What Should You Know as a First Home Buyer?

Wednesday 24 Apr 2019

STEP ONE What’s the first hurdle when buying your first home? For most, it’s working out how big a deposit they’ll need and then saving that home deposit. •Work out what you can afford to borrow and still live comfortably. •Get advice from a financial planner, friend or family member who has bought property before. Arm yourself with as much advice as possible. •Don’t over commit when buying your first home. Most people will qualify for loans far above what they can afford to pay back. Don’t fall into this trap. You’ll need adequate reserves to cover more than just mortgage repayments. •Start looking around once you have around 5% of the purchase price and keep saving. FAMILY HELP Saving for a deposit isn’t easy, especially if you want to save enough to avoid Mortgage Insurance. If your parents are willing and able to help you buy your first home, then perhaps a Family Equity Loan is the way to go. •A ‘Family Equity Loan’ or ‘Limited Guarantor Loan’ is a great way of buying your house sooner and avoiding Mortgage Insurance. •Your parents are able help you without being left out of pocket because they’re using the equity in their property to cover a portion of the loan. •However, if you can’t repay your mortgage, your parents would be required to pay the unpaid amount of the loan. In a worst-case scenario, this could force them to sell their home to cover your debt. WHAT YOU NEED TO KNOW You need to know: •How much you can afford to borrow. •How large a home deposit you will need. •What the other costs are that you will incur. •How to make an offer. Talk to us at First National Balwyn North for advice. BORROWING MONEY •A bank or mortgage broker can help you establish a realistic figure. •If you have less than 20% of the purchase price, you may need to pay Mortgage Insurance. This allows you to borrow a larger percentage of the purchase price but slows the rate at which you pay off your loan •Mortgage Insurance can be included either in your upfront costs or in your loan repayments so that it’s spread out over the term of the loan •Once you have decided that you are comfortable with the amount your Lender has approved for you, it’s wise to get your lender’s ‘pre-approval’ or a ‘Deposit Bond’. Then you can bid confidently at an auction, or make an offer on a ‘private’ sale, knowing your lender won’t say no. THE DEPOSIT To obtain finance, buyers normally have between 5% and 20% of the property’s purchase price. If you have less than 20% of the purchase price, your lender will almost certainly require Mortgage Insurance. BUYING AT AUCTION OR AT PRIVATE SALE Auction •A property is advertised for a set period and a date set by which buyers must have completed their enquiries (legal, building/pest inspections), arranged their finance & be ready to bid •On the day of the auction, buyers compete, bidding in an upward direction until no higher bid is offered •If the seller’s ‘Reserve Price’ is reached, the property will be declared 'on the market' by the auctioneer •The ‘Reserve Price’ is the lowest price the seller is willing to accept •If the ‘Reserve Price’ has been reached or exceeded, the property will immediately be sold to the highest bidder •If the ‘Reserve Price’ has not been reached, negotiations will commence with the highest bidder •If the property has been sold, the highest bidder must exchange contracts and pay the deposit, which is 10% of the purchase price, immediately. There is no ‘Cooling Off Period’. •If you plan to bid at auction, it’s a good idea to have a ‘Deposit Bond’, which will act as a substitute for cash if you don’t have 10% deposit in cash or a cheque book For Sale ‘For Sale’ is the standard term for a Private Treaty sale. It usually has a fixed asking price although there can be slight variations: •Sometimes, the seller will seek ‘offers above’ an indicated price •Interested parties make offers and negotiate with the seller through the agent •The agent may be negotiating with several parties at once and acts under the instruction of the seller •When you commence a negotiation, it’s important to be serious and respond quickly, fairly and decisively •Be mindful that if you are reluctant to negotiate a fair offer, the owner may accept an offer from another party and sell to another party. The agent does not have to tell you what the other party’s offer is •You will be required to pay a refundable holding deposit once your offer has been accepted •However, you must sign the contract to buy the property as quickly as possible. Until you do, even if a deposit has been paid, the seller retains the right to sell his/her home to anybody else they choose. If a higher offer comes along, they are free to accept (Your deposit must be refunded, but the owner and agent are not obliged to refund any other costs) •Private Treaty sales are subject to a ‘Cooling Off Period’. The ‘Contract of Sale’ will explain how long this is – typically three business days THE AUCTION PROCESS 1.The auctioneer starts proceedings with a short explanation of the contract and terms of the auction. Buyers are entitled to ask questions at this stage 2.The auctioneer will then call for an opening bid. If a genuine bid is not forthcoming, the vendor is entitled to make a “vendor bid” 3.Once the reserve price is reached, the auctioneer will generally state that “the property is on the market”. This is when bidding can become more competitive 4.If the highest bid falls short