of:
|One of the most difficult things in buying property Is being able to properly evaluate how much it is worth.
Every property is different and the price can always change.
Let’s try and break down how to value property and find out if the actual value is the same as the market price.
If you ask five different people on how much the same house is worth, you will get five different answers. Valuations can vary widely even among experts. Market value is subjective and someone who has lived in their house for 20 years would value it a lot more than what the banks would. Even as a buyer, good value can depend on what you are looking for. Whether financially, through capital growth, ability to renovate and sell later on, or intrinsically, through location and lifestyle of living, different people have different criteria for determining value. Real estate agents will often give you a free property appraisal. These should only be considered as a guide as they have no legal standing. Property valuers on the other hand, are legally responsible for the information they give you and their valuations are more comprehensive.
How exactly do property valuers determine how much a house is worth?
There are three different approaches to valuing real estate. The most common one is to conduct a comparative market analysis. This includes gathering data of:
To get a good initial estimate of the property, they compare it to at least 3 properties. These 3 properties must be of a similar standard or condition, are sold within 5km of the property and sold within the last 6 months.
After this initial estimate, they can make further adjustments based on any differences found from the above criteria. Property valuers will also visit the property and assess the condition of the building, including any faults which may affect its value.
Another method is the summation method. This is where the property is separated into different parts, land, building and other improvement values and valued individually. Land in a particular location would be valued per square meter and this would be added to the building condition and improvements value per square meter. Every part of the property would be calculated individually and added up, hence the summation method.
The third approach is the income method. This is more common with investment and commercial property. The property is valued by how much income it produces against the gross rent multiplier (GRM). For example, a property would rent for $500 per week. This yields $26000 a year. If the current GRM is around 3%, dividing the annual rental yield by the GRM gives you a value of $866000.
All three methods rely on information in the current market. Most of the time, property valuers choose a primary method and then use another method as validation. These valuation methods give you an outline of what to expect. In the end, the value of a property is how much you or someone else are willing to pay for it
What is preapproval?
A preapproval is an estimate on a loan that a bank or lender will give to you before you make an offer on a property. It allows you to know your budget so you can narrow down your search on your maximum available funds.
Preapprovals are usually not a guarantee that you will be approved for a home loan and can be subject to the valuation of a property. If a property’s valuation is much lower than expected, there becomes a big risk that if the loan defaults, the home owner is unable to repay back the loan from selling the property.
The different home loans
Principal & interest loans
Principal & interest loans are repaid with you paying the amount borrowed plus added interest on that amount. These loans typically end up paying less interest over the life of the loan and are usually paid off faster than interest only loans. However, the repayments are higher and may not be as tax efficient for savvy investors.
Interest only loans
Interest only loans are loans where only the interest portion of the loan is paid for a set period of time. This can be five years down the line before the amount you borrow starts getting paid off. The benefit of these types of loans are they give you a lower initial mortgage repayment. These loans also appeal to investors as they have tax benefits and they can offset the higher total amount repaid by selling their property earlier.
Fixed interest rate
Fixed interest rates stay the same for a set period, then by default changes to a variable interest rate after this period. Having a fixed interest rate is beneficial if you predict that interest rates are low, but will rise in the future. It makes budgeting easier, as your repayments are always constant. However, if interest rates go further down, you could be paying more than you potentially need to.
Variable interest rates depend on the market fluctuations and can go up or down in the loan period. Variable interest rates often offer more features in the loan such as offset accounts, additional repayments, unlimited redraw etc. They are often more the flexible choice, however if rates change, you could end up paying more on your loan.
Split home loan
A split home loan is option that looks for the best of both worlds between a fixed and variable interest rate. A portion of your can have a fixed interest rate, whilst the other portion has a variable interest rate. Having a split loan allows you to fix some part of your loan incase interest rates rise, whilst having the variable part giving you flexibility of additional repayments. This essentially allows you to hedge your bets and minimize risk of any changes in interest rates.
