Home loan guide. 1 July 2015

Transcription

1 Home loan guide 1 July 2015

2 John and Jen are looking to buy their first home. We follow their journey from when they first start saving a deposit through to house hunting, finding a property they love, making an offer, and finally to managing their mortgage.

3 Stage one: Getting ready John and Jen are both 28 years old. John is a plumber and Jen is a teacher. They got married a year ago and have been renting a one bedroom apartment for the past three years. John and Jen want to start a family soon and would like to be settled in a larger property in a family friendly neighbourhood before they have their first child. They decide they have two options: move to a different rental property with enough room to raise a family, or save up to buy a home of their own. Renting vs owning It is often said that owning your own home is the Australian dream and that s reflected in our population statistics around 70% of Australians live in a home they either partly or fully own 1. The advantages are obvious: it offers more security than renting, you can change the property to suit your tastes and needs, and if you take out a mortgage you are paying off an asset you will one day own outright. But home ownership isn t for everyone, and it doesn t always make financial sense. Some people prefer to rent and use the extra money they would have put towards a mortgage to invest in assets other than property, such as shares. Other people choose to buy an investment property and live in a rental property so they can deduct their loan interest payments and other expenses associated with owning a property. It s a good idea to think through all the pros and cons of the different options available to you before deciding the best course of action (See table 1 for some idea). You ll find some helpful tools online to help you with this (such as the rent vs buy comparison calculator at or you can speak to your accountant or financial adviser. 1 Source: Australian Bureau of Statistics, Year Book Australia, 2012 (housing statistics reference the 2006 Census) + + 3

4 Stage one: Getting ready (cont.) Table 1 Renting vs owning: pros and cons Renting Pros + + Maintenance costs, council rates and building insurance are usually covered by the landlord + + It s relatively easy to move to a different property if you change jobs or want to live in a different location + + Rent on a property will often be less than a mortgage on the same property, especially in expensive cities like Sydney and Melbourne Owning + + Paying a mortgage is a form of forced saving + + You are paying off your own asset, not someone else s + + You can renovate and make improvements to your property (though some changes will require council approval) + + You may qualify for government assistance (eg the First Home Owner Grant) which will help with some of the costs associated with buying a home. For more information visit Cons + + You may be forced to move out of the property without much prior notice + + The landlord can increase the rent annually or even more frequently, depending on the terms of your rental agreement + + You generally can t renovate or change any of the fixtures or fittings without your landlord s approval + + Fluctuations in interest rates can have a large impact on mortgage repayments + + There is no guarantee that the value of your property will appreciate + + There are high costs associated with both buying and selling a property + + It can be difficult to save a home deposit, especially if you re renting at the same time Table 2 Ongoing costs associated with owning a property + + Mortgage payments + + Building and contents insurance + + Council rates + + Utilities such as electricity, gas and water + + Maintenance and renovations + + Strata fees (if the property is part of a strata plan) John and Jen weigh up their options and put together a comparison of the costs associated with renting versus paying a mortgage. They take into account the initial costs associated with buying a property (we outline these costs in Stage four: Finalising the purchase) as well as the ongoing costs (See table 2 for an outline of these costs). Finally, they weigh up the flexibility of renting versus the security of home ownership and eventually decide that buying a home is the right move for them

5 Stage one: Getting ready (cont.) Picking a location and property type The location that you want to live in can be the most important consideration for some buyers. To help you with your decision you can use websites such as to research the demographics of suburbs you are interested in (such as the median age, median household size and median household income). Limiting your search area to a few suburbs will make house hunting much easier. If you can, spend some time in the areas you are considering so you can get a feel for whether you would be happy to live there. Before you start attending open houses in your preferred areas, it s a good idea to work out what types of properties are available and what you can afford. Real estate websites such as and can be a good place to start your research. These websites list features of the property such as the exact location, size of the land and building, number of bedrooms and bathrooms and any other notable inclusions. The description of the property will usually include a floor plan and a price estimate, and it will indicate whether the property is scheduled to go to auction. Because the list or asking price on real estate websites is usually established by the real estate agent, another option is to seek an independent valuation to provide a comparison of property prices. Another way of assessing how much a property is likely to sell for is to check the Sold section of the website which will list the sale prices of comparable properties in the area. It may also be worthwhile attending a few auctions and speaking to real estate agents to get a good indication of how popular a suburb is and how many people are looking for the same type of property as you. What to consider when choosing a location and property type + + How many bedrooms and bathrooms you need + + Are the local schools where you want to send your children + + How close to schools, parks, shops, hospitals, sporting and recreational facilities do you want to live + + Access to public transport and/or ease of commute to your workplace + + Whether you want a freestanding house, a townhouse or a unit + + How many car spaces you need and/or how easy it is to find street parking + + Safety and reputation of the area + + Your tolerance to traffic or aircraft noise + + Whether you are willing to do some renovations on the property and how much you are prepared to spend + + Proximity to family and friends + + How long you are planning to stay in the property and, if you re planning to stay there for a long time, whether it will suit your next stage of life + + Demographics of the area, including property values + + Whether you want to buy in your most desired suburb straight away or if it would be better to buy in a lower-priced suburb with potential for growth + + Employment opportunities in the area if you ll be unable to continue your current job in the new location John and Jen decide they want a freestanding house with at least three bedrooms and two bathrooms. They want to be close to schools for their children and close to main roads so they can easily drive to work. It is important to them that the suburb is quiet, safe and family friendly. They are willing to do some renovations on the property if they need to, but they want to be able to move in straight away. They narrow their search to a few suburbs and work out that the type of property they want, in the area they want, will likely cost them between $700,000 and $850,

