A HOME BUYER S COMPREHENSIVE guide 1300 MY BROKER www.argfinance.com.au R F I N A N C E
Your Journey To A New Home Starts Here The journey of buying a home, though exciting and rewarding, can also be time-consuming and tiring. There are several decisions that need to be made. You should keep in mind that thorough research will help you in making the right preferences as well as avert extravagant mistakes. This ebook will guide you in buying a home as well as taking out a home loan in the process. Disclaimer: The purpose of this ebook is to provide potential property investors, sellers, or loan seekers with general information about the financial and non-financial aspects of property buying or selling. The ebook is meant for quick reference only. It is NOT a summary or a compilation of all information relevant to any particular situation. The information is provided solely on the basis that readers will take responsibility for verifying its accuracy and completeness. Although considerable resources are used to draft the ebook, the company (ARG Finance) accepts no liability for any loss or damage that may be incurred by any person acting in reliance on the contents of the ebook.
Contents 1. 2. 3. 4. 5. 6. 7. 8. 9. Determine Your Readiness 1 Self-Evaluation of Creditworthiness 2 Choosing the right type of loan 5 - Loan types - Equity release - Repayments Loan Documentation 9 Finding your property 11 - Getting a pre-approved home loan - How an agent can help? - Making an offer Buying at an auction 12 - Before the auction - During the auction - After the auction Buying at a private treaty 13 - Making an offer - Exchanging contracts - Getting legal representation - The cooling off period - Between exchange and settlement - Settlement Glossary 16 Conclusion 19
Determine Your Readiness It is true that some people do not mind making sacrifices to own a home. Some even go broke while doing so. But, it does not have to come as an unpleasant surprise in future if you take the present time to figure out what you can afford comfortably. Factors involved There are various factors that should be kept in mind when making this decision. You should purchase your home based on factors, like the amount that you can afford, your current and future needs, and your lifestyle. If you are not in a committed relationship, have a demanding job, or spend a lot of time away from home, then a unit or townhouse may be more suitable than owning a house with a garden. As a home buyer, you need to be sure that you are ready, both financially and personally, to invest in a new home. comprehensive guide 1
Self-Evaluation of Credit worthiness This might be one of the obvious and most important steps to take, before beginning to hunt houses. You need to work out exactly how much you need to spend and can afford to borrow for the new home. A borrowing calculator can indicate how much you can afford to borrow based on your income and expenditure. Gross Salary Your income is one of the most important factors which determine the amount you can borrow. Keep in mind that when the home-owning bills and the amount of your repayments are combined, the final amount (annually) should not exceed 40% of your gross salary. Financial Allegiances Lenders are interested in your ability to pay the loan now and in the future, rather than what you earned and spent in the past. Factors To Prepare For: Limited Savings Most lenders do not agree to provide a home loan even if you claim to spend more than 40% of your gross salary in monthly repayments every year by living the minimal lifestyle. So here is what you can do if your savings are limited: Use a budget planner to know where exactly your money is being spent and where you can save. A savings calculator can also help. comprehensive guide 2
Costs associated with purchasing a home Stamp duty fees There are two types of stamp duties you need to be aware of: Duty for the property transfer. Duty for the mortgage. The state and territory governments charge stamp duty, so the amount varies with each state. It will also vary according to the purchase price of the property. If you are a first home buyer, there are some stamp duty concessions. Read more about this in detail in this handbook. Pest and building inspection fee Pest inspections are relatively cheaper than building inspections, which can cost up to $1000, depending on the size of the property. Real estate agent s fee If you re buying your home through an agent, there will be an agent s commission to pay. Conveyancing fee Payment made to legally transfer ownership of the property you are buying. Insurance fees There are a few types of insurance costs you might have to pay: Lenders Mortgage Insurance (LMI) - You will need to pay this insurance if you borrow more than 80% of the purchase price of the property. The insurance protects the lender if you default on the loan. Building insurance - Your lender will ask you to take this insurance dated from the time of exchange of contracts if you are not buying a strata property. Contents insurance - This insurance is helpful if you want to cover fixtures and fittings along with the sale. Mortgage protection insurance - This type of insurance is not mandatory, however, it can be beneficial as it can cover your mortgage repayments if you default in repayment of the loan. comprehensive guide 3
