Section 5 Home Purchase Section 5: Home purchase Buying a home is one of the biggest expenditure items a person can make in their entire lifetime. Before making such an important decision, there are several things which need to be considered thoughtfully. These include location, type of dwelling, initial and ongoing costs, and housing requirements now and for the future. There are several steps to take before buying a home: Develop a budget, to work out exactly what repayments you can afford; Consider getting pre-approval from a bank to find out how much can be borrowed; Research areas where you might want to live, including price, schools, parks and other services; Attend several Home Opens or auctions to get a feel of the market; Make an offer or a bid; Settlement. Assistance for Homebuyers Once you ve done your own research about what you can afford and what s available, the next step is to find out whether you can get a loan. You may be eligible for government assistance, which is designed to help first-time homebuyers to access home purchase. There are several products available, and these are listed below. The Federal Government's First Home Owners Grant provides a $7,000 rebate to firsttime homebuyers purchasing a property under $750,000 (or under $1,000,000 if the property is north of the 26 th parallel). The grant is only available to people who have not previously owned property, and is only provided for residential dwellings. It is administered by the Office of State Revenue within the Department of Finance. Some lenders may take the grant into consideration when deciding to offer finance. If you have already purchased a dwelling, you may still be eligible for the grant, which is able to be rebated for up to a year following settlement. For further information about the grant, contact the Department of Finance on 1300 363 211 or visit www.firsthome.gov.au or www.finance.wa.gov.au for a fact sheet. Assistance with stamp duty: As a first home buyer you may be eligible for the first home owner rate of stamp duty on the purchase of a home or vacant land. The total value must be less than $600,000 for a home or $400,000 for vacant land and you must be eligible to receive the First Home Owners Grant under the First Home Owners Grant Act 2000. You may be eligible for an exemption on stamp duty on the purchase of a principle place of residence where the value of the property does not exceed $500,000, and a concessional rate for properties between $500,000 and $600,000. To find out more about stamp duty concessions contact the Office of State Revenue on 1300 368 364 or visit www.dtf.wa.gov.au (Click on 'State Revenue' and then 'Duties'). 1
The Home Buyers Assistance Scheme is a Western Australian Government scheme established under the Real Estate and Business Agents Act 1978. The scheme provides a grant of up to $2,000 to first homebuyers when they purchase an established or partially built home through a licensed real estate agent, to cover incidental expenses such as mortgage stamp duty, registration and establishment fees, property valuations, settlement agent fees and/or solicitor costs. The current criteria for funding are: the purchase price of the home is $400,000 or less; you must be buying your first home, which is established or partially built (not vacant land or a 'house and land' package); you or your partner must not own or have owned any property in the State of Western Australia before (if one person owns or has owned a home in Western Australia before, then you can apply for a partial grant based on the percentage of your ownership of the home); you must live in the home for at least the first 12 months; you must purchase the home through a licensed real estate agent; the application must be lodged with the Department of Commerce no more than 90 days after the date that the offer and acceptance contract to buy the home is accepted (in exceptional circumstances, a short extension of time for lodgement may be granted if reasonable grounds exist); and the home loan must be financed through an authorised lending institution (such as a bank, building society or credit union). To apply you must complete the application form, which is available from mortgage brokers, real estate agents and the Department of Commerce. If you would like more information, call the Consumer Protection Advice Line on 1300 30 40 54 or visit www.commerce.wa.gov.au. Keystart is the WA Department of Housing s home loan provider and offers different home ownership products to eligible applicants. Keystart home loans provide Western Australians on modest incomes with access to home ownership, and can offer loan packages to borrowers who may find it difficult to borrow money in the general marketplace, including: low-income earners; people who have a low deposit for a house; and those in casual employment or on commission. Keystart offers several loan products depending on your circumstances. For example, Keystart operates specific schemes for people with disabilities, Aboriginal and Torres Strait Islander peoples, Department of Housing tenants and people experiencing temporary financial hardship. Keystart Loans offer either full equity or shared equity loans, depending on income and ability to make repayments. People who can only save a small deposit and afford smaller repayments may find a SharedStart Loan more appropriate to their needs. Keystart Loans operate with a low deposit and no monthly account keeping fees. 2