6 Stage one: Getting ready (cont.) Saving a deposit Saving a deposit can be the hardest part of buying a home. Property prices in Australia are some of the highest in the world, which makes it an extremely difficult market to buy into. It s usually best to first work out how much you can afford to pay in monthly repayments (most lenders recommend allocating no more than 25-30% of your monthly income before tax to mortgage repayments) and do your calculations based on a much higher interest rate than what is currently on offer so you can work out how much your repayments would be if interest rates rise. Most lenders have tools on their websites that can help you with these calculations. Then, based on what you can afford to repay and your knowledge of what the property is likely to cost, work out the amount you will need to save up as a deposit. It s possible to buy a property with a small deposit amount (as low as 5% of the property value) but most lenders will charge you lender s mortgage insurance if your loan amount is more than 80% of the value of the property you are purchasing. You ll also pay more interest because the lower your deposit, the higher your loan. Another option is to take out a guarantor loan, where someone with equity in their own property (usually parents of the borrower) agree to offer their property as security against the loan. You may want to speak to an accountant or financial adviser about deposit options. What is lender s mortgage insurance? Lender s mortgage insurance protects your lender if you default on your home loan payments. You will usually be charged lender s mortgage insurance by your lender if your deposit amount is less than 20% of the value of your property. This is because if the lender is forced to sell your property, the sale proceeds may not be sufficient to cover the outstanding amount of the mortgage. If you have to pay lender s mortgage insurance it will be added as a one-off premium payment to the value of your home loan. The amount charged varies depending on the value of the property and the source of funds used for your deposit (ie a gift or genuine savings). John and Jen work out that they can comfortably afford to make mortgage repayments of up to $4,500 per month. Using the mortgage repayment calculator at with an interest rate of 7% pa (which is higher than the rates currently on offer) and a loan term of 30 years they work out that they can afford a loan of up to $680,000. They want to avoid paying lender s mortgage insurance, which means saving up at least 20% of the purchase price, and after doing some research they budget an additional $40,000 to cover stamp duty and other costs associated with buying a property (we outline these costs in Stage four: Finalising the purchase). John and Jen already have combined savings of $40,000 and a $100,000 inheritance from Jen s grandparents, so they work out how much more they need to save for their deposit

7 Stage one: Getting ready (cont.) John and Jen s deposit amount Estimated property price $700,000 - $850,000 Buying costs Up to $40,000 Loan amount Up to $680,000 Deposit needed (20% of the estimated property price + buying costs) $180,000 - $210,000 Deposit already saved (savings + inheritance) $140,000 Additional money required (deposit needed deposit already saved) $40,000 - $70,000 Your Credit History Before approving a loan, lenders will check your credit file. If you have a history of being late with repayments, your credit rating might be affected. Information stays on your credit rating for at least 5 years, so it s important to tidy up your credit file before you apply for a home loan. Step 1: Check that your credit file is accurate. Sometimes records are not updated and you are entitled to correct them. Step 2: Repair your record by paying any outstanding debts. You may be able to negotiate a longer repayment period or part-payment arrangement. Step 3: If you think your credit history is borderline, raise this issue with your potential lender. Honesty about the situation shows you are responsible, and allows the potential lender to be more comfortable that the problems have been resolved. Step 4: If your credit history is very poor, consider delaying your application and focusing on repairing your credit file and saving for your deposit. Budgeting The best way to save the amount of money you need within a reasonable timeframe is to monitor your expenses and make sure you re spending less than you earn. Start with your biggest expenses first such as credit card and personal loan repayments and work your way down from there. There are many budgeting calculators available (such as tools-and-resources/calculators-and-apps/ budget-planner) which help you to list your expenses from items as large as your rent, insurance and car repayments to items as small as your daily cup of coffee. Listing all your expenses makes it much easier for you to be able to see where you could cut back so you can save your home loan deposit sooner. You may find it easier to save if you set up a separate savings account and transfer money into it each pay day. You may be less tempted to spend the money if it isn t in your account. If you need help to put together a budget you may want to speak to a financial adviser. If you re worried about your credit history, you can buy your credit file from so you can check it before your lender does

