So you have been thinking about getting into the market.
Buying property, particularly your first home can be an exciting yet emotionally demanding experience. Following a few simple steps can take away much of the stress experienced by many and make the whole process a rewarding one.
Property ownership has been described by many as the “great Australian dream” and we pursue this dream for a number of good reasons. Whilst buying our own property involves for most, the biggest single investment we will make, it gives us security both of tenure and financial. In purchasing your own property you are investing not only in your future but that of your family, because history dictates that property investment is one of the best long term investments that people can make in wealth creation. Investment in your family home is free from capital gains tax and accordingly any reasonable improvements made on the property will add value but not incur any tax liability.
The following are suggested steps that should be taken when purchasing a home:
- Assess your borrowing capacity
- Research your loan options
- Set your requirements
- Research the market, choose your location
- Look at houses/Attend auctions
- Select a house
- Contact your solicitor or conveyancer
- Make an offer
- Lodge your loan application
- Exchange contracts
- Insure the property
What can I afford?
It is essential to know how much you are able to borrow to purchase a property. This will require you to seek out a loan through a financial institution (bank, building society etc) and it is important to “shop around” to obtain a loan that best suits your requirements. Before you can secure a loan you will need a deposit, usually 10 percent of the purchase price, although some institutions will lend up to 95 percent of the purchase price if mortgage insurance is taken out. Banks generally allow for one third of your uncommitted income as repayment.
However, always remember that the repayment of a mortgage is not the only expense that you need to consider when purchasing a property.
When considering your budget and loan options remember you’ll need money to cover more than just the purchase price. You need to make allowance for such things as:
- Loan application fees
- Legal fees of your solicitor or conveyancer
- Stamp duty
- Valuation Fee
- Mortgage insurance
- Inspections – building, pest etc
- Removal costs
- Any repairs or immediate improvements that may be required to the property,
- Utilities & Rates.
- Insurance of home.
- Land Transfer Registration.
Loan Options – Borrowing to Purchase
Once you’ve done your figures, make appointments to see lending institutions to establish your borrowing capacity. You want to find out how much they will lend you and what loan charges and terms are involved. Lending institutions are looking for evidence that you can meet the periodical repayments. The more equity (cash) you have and the better your savings record, the stronger your borrowing position.
The amount you can borrow will depend upon:
- Your income, or the combined income of yourself and your partner
- The proportion of the property valuation you wish to borrow
- The type of housing loan selected (ie fixed, variable or interest only)
- Whether loan insurance is taken out.
To avoid delays in establishing a loan, remember to take supporting evidence of income and current outgoings when speaking to lending institutions.
Lending Institution Options
The market for home loans is very competitive so it’s a good idea to shop around for the package which best suits you – both your finances and your lifestyle.
Banks provide by far the most common form of housing finance offering a wide array of home loan packages. A savings history with a particular bank will stand you in good stead for a loan but check the competition for the best deal. Permanent Building Societies and Credit Unions are both popular options for lending institutions, offering a different level of service to the banks. Their rates are often very competitive.
Mortgage Managers are a relatively recent force in the home finance market and generally offer the cheapest interest rates. They may also lend up to 95 percent of the purchase price, making them an attractive option.
Private Loans can be secured from a variety of sources including solicitors, finance companies, trustees, employers and private individuals.
Loan Type Options
Along with a choice of lending institutions, you also have a choice of loan types. These include:
Variable interest loans, where the interest changes during the term of the loan in line with economic conditions. Interest is calculated daily on the outstanding balance and usually charged to the account monthly.
Fixed rate home loans have a fixed interest rate for a set term, usually 1-5 years, after which the loan can be renegotiated. This way you know your monthly repayments for the term of the loan. Usually you have the option to repay interest only or interest and capital.
Variable start home loans can be set to start with your choice of either low or high early repayments. This means you organise your repayments around your plans for the future. For example, a couple planning to start a family in the next few years may choose high initial repayments then drop to lower repayments when they switch to one income.
If the purchase is your first home then financial assistance is available through the First Home Owners Grant Scheme provides a $7000 grant to people buying or building their first home in Australia. The grant will be paid regardless of an applicant’s income or value of the home. For information regarding this grant contact the Office of State Revenue.
Set Your Requirements – What Exactly Am I Looking For?
- Amenities – does the area offer all the amenities I need, such as shops, transport, schools, sports facilities, parks?
- Travel – are the daily trips to work and school going to be easy?
- Features – does the house have all the rooms I require? Enough bedrooms, bathrooms, a study, entertaining area or large enough kitchen? Is there enough storage space?
- Renovations – will I need to do any immediate work on the property?
- Garden – does the garden suit my needs. Is it high maintenance?
- Zoning – what future development could possibly occur in the area?