SharedStart is a shared-equity, or shared ownership, scheme developed to address housing availability and affordability in WA. With a SharedStart loan you can purchase newly-built homes and off-the-plan properties offered by the Department of Housing. The Department of Housing may co-own up to 30 per cent of the property with you. With shared ownership, the initial cost of buying a home and the borrowing costs are reduced, making it more affordable. The Department s share will depend on your borrowing capacity, household size, and the location and type of property to be purchased. The Department of Housing also offers a rental sales scheme for some public housing tenants interested in purchasing their Department of Housing rental property. There are certain eligibility criteria, call Keystart on 1300 720 855 or visit www.keystart.com.au to obtain further information. The Department of Housing also offers affordable land and house sales to the general public. For more information, visit www.housing.wa.gov.au and click on Housing Options. Costs of buying a home Before you go looking for properties, you should approach a lender a bank, building society, credit union or Keystart to approve a home loan in principle and in writing for a certain amount of money. As a general guide, you may be eligible for a home loan for a certain amount where the monthly repayments are not greater than 25 per cent of your monthly income before tax. When determining how much money you may want to borrow, consider your budget, develop a savings history and shop around for a financial institution or bank. There can be vast differences in interest rates, monthly account keeping fees, loan application fees etc., therefore it is advisable to shop around and price everything to work out which is the best deal over the long term. In applying for a loan, the lender will consider your income and capacity to repay the loan. Home loans have different features, including interest rates, fees, charges and repayment options. Understanding the different options can be difficult and confusing. If you are not sure about anything, ask questions and get advice. The cost of buying is much more than just the price of the land and dwelling. There are other expenses that you need to plan for, such as stamp duty, settlement charges, expert advice, site costs, possible demolition or refurbishment, inspections for pests, bank valuation; and ongoing expenses, such as land and water rates, insurances, maintenance and utility charges. There is also the cost of moving into the new property. When you own your own home, there are all the other ongoing bills that must be paid. It is important that you can afford not just the purchase price of the home, but that you are able to continue to meet your expenses in the future; you must plan for loan interest rate rises when mortgage repayments will go up, and when insurance, rates and utilities increase, as they do every year. Fees and charges There are several fees and charges associated with taking out a loan. A loan application or establishment fee may apply. This is a one-off 'administration' charge to set up the loan. 3
When shopping around for a loan, find out what charges will apply. Some financial institutions don t charge application fees or ongoing account keeping fees. Interest rates also vary greatly from one institution to another and depending on whether the rate is fixed or variable. Differences in interest rates can add tens of thousands of dollars to the loan in the long term. Most lenders charge a fee for an inspection of the property to be purchased to ensure the property is not priced above the market value. This is so the lender does not risk the loan in the event of foreclosure (repossession). The longer it takes you to pay off your loan, the more interest you will pay to your lender. The interest rate may also rise during the term of your loan, which will increase your repayments to the lender. The rise in your repayments may affect your ability to keep making the payments and if so, you may lose your property as a result. There are things that can be done to avoid house repossessions until you are able to increase your income or sell the property. Repossession can be very costly and may result in a substantial debt, even after the house has been sold by the financial institution. Contact your lender if you are unable to meet the terms of your loan. They may be able to work with you to minimise the chance of repossession (i.e. increasing the term of the loan or putting the loan on hold, allowing you to pay interest only until you are able to resume normal payments). If you are experiencing mortgage stress and unable to meet the obligations of your home loan, contact Financial Counsellors of WA. Changing the features of your loan during its term (such as applying for a fixed interest rate) may also attract additional fees. Stamp Duty is payable on the market value of the property. There is the cost of expert advice when buying or building, such as settlement agents, lawyers and building consultants. Moving costs may be incurred, including: hiring removalists; connection and disconnection fees for utilities, like electricity, telephone and gas; and cleaning and repair costs associated with leaving a rental property. Ongoing costs include: Strata levies may apply, which include the cost of building insurance for strata titled properties, ongoing strata fees and maintenance costs; Consider taking out contents insurance; Building Insurance is a must, and is compulsory if the equity in your home is less than 20%; Home utility costs apply, including electricity, gas and phone bills; Water and local authority rates and water consumption are payable yearly and halfyearly respectively. 4
Searching for a property After working out the price you can afford for a property, think about the type of features you want within your price range. List the features that are important to you in a property, e.g. number of bedrooms and bathrooms, garden or courtyard, open-plan or separate living areas etc.; Get a map book and list the suburbs where you would like to live; Research newspapers and the internet for up-to-date information about the general price and demand for blocks or properties in your preferred suburbs. Be realistic and choose suburbs where you can find houses in your price range. You may have to expand your area to find affordable properties; Visit real estate websites on the internet and talk to family and friends about the type of real estate you re interested in buying. Sales and contracts Types of sales Property can be bought either by private sale or at auction. An auction is a publicly held sale where the property is sold to the highest bidder. A private sale can be conducted directly with the property owner (also called the owner/seller) or through a real estate agent. Real estate agents are required to be licensed by the Department of Commerce. To check that an agent is licensed before you engage one to sell a home or assist you in buying a home, ring the Department of Commerce on 1300 304 064. The law in Western Australia does not require that contracts