8 Stage one: Getting ready (cont.) John and Jen work out that if they are careful with their money they can save the extra $40,000 - $70,000 they need in two years. They use a budget calculator to help them put together a summary of their current income and expenditures. Then they decide to: + + set up a high interest savings account and transfer money into it each pay day + + sell one of their two cars because Jen is able to get to and from work using public transport + + pay off John s high interest personal loan with the proceeds from the sale of the car + + forego expensive holidays for two years + + cut back on dining out and takeaway meals + + cancel their gym memberships and do free exercise (such as walking and running) instead + + consolidate their credit cards, shop around for a lower interest rate, and set a lower credit limit to avoid temptation + + pay off and cancel Jen s two store cards Top five tips for saving a home deposit 1. Put together a budget, and stick to it 2. Allocate a proportion of each pay to savings 3. Avoid unnecessary expenses 4. Consolidate debts 5. Try to find additional sources of income John also decides to take on some extra work to increase his income

9 Stage two: Getting serious After two years, John and Jen have saved $60,000. Added to their additional savings and Jen s inheritance, this gives them $200,000 to use as a deposit and to cover additional purchasing costs. They decide it s time to start looking for a house while they keep saving. They have already done their research on which suburbs are suitable for them and have decided what features they want in their home (both must haves and nice to haves ). They review their price range based on recent sales in the area and decide their estimated price range of $700,000 - $850,000 is still reasonable. Learning the lingo There are three phrases you will likely come across when you start looking for a home: torrens title, strata title, and off the plan homes. Torrens refers to the land title if you own a torrens title you own the land and any properties on it. Most freestanding houses on a block of land will have a torrens title. Strata refers to land and property titles that are owned by more than one party. This is common for properties that are joined in some way, such as apartments and townhouses. Maintenance expenses are shared proportionately by the owners, usually in the form of strata payments. An off the plan purchase means signing a contract and paying a deposit to buy a property (usually an apartment) that has not yet been built. The purchase of an 'off the plan' property is based on building and design plans. Buying off the plan : pros and cons Pros You may qualify for government incentives such as the First Home Owner Grant that aren t available to buyers of established properties Usually a deposit of only 10% is required Capital growth may be higher than expected The builder is obligated to fix any building faults in the first seven years Cons There may be construction delays There is a risk that the project may not be completed to the quality you were expecting, or it may not proceed at all You can t physically walk through the property The finished product may not be quite what you expected You can t physically walk through the property to inspect before purchasing Capital growth may be lower than expected The value of the property may decrease in value from the time you put down the deposit to completion + + 9

10 Stage two: Getting serious (cont.) Buying a unit or townhouse: pros and cons Pros Units and townhouses are generally more affordable than freestanding houses Maintenance of the property, repairs and insurance are the responsibility of the Owner s Corporation you contribute to these costs by paying your strata levies, which are usually a set amount Cons You only own the space within your apartment the strata plan owns the building and common areas Extra features on the property, such as a pool or lift, can add significantly to your levies because they need extra maintenance Choosing a lender and type of loan It s a good idea to choose a lender and the type of home loan you want before you start looking at properties so you can move quickly if you find a home you want to make an offer on. You may want to go with a traditional lender, such as a bank or credit union, or you may want to examine some of the other lenders on offer. A mortgage broker can help you find an appropriate home loan product with a competitive interest rate, or you can do your own research using a comparison website such as All lenders have to provide comparison rates for their home loans so you can be sure that you re comparing like for like. Comparison Rate In the past, calculating the real cost of a loan has been complicated and difficult. The interest rate is only one factor in the overall cost of the loan fees and charges must also be taken into account. Comparison rates were introduced so that consumers could easily compare loans from different lenders. The comparison rate includes the interest rate, any establishment fees and other upfront or ongoing fees for a particular loan and reduces it to a single percentage figure. All home loan advertising must show the comparison rate. For example, a home loan may be advertised with an interest rate of 5.49% p.a. but the comparison rate is 5.75% p.a. when all the other fees and charges are considered. A word of warning when using comparison rates they do not take into account the various additional features offered by some loan types. For example, the benefits of making additional repayments or accessing a redraw facility are not calculated in the comparison rate. You may have to pay a little more for these benefits, but it may be worth it in the long run if these features better suit your needs. To narrow your search, you ll need to decide whether you want a fixed rate loan or a variable rate loan. A fixed rate loan is just that you agree to pay a fixed rate of interest for a fixed number of years (usually one to five years). A variable rate loan means the interest rate you pay can go up or down over time. Lenders raise or lower rates based on changes the Reserve Bank of Australia (RBA) make to the official interest rate, but lenders aren t required to pass on interest rate cuts to borrowers in full (or at all). Unfortunately it s very difficult to tell whether you are likely to pay more interest on a fixed rate loan or a variable rate loan because it s almost impossible to predict interest rate movements years in advance