Miscellaneous costs Moving costs - Unless you are good friends with a mover, you ll need to pay for removalists and possibly storage. Council rates and strata fees - These are applicable if you are purchasing an apartment. Renovations and furniture - Do you need white goods? Are you planning to freshen up the place with some paint and new carpets before you move in? You ll need to count these costs as well. comprehensive guide 4
Choosing the right type of loan There are hundreds of different loans in the mortgage marketplace, but here are some of the most common types of home loans you will find, and their pros and cons. Fixed loans Pros Cons Repayments won t change for a fixed period (usually 3-5 years), no matter what the Reserve Bank s current rates are. You can budget with some certainty. The rate is usually a little higher than a variable loan. Redraws and extra payments are restricted or not available. Variable loans Variable Loans, as the name suggests the interest rates vary, on the Reserve Bank and lender pricing throughout the term of the loan. Pros Your repayments can drop with the official interest rates. Cons The interest rate and your repayments might go up. Rates are lower than fixed rates. Some basic variable loans may have better rates but less flexibility. Split loans This loan blends repayment flexibility with some interest rate security. When you split a loan, you fix one part and let the other part range with market fluctuations. Pros Payments have a little bit more certainty around a long-term budge Cons Interest rates and repayments can still go up. comprehensive guide 5
Low-doc loans This loan is mostly for self-employed home buyers, who do not have all the financial documents required for getting a loan. It can be either fixed or variable. Pros It allows eligible home buyers without all the documents to access finance. Cons Though the rate is higher than a standard variable or fixed loan, it is usually reduced after a few years if repayments are made on time. Line of credit loans With this loan, you can draw from a fixed amount at any time to pay for whatever you want. It works like a credit card with a big limit with your home still acting as the loan security. Pros You only pay interest on the funds you use and are able to access the funds, like in a normal savings account or credit card. Cons You need to have some discipline to ensure you pay off the principal as well as the interest. Equity Release/ Reverse Mortgage This loan is generally available to people over 60 years of age who want to access the equity that has been built up in their property. Pros Controlled loan to value ratio lending Allows you to borrow money using the equity in your home as security. Cons The rate of interest that you will be charged is generally higher than for a normal home loan. May affect your eligibility for the Age Pension. comprehensive guide 6
Repayments Interest only repayments This allows you to pay off only the interest part of the loan. This repayment won t save you money because the principal will not reduce, but you might have to probably pay a bit more interest in the long term. Remember, you will need to pay off the original amount that you borrowed, by the end of the loan term. Weekly or fortnightly repayments Some lenders allow you to make fortnightly or weekly repayments to help you save something in the long run. The interest on home loans is calculated daily, so the more often you pay off a bit of the principal, the less interest you ll pay over the long term. To see how this can save you thousands of dollars, take a look at our repayment calculator. Extra repayments Being able to make extra repayments are a handy feature, yet one should watch out for the extra fees that some lenders charge for it. Extra repayment will help you pay off your loan sooner, and save thousands of dollars as interest. Redraws This facility allows you to re-borrow any extra repayments that you have made. In the process, it allows you to reduce your interest repayments when you have some extra money and draw that cash back when required. There can be additional fees for using this feature. Offset account This is a bank account connected to a loan. The amount of cash in the account is taken off the outstanding loan balance, or the principal that you owe. This reduces the amount on which your future repayments will be calculated. Direct Debit A direct debit feature means your lender will automatically draw your repayments from a nominated account. It can make paying your mortgage simpler. As long as there is enough cash in the nominated account, you can be sure you ll never miss a repayment. comprehensive guide 7
Portability Portability means you can take the same home loan with you if you sell the current property and buy a new one for residence. This can save a load of fees and hassle when you move house, but there can also be a charge when you use this feature. comprehensive guide 8