for the purchase of property contain a cooling-off period, whether the property is bought at auction or through a private sale. If the contract you sign does not include a cooling off period, you cannot get out of the contract because you have changed your mind. It is possible to add a clause to the contract to stipulate that the sale is dependent on finance from a specific financial institution or lender. If you require finance to purchase a property, never make a cash offer on the contract. This would mean you are informing the seller you have sufficient funds to purchase the property. If the finance falls through in this instance, you would lose your deposit. It is important to remember that, unless the contract makes specific provision, properties are sold in the same condition as when first inspected. So it is essential to conduct a thorough inspection. Once you have inspected the property, if you want changes to be made prior to sale or you want to ensure certain items are included in the sale, you should insert specific terms (or conditions) into the contract. Some conditions in relation to the property are required by law, including that two Residual Current Devices (RCDs) and mains powered smoke alarms be fitted to the dwelling. These are the responsibility of the seller and must be fitted before settlement of the sale of the property. 5
These terms need to be accepted by both the seller and the buyer. The seller is not currently required to supply information about a property directly to the buyer, except for a strata title property. However, buyers may (if the seller agrees) receive a Seller Disclosure Summary, which provides information about a property. It is important that the seller (and agent) do not deliberately mislead buyers about the condition of a property. Checking the things you can t easily see in a property or complex may require special skills, so it s often a good idea to engage experts to do these inspections for you. Types of inspections include structural, electrical, plumbing/sewerage and timber pest inspections. In most cases, the lender (bank or building society) will require a pest inspection certificate and mortgage and building insurance certificate before finalising the purchase of the property. Checking the things you can t easily see may also involve asking the seller or agent to confirm in writing if: there are restrictions on the use of the property that are not listed on the title (for example, access to a sewerage); any buildings, improvements and fences on the property were constructed without the relevant approvals; the building or any additions are less than six years old and, if so, whether home indemnity insurance has been taken out; and there are any legal ownership disputes. If a property is currently tenanted, ask for details of the lease agreement. If the tenants have a fixed term agreement with the current owner, and do not agree to move earlier, they may remain in the property until the fixed term expires, with the buyer as their new landlord. If you require vacant possession of the property on settlement, that needs to be agreed in writing before the contract of sale is signed. Types of loans The interest is the 'price' you pay to the lender when you borrow money. There are different rates of interest, depending on the type of loan, the amount you are borrowing and the lender. Some interest is calculated daily on the balance of your loan, whilst some is calculated monthly. If the interest is calculated daily, it is beneficial to make more frequent repayments. For instance, with a variable rate loan where the interest is calculated daily, it is more advantageous for you to make fortnightly repayments of $450, rather than monthly payments of $900. Paying slightly more than the proscribed amount in fortnightly payments will reduce the loan faster and shorten the term of the loan considerably. With a variable rate loan, the interest rate can rise or fall throughout the life or 'term' of the loan. The interest rate can change depending on the economic climate and competition among lenders. You should ensure you would be able to meet any increases in your mortgage repayments if the interest rate increases during the term of your loan. 6
With a fixed loan, the interest rate is 'locked in' for a certain period usually between one and 5 years. This type of loan provides borrowers with certainty about the amount of their repayments during the fixed period and protection against interest rate increases. Fixed rates are usually higher than variable rates, because of the guarantee they will remain the same. However, a decrease in interest rates does not occur in a fixed loan either. 'Honeymoon' or 'introductory' rates on loans are interest rates that are generally lower than most lenders are offering in the home loan market and may be fixed or variable for a short period of time, usually between six months and one year. You should make sure that you could still afford your mortgage repayments once the fixed interest rate period finishes and the interest rate becomes the standard variable rate. A combination loan allows you to split your home loan into a fixed rate part and a variable rate part. Generally, you can decide how much of the loan will be subject to a fixed rate of interest and a variable rate of interest. Usually, the fixed rate part of your home loan is available for a period of between one to five years. You may be required to pay two sets of application fees for a combination loan and you may be charged a fee every time you renegotiate a new fixed term portion of the combination loan. Some home loans, such as fixed interest rate loans, may have restrictions on making payments that are greater than the agreed or scheduled payments. You should also ask about any fees or penalties that apply if: paying out your loan early; redrawing any extra payments you may have made towards the loan; negotiating another fixed term on your loan; extending the term of the loan. Types of lenders Banks often have a convenient branch network and offer a range of different savings and credit accounts, in addition to home loans. Banks, which are subject to supervision by the Australian Prudential Regulation Authority, provide security for their customers, but may be stricter about who is eligible for a loan and the amount of deposit required. Banks may be more inclined to increase interest rates more readily than non-bank lenders. Non-bank lenders include credit unions, building societies and other financial institutions. Some non-bank lenders operate through mortgage brokers and increasingly via the internet. However, most of the business is done over the phone and you can make an appointment to be visited by a representative. Ways you can shop around for finance include: checking television, newspapers and the internet to find out whether lenders are offering any special deals, such as Keystart; checking various consumer and finance magazines; considering the comparison rate for loans; and using the services of a mortgage broker. 7