11 Stage two: Getting serious (cont.) Fixed rate loan vs variable rate loan Fixed rate loan There are no surprises you know exactly how much your repayments will be You usually can t make extra repayments You will most likely be charged a break fee if you change or pay off your loan during the fixed term Variable rate loan The interest rate can change at any time and this will either increase or decrease your repayment amount You may be able to make extra repayments to your home and redraw the money later to pay for a holiday or renovations, or to pay your loan off sooner It may also be an option for you to choose both some lenders will allow you to fix part of your home loan and keep the rest of it on a variable rate. This allows you to benefit from the certainty of a fixed rate loan, with protection against interest rate increases, while still having some of the flexibility of a variable loan which can allow you to pay off part of your loan sooner. Make sure you shop around for the most suitable loan for your circumstances, and keep in mind that the interest rate is not the only way to compare loans. Check whether the loan includes features such as: + + introductory or honeymoon rates + + a choice of payment frequencies (ie weekly, fortnightly, monthly) so you can align your mortgage repayments with your pay date + + the ability to switch between interest only and principal and interest payments + + a redraw facility, which allows you to pay extra to your home loan and then withdraw the extra money when you need it + + a repayment holiday facility where you can stop paying your mortgage for a short period of time (usually three months to a year) if you are ahead with your repayments + + a mortgage offset account, which is a savings account linked to your home loan account that helps reduce the balance on your mortgage so you pay less interest You may not need all of these features, but it s important to think about it before you commit to a loan. Generally the lower the interest rate, the fewer the features offered Some lenders will offer you a lower interest rate and an exemption from some of their fees if your home loan is part of a wealth package. This usually involves bundling together a credit card, home insurance and your home loan

12 Stage two: Getting serious (cont.) Getting pre-approved for a home loan With some lenders (but not all) you can apply for conditional pre-approval on a home loan so you can have everything in place before you find and make an offer on a property. You ll need to complete an application and the lender will do a credit assessment to check your income, commitments and borrowing history. Pre-approval gives you peace of mind and shows real estate agents that you are a serious buyer. It allows you to move quickly if you find a property you love, and if you buy your home at auction it helps you avoid financing delays that may end up with you losing your deposit. There are a number of things you can do to improve your chance of being pre-approved for a home loan: + + Establish a good track record of regular savings + + Reduce the limit on your credit cards and any overdrafts you have, because lenders assess your borrowing capacity based on the overall limit of these debts rather than the balance owing + + Pay off other loans (including interest free purchases) and cancel store cards if you can + + Make sure you fix up any outstanding bills or payment defaults, because they are likely to show up during your credit check + + Be honest about your financial position, even if it s less than perfect. A lender may still offer you a loan if you are able to explain a loan default or less than desirable credit history + + If you are considering changing jobs, try to wait until after your home loan is approved because lenders prefer a stable employment record. If you re self-employed, many lenders will ask for two years worth of tax returns + + Be realistic about what you can afford What lenders check when assessing a loan application 1. Your age most lenders won t lend money to you if you are under Your financial position the lender will verify your income and expenses 3. Your credit history the lender will examine your repayments on any previous loans, credit cards or bills to check whether there were any defaults and if the repayments were made on time John and Jen are pre-approved for a home loan of up to $680,000. They decide to choose a variable rate with an initial one year interest only period so they can get used to paying a mortgage and have some money available to make changes to the property. House hunting House hunting can be an emotional experience. It s easy to get intimidated by real estate agents and other prospective buyers. To help you think rationally rather than emotionally about a property, it s a good idea to make firm decisions about your must haves and nice to haves as well as your budget. It s easy to repaint walls or change the carpet, but it s not easy (or cheap) to change a floorplan or redo kitchens and bathrooms. That doesn t mean you shouldn t consider properties that need to be fixed up sometimes you can get a better price that way but you need to consider the time and cost of substantial renovations and factor that into your decision making process. If you are interested in a property but would like to do major renovations to it, such as adding a second storey, you should check whether you will need council approval first. It may be a good idea to make enquiries with building companies to gain an idea of how much any renovations may cost