Loan Documentation Comparison Rate A Comparison Rate, made mandatory by the Government, for all lenders to publish, helps borrowers to get a better indication of the cost of a loan over a long term. It s calculated using a standard formula that takes into account: The amount and term of the loan The repayment frequency The interest rate The loan s fees and charges Loan Documentation Checklist To help make the application process as quick and easy as possible, read this list to find out what documents you will need to have ready to apply for a home loan. The provided checklist is only a guide. Contact our credit advisor to know if any other documents are required. Personal identification You will require your personal identification to sum up to 100 points. For example, a current Passport will equal to around 70 points, birth certificate to another 70 points, and the driver s license to 40 points. To find out more about this you can get in touch with our credit advisors. Income details As a part of documentation, you would need to present two most recent payslips as well as the most recent Group Certificate from your employer to show your income details. If you are self employed you will require the last two year s personal and business tax returns and ATO assessments along with other income details. You may also require the following documents: comprehensive guide 9
Rental income statements or bank accounts showing rental income for any investment properties Proof of share dividends or interest earned Centrelink letter confirming family tax benefits Centrelink letter confirming permanent government pensions Private pension group certificate or statement Proof of any other regular or ongoing income Additional documents if you are refinancing Some of the additional documents that you require in order to refinance are: Documentation on an existing loan including the date the loan commenced, loan period and any financial penalty payable if you exit the loan early Statements for the last six months for any existing home loans and personal loans The most recent Council Rates Notice and building insurance policy on the property or properties being offered as security If you have credit card debt, then you would require statements for the last six months, otherwise submitting the most recent statement would suffice. Additional documents for investors If you already have investment property then you must have these documents ready: Evidence of income such as rental statements A copy of the tenancy lease A Council Rates Notice Copy of the Contract of Sale for the property being purchased A letter from a property manager indicating likely rent for the new property comprehensive guide 10
Finding your property Finding your property will mean lots of internet searches, endless staring in real estate agency windows, and nights spent flicking local papers. To make the hunt just a little bit easier, we've got some tips and tools for you. Location counts Location is crucial to your lifestyle and to your property s potential resale value. You need to consider the time it would take to get to work, the availability of amenities, and hangout places, like local schools, shopping centres, and other public facilities. Do your homework Check out recent home sale prices in your preferred areas. Look at market trends, houses for sale and suburb statistics. There are lots of websites out there to help. Another good way to get an estimate of the market value in the area you re interested in is to go to auctions and keep an eye on results. Get pre-approved for your home loan With pre-approval you ll know how much you can borrow and how much you can spend, and you won t waste time looking at places out of your range. Talk to a broker or a lender and apply for a loan before you start the hunt. Consider hiring an agent An agent will hunt houses on your behalf and will take you to check out only those properties that meet your criteria. Since, they are always scouting the market, they have a good idea of a property s real value and can help you secure it at a realistic price. So while there s a charge for the service, a buyer s agent could actually save you money. Make an Offer If the property is for sale through a private treaty, you can make an offer to the vendor or his agent, in writing, which must be signed by you. You can also make an offer in the form of a contract of sale which will become legally binding if the vendor signs it. If you are planning to make this kind of offer, it is recommended that you include a condition in writing, that if the contract is not signed by the vendor by a particular date, the offer and the contract will become invalid. Your conveyancer or solicitor will be able to help you with the proper phrasing of this condition. comprehensive guide 11