Types of titles Joint Tenants and Tenants in Common If you are buying or building a house with another person, at law there are two types of ownership on a title that you should think about and discuss. The first type is ownership in the property as joint tenants. As 'joint tenants', you and another or others own the piece of property jointly. All owners must agree to the property being sold. When you die, your ownership in the land is automatically given to the other surviving owner or owners. The surviving owner or owners will need to lodge an 'Application by Survivor' form with Landgate to amend the certificate of title. The second type is ownership in the property as tenants in common. 'Tenants in common' hold undivided shares in a piece of property. You can transfer your share of a property to others and you can specify who will inherit your share of a property upon your death in your will. All owners must agree to the property being sold. Buying or building has long-term effects, so if you are thinking about sharing ownership, discuss whether it will be as joint tenants or tenants in common and talk about what will happen if the relationship doesn t last. Green title refers to land that generally has no common areas (unless indicated on the certificate of title) and may include a freestanding dwelling. The term green title refers to the sketch on the certificate of title that used to be shaded green. However, green title properties may have restrictions or instructions about how the land can be used. For example, the Water Corporation may have a right to install or access a sewer line on the property and, depending on its location, it may restrict your ability to install a pool or build an extension. As many restrictions are recorded on the certificate of title, it is a good idea to check the title and make other relevant enquiries before buying a property. Purple title refers to ownership of an undivided share in a property. The term similarly refers to the colour of the sketch on the title, which used to be shaded purple. Although not a common form of title, some retirement villages or multi storey flats, for example, offer residents an undivided share in the complex. The right to occupy certain areas in the complex is determined by the contract with each resident. A strata title is a certificate of title for a lot and a share in the common property in a strata scheme set up under the Strata Titles Act 1985. Buying a strata titled unit, flat or apartment (called a lot) gives you the right to own the space inside the walls of your lot, but may include parts of the building and land if that is shown on the strata plan, and also gives you the right to use areas that are designated as common property. Depending on the strata scheme, common property may include the exterior walls, roof, driveway and courtyards. Common property may also include shared facilities, such as laundries or swimming pools, stairwells and lifts. Before buying a strata titled property, you need to see a copy of the strata plan to see what you will own and what is common property. Each parcel of land available for purchase in Western Australia is recorded on an electronic register by the Land Titles Office. The Land Titles Office is part of Landgate. The original record of each portion of land is known as a certificate of title. 8
The certificate of title outlines important information about each portion of land, including: the legal description of the land (lot number, plan number and title number); whether the land is green title, purple title or a strata title; who 'owns' the land; and some types of restrictions about if and how the land can be used (if applicable). You can request a copy of the title of the property from Landgate for a fee. Otherwise, the real estate agent should provide you with a copy of the certificate of title. When requesting a copy of the title (which is now in digital format) from Landgate, ask for a sketch of the title. The sketch is provided at no extra cost and shows the size of the property you are thinking of buying. A sales map can also be obtained from Landgate for a fee, which shows the size of the allotments for a given property and neighbouring properties. The role of a real estate agent When you are looking at properties, you will often come into contact with real estate agents or sales representatives. The most important thing to understand about real estate agents or sales representatives when buying a property is that they have been hired by the seller. Their aim is to sell the property for the seller at the best possible price and under the best terms. The seller of the property is responsible for paying any fees to the real estate agent. To gain equal representation in the transaction you could consider using a sales representative, broker or agent as a buyer s agent. If you decide to appoint a buyer s agent, you are responsible for paying any fees associated with this service. This can be of real benefit in ensuring you are well represented in the transaction. The role of a conveyance or settlement agent When you buy a property, certain documents must be lodged with the appropriate authorities, contracts need to be signed and all undertakings stated on the offer and acceptance form. It is necessary for all the paperwork to be completed and all the promises fulfilled in the contract for the sale of the property. Such work is known as conveyancing. You can employ a licensed settlement agent or a lawyer with a current practicing certificate in law to attend to all these details on your behalf. The main difference between employing a settlement agent as opposed to a lawyer is that settlement agents are not qualified to give you legal advice. However, a settlement agent is required by law to let you know when it is a good idea to get legal advice. It is a good time to think about employing a settlement agent or a lawyer when you make the decision to start looking at properties. Advantages and Disadvantages of Renting versus Buying Buying a house is not the right decision for everyone. It is important to weigh everything up and consider whether home purchase may in fact result in mortgage stress, once all expenses are taken into account. It is also essential to think about what may happen in the future and take that into consideration. For instance, if you are planning on having children, how will that affect your future income? If you have been earning a high income due to fly 9