13 Stage two: Getting serious (cont.) What to do when inspecting a property + + Check which direction the property faces. North-facing is often considered best, because it gets light in the mornings and afternoons + + Ask the real estate agent how much you will have to pay in council rates and strata fees (if applicable). Usually these details are also listed on the property description + + Measure the size of the rooms in your existing home so you can compare them to the measurements given in the floor plan. Make sure your furniture will fit + + Pay attention to the traffic, noise and availability of parking at the property. If you can, visit the property several times on different days of the week and different times of the day so you can see whether that makes a difference + + Make sure the property has adequate storage for your needs + + Check for signs that could indicate substantial property damage, such as sagging ceilings, warped walls and floors that could indicate rising damp, and substantial cracks in the walls or ceiling + + Assess whether you will need to complete any renovations on the property + + Think about how much ongoing maintenance you will need to do to the property and garden + + Assess the quality of appliances that will be included with the property (eg ovens, hot water systems, solar panels) and check whether or not they are energy saving + + Assess how secure the property is and check that any danger areas such as stairs, pools and verandas have adequate safety features installed + + Ignore the current owner s furniture and décor and try to picture your own in its place + + Make sure the property fits all your key criteria John and Jen set up alerts on real estate websites that match their property criteria and make enquiries with real estate agents servicing the suburbs they are looking at. They spend weeks attending open houses and arranging private inspections with real estate agents. Eventually they find two properties they are interested in. Buyer s agents If you don t have the time or the inclination to search for properties yourself, you can hire a buyer s agent. They will find and inspect properties that fit your criteria and budget, and negotiate the purchase of the property (including bidding at an auction) on your behalf. They can also co-ordinate the legal and insurance aspects of the purchase for you. You can find a fee guide on the Real Estate Buyer s Agents Association of Australia website ( Fees will range from around $500 + GST to bid at an auction for you, up to 2% + GST of the purchase price for their full services

14 Stage three: Making an offer If you find a property you are interested in and would like to make an offer for, the first thing you should do is ask the real estate agent or seller for a copy of the contract of sale. This usually includes: + + terms and conditions of the sale + + a zoning certificate from the local council + + a copy of the title to the property as recorded in the Land Titles Office + + copies of documents outlining any other registered interests over the property + + as well as other documents such as strata plan (if any) etc. If you haven t done so already by this stage, you should hire a solicitor or conveyancer to look over these documents for you to make sure they re acceptable. Building and pest inspections It s not mandatory to obtain building and pest inspections before making an offer on a property, but it s usually in your best interest to do so because if you find a problem after your offer is accepted and your deposit is paid you may not be able to get your money back. A building inspection will confirm the structural soundness of the property and outline any visible defects or repairs that are required. You can expect to pay between $275 and $500 for a building inspection report 2. A pest inspection will let you know if there is any indication of a current infestation, or evidence of a past infestation. You can expect to pay between $150 and $300 for a pest report 3. Building and pest inspections can be arranged quickly and a report is usually ed to you within 24 hours of the inspection, so it won t delay you from making an offer for more than a few days. If you are worried that you may miss out on the property while you are waiting for the inspections to be completed you may be able to make a conditional offer that depends on the outcome of the building and pest inspections. It s also possible to make an offer and then make sure the inspections are competed during your cooling-off period (The period given after the exchange of contracts during which time the contract may be cancelled) so you have time to rescind the contract if something is wrong. If the property is a strata title, you may also want to organise a strata inspection. This will let you know if there are any ongoing maintenance or structural problems with the building. It also provides information about the property s strata levies, special levies and insurance. You can expect to pay $200 to $350 for a strata inspection 4. If you re happy with the outcome of the inspections, you may be ready to make an offer on the property. There are two ways properties are sold in Australia: private treaty and auction. 2 Family and Community Service A Guide to the Cost of Home Purchase May ibid 4 ibid

15 Stage three: Making an offer (cont.) Private treaty A private treaty is a sale that may be done through a real estate agent or directly with the seller (also known as a private sale). The seller sets an asking price and you can either pay that price or try to negotiate a lower price. You may be required to formally submit an offer in writing to the seller or their real estate agent, and they will let you know if you are successful. Sometimes you will be competing with several other buyers who have also made offers on the property. If this happens you may need to raise your offer price, but be careful not to offer an amount above what you think is reasonable for the property. Sometimes buyers will offer to waive their cooling-off period as part of the negotiation, but be careful because these rights are put in place to protect you. If you waive your cooling-off rights and then find out via your building or pest inspection report that there is a major fault with the property, you may not be able to back out of the sale. Tips For Negotiating A Purchase Price + + Don t put forward your highest offer first, but be reasonable with the amount you offer so the seller knows you are serious + + If your first offer is rejected by the seller, you can ask them to make a counter offer + + Be wary of real estate agents referring to other interested parties. Sometimes this is a tactic aimed at making you increase your offer + + Let the real estate agent know that you have done your research on properties in the area and have a clear indication of what the property is worth + + Be prepared to walk away if the seller isn t willing to accept your highest offer