Buying at an auction Auctions are abound for both buyers and sellers because at anytime, either one could be forced into making a speedy decision that could cost thousands of dollars. Buyers, in particular, have little room for error. If you make the winning bid, you are legally bound to exchange contracts and pay the deposit on the day. There is no cooling-off period. The best way to get what you want, at an affordable price, is to be prepared all throughout the auction. Before the auction Keep the following points in mind prior to an auction. These will help you get what you want. Visit as many auctions as you can. Go to some open houses of the trial auctions you plan to attend. Grasp the the difference between what an agent quotes as the estimated selling price and the actual selling price. Arrange finance to get a pre-approval on your loan. Decide the maximum amount you will pay for the property. During the auction Stand back. Keep an eye on other bidders and wait till the property is on the market, prior to making a bid. This means that the bids have reached the reserve price, or the seller is prepared to sell at the current bid and the property will definitely be sold. You can now bid firmly and confidently with the decided budget. After the auction If you are able to make the highest bid after the property was declared on the market, then you have successfully bought yourself a property. At this stage, the agent will take you to a private area to finalise the paperwork. At this point, you also will have to hand over the deposit. Remember that if the property did not reach the reserve price and is Passed in, then you can still negotiate the price. Being the highest bidder you have the first right to refuse the vendor s reserve price. However, if you are not, then talk to the agent and convey your interest. comprehensive guide 12
Buying your property So, now that you have found the right property and agreed on a price with the seller, this is when the real shuffling of papers begins. We ll take you through the process step by step. 1. Make an offer There are two types of offers you can make: Unconditional offers Conditional offers Unconditional offers Unconditional offers are the norm at auctions. You should be 100% sure that this is the property you want, and that you have access to the money to buy the property. Once the vendor has accepted your offer, you are legally obliged to proceed with the sale. Conditional offers A conditional offer is also a binding contract, provided that all your conditions are satisfied. You can only back out now if one or more of the conditions are not met. 2. Exchanging contracts The first important paper to be shuffled is the contract for sale. Neither you, nor the seller is legally bound to go ahead with the sale until a written contract is exchanged. This contract documents the property address, names of the parties involved, the selling price, terms and conditions, any special inclusions in the sale, and the date of settlement 3. Legal representation You should arrange to get a legal representative to arrange the entire process of property transfer. While this contract is usually prepared by the seller s solicitor, your legal representative should check the details and make sure that the zoning, heritage, or title restrictions do not clash with the intended use of the property. comprehensive guide 13
4. The cooling-off period If you have bought through private treaty rather than at auction, you get a cooling-off period after the contract is exchanged. During this period, you can cancel the contract, but there may be a small penalty. The duration of the cooling-off period varies from state to state. Between exchange and settlement The time between exchange and settlement is usually six weeks although this can change, if both parties (you and the seller) agree to extend or reduce it. You Should Your Lender should Insure the property Arrange for a valuation of the property. Arrange the balance of the purchase price. Finalise the finance and sign the mortgage documents. Require you to take out building insurance effective from the exchange, unless you re buying a strata property 5. Settlement The date, on which you take legal ownership of a property is your settlement date. On this day, the balance of the purchase prices must be paid. Settlement is usually 6 weeks or 30 days in QLD, and can be negotiated as part of the contract of sale documentation. The process Your solicitor/ conveyancer will prepare and arrange for you to sign a Transfer of Land document, which should be done at least two weeks prior to the settlement date. Your solicitor/conveyancer will contact you, the seller s solicitor/ conveyancer, and other interested parties to arrange the date, place, and time of settlement. Your solicitor/conveyancer will inform you, one week prior to the settlement, about the exact date and time of settlement along with the amount of funds required prior to settlement. This amount is usually required to be paid by bank cheque one day before settlement. comprehensive guide 14
After settlement, the seller s solicitors will contact the real estate agent who sold you the property and asks him to hand over the keys to the property to you. Your solicitor should contact you and confirm that the settlement has taken place. They will also send you a Statement of Adjustment to show you how the funds have been disbursed to the parties involved. comprehensive guide 15