Check your comparison rates
You will often see comparison rates when shopping around for a loan. They are designed to give a closer estimate of the total cost of the loan per year and includes all the fees and expenses associated with the loan. The difference between comparing interest rates between lenders and comparison rates is that some lenders may offer lower interest rates, but their fees and expenses are much higher, leading to you ending up paying more.
Popular mortgage features
Many lenders offer different options to entice you to borrow from them. Some features may be more beneficial to you than others and it’s always worth it to calculate how much exactly do they help you out. Here are just a few of them:
Hidden fees, upfront and ongoing costs of mortgages can really add up in any home loan. Having low fees can sometimes be more beneficial than a similar home loan with a lower interest rate.
Having the ability to choose how often you repay can offer greater flexibility of your finances and planning. Choosing between weekly, fortnightly or monthly repayments can help offset stress from other bills and debts.
Being able to put extra money towards your regular repayments can help save you by paying off your loan sooner. The more extra repayments you make, the less interest you will end up paying.
Whilst some loans let you make additional repayments; you might also have the option to redraw the money you’ve repaid as an extra reserve of funds. Over a long loan period, unexpected fees and expenses might occur and having access to ‘emergency funds’ might be helpful.
Offset accounts are savings accounts linked to your home loan. The amount of savings you have in your account is offset on the amount you owe on your loan. This can help save a lot on interest, as typically your mortgage interest rates are a lot higher than what your savings interest rates would accrue.
General step by step summary
1. Contact the bank or lender for pre-approval.
The banks and lenders will give you an estimate of how much you are able to borrow depending on your financial situation. The banks and lenders will also lend based on how much the property is worth. If your preapproval is higher than the property value, they will lend based on the property value.
2. Start looking at different properties.
Once you get your preapproval, you have an idea of how much you can afford. Make sure you are thorough when inspecting properties. Check for every potential crack and scratch. Make sure that everything is in working order and take note of all damages. Paying for a building inspection may also be worthwhile to find any hidden defects which may be expensive to repair down the line.
3. Contact a conveyancer or lawyer
It’s important to review the contract to find anything that is not standard. Anything that you don’t understand you should ask your conveyancer/lawyer for recommendations. During this stage is also when you can negotiate and add conditions such as subjects to finance and subject to pest and building inspections.
4. Sign the contract and apply for a mortgage
After you are happy with the contract and conditions, sign the contract and bring it to the bank or lender. As long as their lending policy hasn’t changed and your financial situation is similar to when you got your preapproval, the higher probability there is of securing your loan. During this stage, if you have not conducted a building inspection yet, and have a subject to building inspection, organise a building inspector. If the report comes back unsatisfactory, you still have an opportunity to pull out.
5. Wait for loan approval
The bank or lender will ask for a lot of documentation and paperwork to prove that you are able to pay off the loan. During this stage, they will also conduct their own valuation of the property and lend based on this amount. If their valuation is lower than your purchase price, you will have to cover this difference yourself. If you are unable to secure a loan, or the bank rejects your application, the subject to finance condition will allow you to pull out of the contract without losing your deposit.
6. Transfer of titles
After you’ve secured your loan, your conveyancer/lawyer will prepare the transfer of titles to your name. Make sure that your name is exactly the same as all ID documents. They will also calculate any fees that may need to be paid on settlement. This includes any body corporate fees, council fees, water rates, transfer fees and government grants and concessions.
7. Inspect the property before settlement
Before settlement, you are entitled to inspect the property again to ensure it is in the same condition as when you signed the contract. This is especially important if you are buying off the plan as this is usually the first time you are able to physically inspect the property. If you find any defects, immediately contact your conveyancer/lawyer so they can contact the seller to fix the situation.
8. Settlement day
Once settlement has happened, the bank will contact both parties’ conveyancers/lawyers to finalise paperwork and exchange funds. Once it has all been sorted, you can then receive the keys and the property is officially yours.
Grants and incentives
Useful links and tools