16 Stage three: Making an offer (cont.) Auctions An auction is a sale set at a specified time and place. Prospective buyers submit bids to the auctioneer and if the final bid amount exceeds the reserve price set by the seller then the person who put forward that bid will be successful in purchasing the property. One key difference between private treaty and auction sales is that there is no cooling-off period with auctions. If you win an auction you are obligated to follow through with the purchase. You must sign a contract on the spot and pay the deposit, which is usually 10% of the purchase price. If you later decide to back out of the purchase you will most likely lose your deposit. If bids on a property don t reach the reserve price set by the seller, it is passed in. Then the highest bidder is usually given the first opportunity to negotiate a price directly with the seller. It may be helpful to attend a few auctions before you bid at one so you can get a feel for how they work and what techniques people use to secure a winning bid. Overbidding is a common problem at auctions, as emotions can run high. Tips for bidding at an auction + + Gain pre-approval for a home loan so you know how much you can bid + + Ask your solicitor or conveyancer to review the contract and certificate of title before the auction + + Arrange building and pest inspections before the auction + + Make sure you register with the auctioneer before the auction begins. + + You ll need to have your deposit ready on the day of the auction in case you re the successful bidder + + Don t let excitement or emotion get the better of you stick to the maximum amount you are prepared to pay for the property + + Don t let real estate agents pressure you into bidding on a property, even if you ve registered as a bidder + + Ask a friend, family member or buyer s agent to bid for you if you don t want to do it yourself Sometimes it is possible to make an offer on a property before the auction date. The seller can decide whether to accept your offer or go along with the auction as planned

17 Stage three: Making an offer (cont.) Real estate agents Always remember that the real estate agent is working for the seller, not for you. They are paid by the seller and usually receive a percentage of the final selling price, so their main aim is to get the highest price possible for the property. That s why it s important for you to do your research and know the market so you re not swayed by the agent s attempts to get you to increase your offer. John and Jen request contracts for the two properties they are interested in. Both are private treaty sales. The first property is only five years old and meets all of their criteria, but the asking price is $880,000, which is $30,000 over the maximum amount they are willing to pay. They ask the real estate agent if the seller is likely to accept less than the asking price and he says it is possible. The asking price of the second property is $840,000. It is an older building and needs a new bathroom and other minor repairs, but it meets their criteria and they love the location. John and Jen arrange a building inspection and the report says there is rising damp in the wall between the bathroom and one of the bedrooms. They do some research using the renovation cost guide available on the Archicentre website ( and decide the renovations would cost them around $20,000. In John and Jen s opinion, the asking price for the property is too high considering the renovations that have to be done. John and Jen decide to make an offer on the first property, but their offer of $850,000 is rejected by the seller. However, their offer of $810,000 for the second property is accepted. They hire a solicitor, exchange contracts, pay a 10% deposit and ask their lender to arrange a loan for $648,000, which is 80% of the purchase price

18 Stage four: Finalising the purchase Conveyancing Conveyancing is the legal transfer of a property from the seller to the buyer. To help you with this part of the process you may need to hire a solicitor or a licensed conveyancer before you exchange contracts on a property. Often your lender will be able to put you in touch with a conveyancer in your area, or you can go to The role of your solicitor or conveyancer is to: + + act as a liaison between you and your lender's solicitor + + check your contract of sale + + perform title searches + + check whether there are any outstanding rates or water payments on the property + + act as your legal representative for the transaction Conveyancing/legal fees vary from state to state and depend on the amount of work you ask your conveyancer or solicitor to do for you. A general guide is $900 - $2, Exchanging contracts Once your offer is accepted, either by private treaty or auction, the next step is to exchange contracts. This means you and the seller will both sign a copy of the contract, and you both keep a signed copy of the contract. Your solicitor or conveyancer will help you with this. You ll also need to pay a deposit at this stage, which is usually 10% of the purchase price. Most lenders require you to start a home building insurance policy for your new property as soon as contracts are exchanged, however there is no need to insure your contents until you move in. If you buy a strata property you aren t required to purchase building insurance because it should be included in your ongoing strata payments. It s important to arrange a final inspection of the property after contracts are exchanged, but before settlement, so you can make sure the condition of the building and the inclusions are exactly as they appear in the contract. First Home Owner Grant The First Home Owner Grant was established by the Federal Government to help first home owners with the costs associated of buying their first home. The grant only applies to new builds, not established properties. The eligibility requirements and amount vary from state to state and are constantly changing. You can check the current rules for your state at 5 Australian Institute of Conveyancers NSW Division