- Capital Growth – how will the value of the property appreciate?
- Consider whether its the worst house on the best street, and therefore a good investment.
Researching the Market
Once you have established you requirements and have considered exactly what you can afford then you need to research the market and establish which suburbs or regions meet your needs within your price range. This can be done by visiting real estate web sites or through the printed publications such as the suite of EAC Realtor publications.
Realtor is a free weekly magazine available from any EAC agent. With property details and prices listed by suburb you’ll quickly get a feel for the house styles and price ranges in each area. Drive around the areas you’re interested in. Make contact with the local real estate agents and tell them exactly what you’re looking for.
The best way is to find your local EAC agent who is part of a Co-operative of agents sharing details of houses for sale. If you’ve got access to the internet you can save time and energy by searching the world wide web for your dream home on www.eac.com.au – search by suburb, house type and price range to see full colour photos and descriptions of properties that meet your needs. By using the EAC web site you get access to the very latest listings as soon as they hit the market.
Looking at Houses
Your real estate agent will start contacting you with inspection opportunities plus you can attend open houses listed in the Realtor or local papers.
Take your buying checklist and make comparisons between properties based on how many of your needs they meet. When you find a place you really like, it’s a good idea to look at it at different times, for example both day and night, when its sunny and raining, then you’ll start to get a real feel for what it would be like to live there.
Attending auctions is another good way to get a feel for property values in specific areas and, should you be considering purchasing a property at auction it is a good idea to attend a few auctions before attempting to bid at one – they can be pretty nerve wracking. Alternatively, you can set a maximum limit and have an agent bid for you.
Making an Offer
Once you’ve found the right house in the right place, make an offer. If you believe that the price at which the property is being offered is too high – then negotiate. Always deal with the agent, not the vendor. The agent will discuss your offer with the seller on your behalf. Firstly, however, establish what the price includes. Sometimes removable features like carpets, light fittings, white goods and barbeques are not included with the sale. Ensure your offer is realistic, otherwise the seller may take the view that you are not a serious purchaser.
Once your offer is accepted you should contact your solicitor with all the details. At this stage you may be asked to pay a token deposit to the vendor’s agent. This shows your intention to purchase but it is not legally binding and is fully refundable if a contract isn’t entered into. It is still legal, at this stage, for the vendor to accept a higher offer from someone else, so time is of the essence.
Under “anti-gazumping” legislation a buyer who enters into a contract may cancel it at any time within what is known as “the cooling off period” (usually five working days). No reason need by given for the cancellation but an amount equal to 0.25 percent of the purchase price will be forfeited to the vendor. The purpose of the cooling off period is to give the buyer time to complete arrangements for finance, to have a building and/or pest inspection made, etc.
A vendor however may require that before signing the contract, the buyer must forgo this cooling off period. If this is agreed then the purchaser must sign an agreement known as a 66W certificate. This certificate must be signed by a solicitor or barrister. It should be noted that there is no cooling off period when property is purchased at auction.
The five day cooling off period allows your solicitor the time to undertake legal searches – the investigation to ensure you’re obtaining clear title to the property. This can be a complex and time consuming task and you should ask your solicitor for an indication of the time involved and anything you can assist with to speed up the process.
After your homework talking to loan institutions and assessing your borrowing capacity, lodging your loan application should be relatively straightforward. Simply complete the loan application forms and lodge them with the loan manager you previously spoke to.
Your loan organisation will send a valuer to assess how much they think the property is worth (this may be less than the actual market price).
This valuation is used in determining the amount of the loan. You pay for the valuation regardless of whether the loan is approved.
Exchange of Contracts
Your lending body will contact you when your loan is approved, this will usually take around one to two weeks, although many institutions now offer a 24 hour turnaround.
Meanwhile your solicitor will organise the exchange of contracts. For the legal protection of both buyer and seller the contract is signed by both parties and exchanged. This is when you pay the legally binding deposit – usually 10 percent of the purchase price. If your deposit is tied up in property, other investments or your loan, an ideal alternative is a Deposit Power Bond. Far cheaper than the option of bridging finance, Power Bonds applications are approved within 24 hours. Your EAC agent can provide an application form or call Royal Sun Alliance on 1800 678 979.
As you are now legally responsible for the property, it is advisable to have insurance in place from this time on.
The final step is the settlement when the solicitors of all parties meet. This is usually somewhere between four and six weeks after the exchange of contracts. Your solicitor hands over the money and in return receives the deeds which are kept by the lending body until the loan is repaid. It is at time of settlements that the adjustments are made for water and council rates paid or owing etc.
The settlement period can be negotiated between the seller and purchaser to suit both parties needs.
The house is now yours (and the bank’s) and you can take occupancy.