Glossary Agent: Someone who is registered to practice real estate, and acts on behalf of another person, in the process of selling, buying, renting, or managing a property. The term can also be interchanged with real estate agent. Contract or contract of sale: This is a legal document that is generally prepared on behalf of a seller by a real estate agent, solicitor, or a conveyancer. The document sketches out the details of any property sale. When the two involved parties sign on the contract of sale then this document becomes legally binding. Conveyancer: Someone who arranges the channel for transfer of fees or rewards for the purpose of handing over a property from the seller to the buyer. Legal practitioners are also permitted to engage in tasks that are related to conveyancing. Cooling-off period: This is the time interval when a buyer is permitted to withdraw himself/herself from the sale of a property, other than by auction. This period can vary between 24 hours to 14 days, from the time a contract has been signed. For instance, in South Australia, the cooling period stretches to the end of two clear business days, from the time when the contract or the service of the Form 1 is created, whichever is later. Deposit: During the purchase of a home, when all contracts are signed and exchanged, the buyer pays a percentage of the purchase price, called the deposit, to express his genuine intent of purchasing that property. This price is non-refundable and is usually ten percent of the purchase price. The deposit is held in a trust account by the land agent or by the vendor s solicitor or conveyancer, else it is held jointly in a trust account by the vendor and buyer. Estimated selling price: This is the price that is estimated by an agent, which he/she thinks a property will be able to attract. The estimated selling price has to be recorded on the sales agency agreement as one single amount. Fittings: These are the items which are removable from a property without causing damage to it. These can comprise of garden ornaments, lighting, air conditioners, furnitures, and the like. Fittings must be listed in the contract of a sale if a buyer desires them to come along with the property. comprehensive guide 16
Fixtures: These are items, which are attached to the property and are not removable without causing some damage to a property. These comprise of items such as bathroom suites, built-in wardrobes, kitchen stoves, etc. These items are generally already present during the sale of a property. Lender's Mortgage Insurance (LMI): This is an insurance payment charged by many of the lenders if they lend more than 80% of the total value of the property. This insurance covers any extra risk to the lender when a buyer invests little or no money towards a home. Stamp duty: This is a tax, issued by the state government, which is based on the actual selling price of a property. This amount is payable by the buyer at the time of transfer of property ownership. Settlement: This is the moment when the ownership of a property passes from the seller to the buyer, and when the surplus of the selling price is paid to the vendor. Solicitor: Someone who is legally qualified to shoulder legal work and can provide important legal advice for a fee. A solicitor may also specialize in property law and conveyancing. Private treaty sale: This is the purchase of property, either by a vendor or an agent, acting on behalf of the seller, through private negotiations and contract. This means that a seller is offering the property to the market and inviting offers from interested buyers. Reserve price: This is the minimum selling price for a property given by a seller. This amount must be listed under the auction records and it cannot be more than 110% of the price agreed by the vendor. Service fee: This is a common monthly fee that is collected to cover the administration and maintenance costs of a loan account. Title: This is a legal document that establishes the person who has a right to the ownership of a property. Transfer: Transfer is registered in the Land Titles Office, which documents any change in the right to ownership of a property. comprehensive guide 17
Valuation: It is a statement which is prepared according to the requirement of the lender which specifies a professional opinion of the property s value. Variable interest rate: A loan whose rate of interest changes according to fluctuating rates in the market. These differences normally depend on the RBA Cash Rate, yet sometimes lenders can increase or decrease their interest rate according to their own judgment. Zoning : This is a preconditioned agreement by the local council, which outlines the permissible uses of land or buildings, whether residential or commercial, in a specified area. comprehensive guide 18
Conclusion Whether you are buying a new home or selling off your property, the process for most homeowners is taxing, both financially and emotionally. Every step determines the end result of your purchase. If you are really out to get a new home other than the one that you already have, then remember to plan each step well, even though you have done this before. It is only after you have taken each step from scratch and strategized your each move, that you will know, you have invested in the right property. comprehensive guide 19
R F I N A N C E We are ARG Finance, your go-to credit advisors. We help navigate you through the competitive and everchanging mortgage landscape to find the right loan for you. We go into bat and negotiate on your behalf, and make the process as simple as possible for you. We help you avoid the pitfalls, and we find loan features to suit your personal circumstances. Mailing Address ARG Finance Suite 128, 1 Queens Road Melbourne VIC 3004 Contact Details 1300 MY BROKER Phone: 03 9866 5500 Web: www.argfinance.com.au ABN: 19 407 764 700