19 Stage four: Finalising the purchase (cont.) Stamp duty After you exchange contracts you are required to pay stamp duty on the purchase price of the property. The rules of when you have to pay stamp duty, and the amount you have to pay, varies from state to state. Your lender will be able to tell you when you will need to pay stamp duty, and how much it will be. Most lenders also offer a stamp duty calculator on their website. It s important to budget for stamp duty because it can be a considerable sum of money. Some states offer an exemption or concession on stamp duty for first home buyers if the value of the property falls under a certain value. As with the First Home Owner Grant, there are complex rules around the eligibility requirements. You can check the rules on the website for your local state/territory revenue office, or ask your conveyancer/solicitor, if you have one. The property John and Jen are purchasing is an established property rather than a new build, so they know they aren t eligible to apply for the First Home Owner Grant. Also, they know the purchase price of their property is too high for them to receive a concession or exemption on their stamp duty. The $200,000 they have saved is sufficient to cover their deposit of $162,000 and $37,161 in stamp duty, legal and other purchase costs. They liaise with their solicitor and their lender to sign and prepare the necessary documents for settlement and to finalise the loan. While they are waiting for the settlement date they give notice on their lease, organise removalists, take out a building insurance policy and arrange for utilities to be connected at their new home. A few days before settlement they do a final inspection to make sure everything is in order and there hasn t been any damage to the property since their last inspection. John and Jen s purchase costs Property price $810,000 Building inspection $500 Pest inspection $300 Mortgage registration fee $107 Transfer fee $214 Stamp duty $31,940 Conveyancing/legal fees $1,200 Loan application/establishment fee $600 Settlement fee $200 Survey report $500 Council and water rates adjustment $300 Home insurance $1,300 Total purchase costs $847,161 Sources: (all costs are based on NSW prices)

20 Stage four: Finalising the purchase (cont.) Settlement Settlement is the date when legal documents are finalised and exchanged at the state or territory title office and you take ownership of your new home. The date has to be agreed on by both the seller and the buyer and the parties representing them. Usually it s four to six weeks after you exchange contracts (unless you are buying 'off the plan'), but the date can be negotiated. Signed documents and titles are exchanged between the lender, the seller s solicitor and the buyer s solicitor or conveyancer. You don t need to attend the settlement your solicitor or conveyancer will attend on your behalf and contact you afterwards to confirm that the settlement has taken place. During and soon after settlement (ie later that day): + + your purchase price is paid in full and your home loan is made available to you by your lender + + title and mortgage documents are registered and the property is changed to your name + + you receive the keys to your new home and are free to move in Your first mortgage repayment will likely be due one month after settlement, so make sure you have the available funds in your account to cover the payment. Your lender will most likely require you to set up an ongoing direct debit arrangement for your repayments. Four weeks after John and Jen exchange contracts with the seller of their property, settlement occurs and they are given the keys to their new home

21 Stage five: Managing the mortgage As exciting as buying a new home can be, the reality is that you ve likely just taken on a huge long-term debt as well. Make sure you re familiar with how your loan works and what options are available to you if your circumstances change. For example, if your household income reduces (eg if you decide to have a child, or you or your partner s job is made redundant) it may be possible to switch to paying interest only on your loan for a period of time to reduce your repayment amount. Another option available to you is to switch between a variable rate loan and a fixed rate loan. The most common time to do this is if fixed interest rates are low and the RBA cash rate is expected to rise soon (which increases the interest rate for variable rate loans). However your lender is likely to charge you a switching fee if you do this, so make sure it will be worthwhile. If you find yourself unable to meet your repayments at any point, talk to your lender. They may be able to reduce your repayments for a period of time, or delay your payments until your financial situation improves. They re likely to be much more receptive to helping you if you contact them as soon as you find yourself in financial trouble rather than if you wait until you default on your loan. Tips for paying off a mortgage sooner + + If you have the funds, and your loan allows it, try making extra repayments. It will reduce the amount of interest you pay and you can always withdraw the money later if you need to + + Consider making your loan repayments fortnightly instead of monthly. Over the course of a year you ll make two more payments and shorten the life of your loan overall + + If you are on a variable rate loan and the interest rate falls, your minimum required repayment amount will fall too. But if you maintain your old repayment amount you ll pay less interest, which means you re repaying more of the principal on your loan + + Put extra money that you may receive, such as a tax refund or a bonus, into your home loan. You can withdraw it later if you need to, but in the meantime it will reduce your interest + + Refinance or switch to a different loan type if you can get a better interest rate elsewhere, but first be sure to weigh up all the fees and costs against the amount you ll save in interest. If you speak to your lender before you refinance they may be able to offer you a better rate on your current loan

22 Stage five: Managing the mortgage (cont.) Protecting Yourself & Your Home Now that you own your own home, it is important to protect it and yourself. Building and Contents Insurance Outside of your superannuation savings, your home will probably be your biggest asset and it s important to protect it and the contents in it against fire, theft, flood and other disasters. Many people in Australia don t have adequate insurance for their home and contents and they don t realise it until it is too late. Building insurance is likely to be a condition of your home loan. It will also be necessary for your lender to be included in the policy to protect their interests. Life and Trauma Insurance These insurances provide financial security for you and your family in the case of your death or serious illness, such as cancer or heart attack. The amount paid by these insurance policies means that you and your family aren t burdened by financial worries at these difficult times. Income Protection Insurance Along with your home, your capacity to earn a living is your biggest asset. If you are unable to work for an extended period of time due to illness or disability, this insurance pays you an income, usually up to about 75% - 80% of your normal earnings. Income protection insurance premiums are normally tax-deductible. Difficult Circumstances Owning property is a long-term investment and circumstances can change along the way. If you find your situation has changed, due to illness or unemployment for example, it s vital that you talk to your lender. If you take control and communicate openly with your lender, they can help you through difficult times. They may reduce your minimum repayments for a period of time or give you a payment holiday. You may feel anxious about telling your lender about your problems but it is definitely worse to miss repayments and not be contactable. Responsible lenders will most likely be sympathetic to your circumstances, appreciate your honesty and be willing to help. From their point of view, they are more likely to get the loan repaid in full if they help you through a hard patch. A word of caution, there is no legal obligation on lenders to enter such arrangements. The sooner you begin a genuine discussion with your lender the more likely the chance of coming to an arrangement