in/fly out employment, what will occur if the resource industry slows down and you lose that employment? Some of the advantages and disadvantages of buying and renting are listed in the table below. Renting Advantages Renting allows greater flexibility in moving to new locations and/or living in different types of housing. As a renter, you are not responsible for local authority rates and charges for water, sewerage and drainage services each year. Rent is not subject to interest rate changes. Renters are only responsible for repairs of damage they cause; the owner is responsible for maintenance and other repairs. Disadvantages You may have less security of tenure. The owner may sell the property, choose not to renew your lease, or increase your rent. Your rent does not go towards purchasing an asset. You cannot usually make your own decisions about the use of the property, for example making renovations. You are subject to rental inspections by the agent and/or owner. Buying Home ownership is a form of forced saving toward an asset that may increase in value. Depending on the property you buy, you can usually make your own decisions about the use of the property, for example keeping pets or renovating. You are not subject to inspections by the agent and/or owner. If you are paying off the mortgage on your property, changes in your circumstances, such as a job loss may affect your ability to keep making your repayments and if so, you may lose your property as a result. If you are paying off the mortgage on your property, interest rate rises may affect your ability to keep making your repayments and if so, you may lose your property as a result. It may be more difficult to move, especially if you need to sell your property before buying or moving elsewhere. As a homeowner, you are required to pay local authority rates and charges for water, sewerage and drainage services each year as well as keep up with your regular bills, for example electricity, phone and gas. You may be prevented, either 10
financially or by law, from making changes to the property, and this may not be apparent without thorough investigation before you buy. There are also different options to only buying a property by yourself or with your immediate family. For instance, if you are able to share housing with a good friend, that may be a good option. Alternatively, if another family member wishes to purchase a home, buying it together may be a good possibility. It is also possible to get several people together who have the same philosophy to form a co-operative. When considering these alternative options, also think about the type of title which would be best for all concerned, and what would happen if one person wishes to sell the property, or one of the parties dies. Buying checklist Conduct thorough inspections of the property and check restrictions, or use independent experts to do these checks on your behalf. Get all assurances and undertakings in writing before signing any documents or offers. Word the contract so any offer on a property can be withdrawn if standards written into the contract are not met, or finance with the lender of choice is not approved. Be clear on what is included in the sale e.g. fixtures and fittings, curtains, light fittings, plants etc. Check for asbestos (on the roof, walls or the garage) as this can be difficult and expensive to remove if repairs need to be done or insulation or air conditioning put in place. In some instances, insulation or ducted air conditioning installers may refuse to perform the work required. Getting advice For more information on buying and building, including getting advice from experts, buying off-the-plan and kit homes, contact the Consumer Protection Advice Line on 1300 30 40 54 or visit the Department of Commerce website. The Homebuyers' Survival Guide for WA provides relevant and useful information for Western Australians when buying or building a house. Other publications from the Department of Commerce include: Choosing a Settlement Agent fact sheet - this information sheet explains the role of a settlement agent and how to appoint a settlement agent. Property settlement fact sheet - this fact sheet explains the process of settlement for residential properties. Buying a Home Through an Agent - buying a home is an expensive undertaking and this publication gives you tips on buying a home. 11
Buying Vacant Land - pointers and pitfalls to consider when buying vacant land. Home Buyers Assistance Account - the account allows for the provision of grants, of up to $2,000, towards some of the incidental expenses associated with buying your first home. This publication tells you how to apply for a grant. Real Estate Auctions - how auctions proceed, as well as the pros and cons. Sale by Offer and Acceptance - sale by offer and acceptance is the most common contract for the sale of residential land in Western Australia. This publication tells you what to expect. Timber Pest Inspections and Reports: a guide for homebuyers - the house that you are thinking of buying could be significantly damaged by termites or other borers. This publication tells you the steps to take to protect your investment. Real Estate Fees - negotiating with an agent if you want to sell your house or business, or have someone manage your rental property, this publication has points to consider when choosing a real estate and business agent. 12