23 Helpful resources Suburb demographics You can research suburb demographics and recent sales at to get an idea of how much a property in that area will sell for. Budgeting Budget calculators, such as the ones available on the MoneySmart website at help you to get your finances in shape while you re saving a deposit: + + Budget planner: tools-and-resources/calculators-and-apps/ budget-planner + + Net worth calculator: au/tools-and-resources/calculators-andapps/your-net-worth-calculator + + Money health check: au/tools-and-resources/calculators-andapps/money-health-check + + Savings goals calculator: gov.au/tools-and-resources/calculators-andapps/savings-goals-calculator + + TrackMySpend mobile app: gov.au/tools-and-resources/calculators-andapps/mobile-apps/trackmyspend Comparing home loans You can compare home loan rates at Credit file If you want to see your credit file before your lender completes a credit check, you can order from: + + My Credit File: Dun & Bradstreet Australia: Veda Australia: Experian Australia: Conveyancer/solicitor You can find a conveyancer to help you leading up to and during settlement at You can find a solicitor to help you leading up to and during settlement through your respective State/Territory Law Society. First Home Owner Grant The website provides a link to the First Home Owner Grant amount and eligibility requirements for each state and territory. Real estate websites Home loan/mortgage calculator Most lenders will have a mortgage calculator on their website. State/territory revenue offices You ll find details of stamp duty and other purchasing costs at the revenue website for your state. Your conveyancer or solicitor can also help with these calculations and other information surrounding stamp duty. + + ACT: NSW: NT: QLD: SA: TAS: VIC: WA:

24 Glossary of home loan terms + + Allotment: An area of land that is subdivided into smaller portions of land + + Application Fee: A fee paid to the lender for setting up the home loan + + Breach of contract: When the conditions of a contract are broken + + Bridging finance: Short-term finance (usually at a higher interest rate) while waiting for a loan or for your existing property to sell + + Certificate of currency: A certificate issued by an insurance company showing that a building is insured + + Certificate of title: A document identifying ownership of land. It shows dimensions, the owner s name, and details of mortgages, easements or encumbrances on the property + + Chattels: Movable possessions that may be included in the sale (such as furniture or window coverings) + + Common property: Areas in a strata property that are not included in the owner s individual lot + + Comparison rates: A tool used to help identify the true cost of a loan. It is a rate which includes both the interest rate and the ascertainable fees and charges relating to a loan, reduced to a single percentage figure + + Contract of sale: A legal document describing the property, price, identity of the seller and buyer, and conditions of the transaction. It is legally binding when signed by both buyer and seller and after a deposit has been paid + + Conveyancing: The legal transfer of property from seller to buyer + + Cooling-off: The period given after the exchange of contracts during which time the contract may be canceled + + Covenant: Terms, conditions and restrictions noted on a property s certificate of title. The covenant may affect future plans or resale + + Credit rating: An assessment of the credit-worthiness of individuals and corporations, based on their borrowing and repayment history + + Credit report: A report from an authorised agency that shows the potential borrower s credit history. Lenders access the information in your file to help them decide whether to lend to you + + Default: Failure to meet debt payment on the due date + + Purchase Deposit: A portion of the purchase price, usually 10%, paid by the buyer at the time of exchanging contracts on the purchase of a property + + Easement: A right over a property to use or prevent the use of the property in a particular way + + Equity: The difference between what you owe and what your property is currently worth + + Exchange of contracts: The buyer and seller enter into a binding contract that commits them to the purchase/sale of the property + + Exit fee: A fee imposed by some lenders if you decide to refinance with another lender within the first years of the loan + + First Home Owner Grant: A federal government grant given to eligible first home buyers + + Fittings: Items such as light fittings that can be removed without causing damage to a property. They are usually not included in the sale unless specified in the contract + + Fixed rate loan: A type of loan with an interest rate that is locked in for a set time period + + Guarantor loan: A type of unsecured loan that requires a guarantor to co-sign the credit agreement. A guarantor is a person who agrees to repay the borrower's debt if they default on agreed repayments