of the reserve, the property may be passed in or the auctioneer may pause the auction while the agent discusses the situation with the vendor 5.The vendor may choose to reduce the reserve to the highest bid and recommence the auction OR 6.If the vendor refuses to revise the reserve price, the property will be “passed in”. You may then be approached by the agent and invited to negotiate in an attempt to agree upon an acceptable offer for the vendor. THE RESERVE PRICE The “reserve price” is the minimum price that the vendor will accept. This is set by the vendor prior to auction and can be changed by the vendor during the auction if desired. MAKING AN OFFER •Contact the real estate agent and indicate what you are prepared to pay •If your offer is accepted, you will normally be required to pay a refundable holding deposit to show good faith •This doesn’t mean the seller is obliged to sell to you or has to take the house off the market. It just means that if you do follow through in a timely, business-like fashion, the home will be yours •If your offer is too low, the agent will indicate this and guide you towards a more acceptable offer •Once your offer has been accepted, your solicitor or licensed conveyancer will receive the ‘Contract of Sale’ from the seller’s legal representative. After checking the contract, your legal representative will ask you to sign it and exchange contracts. On exchange of contracts, you pay the full deposit and the Cooling Off Period starts. This varies from state to state but is usually between 3 to 5 days (no days in WA). •To save unnecessary expense, do your building and pest inspections during the Cooling Off Period •You can change your mind if you get cold feet or if a building and pest inspection reveals something of concern. Most of your deposit will be refunded (check the contract for details) Is there an ideal time to make an offer on a property? The ideal time is the moment you decide that you are interested in it. Whether it is for sale by Auction or For Sale (Private Treaty) the owner is always interested in hearing offers. A FIRST HOME BUYERS GRANT The best place to start is with the Federal Government’s advisory website. It explains the First Home Owners Grant and connects you with any additional grants available from your State Government. Visit http://www.sro.vic.gov.au/first-home-owner •The First Home Owners Grant is a national scheme funded by the states and territories and administered under their own legislation •A one-off grant of up to $7000 is payable to first home owners that satisfy all the eligibility criteria. •Additional State Government grants may be available to assist your first purchase. Visit www.firsthome.gov.au for more information and links to any grants available in your state. When should I involve a solicitor or conveyancer in the purchase of my home? Before a contract is signed is the best time to get legal advice from a qualified lawyer, solicitor or conveyancer. Opportunities to end the contract can be severely limited if legal advice is sought after the contract has been signed. THE SETTLEMENT PROCESS It usually takes four to eight weeks from the exchange of contracts for settlement to be completed. The terms of the contract will make the exact date clear and it can be negotiated with the seller prior to signing the contract. Until settlement, the property remains in the possession of the vendor, however, risk passes to the purchaser so it is recommended that the property be immediately insured with a building insurance policy. 1.Your solicitor / conveyancer will prepare all the documentation that will be required to complete the purchase on the day of settlement 2.Your solicitor / conveyancer will contact the vendor’s legal representative to arrange the date, place and time of settlement 3.Your solicitor / conveyancer will advise you prior to settlement, of the exact date, time of settlement and the amount of funds that you are required to provide prior to settlement (if applicable) 4.After settlement, the vendor’s solicitor will contact the real estate agent that sold you the property and instruct them to release the keys to the property to you 5.Your solicitor will contact you to confirm settlement has taken place. They will also send you a Statement of Adjustment to show you how the funds have been disbursed to all parties involved SETTLEMENT PROCESS TIPS 1.During the settlement period, purchasers are entitled to ask for accompanied access to the property for “reasonable” purposes. Remember though, the property still belongs to the owner and they are not obliged to grant access 2.Stay in close contact with your legal representative when planning removal van booking times. It’s crucial that your belongings will be delivered to your new home at a time that fits tightly with the legal process 3.Your agent cannot hand over the keys to your new home until instructed in writing to do so by the vendor’s solicitor (in writing). You must be prepared for possible legal or banking delays when moving out of your current residence. BUYING WITH A FRIEND 83.5% of Australians say they wouldn’t even conceive buying a property with one of their friends. However, for many single Australians, buying with a friend solves the challenge of how to get a foot on the first rung of the property ladder. So, if you’re considering buying real estate with a friend, take our advice and cover these bases: •Use a co-ownership property agreement. This sets the ground rules from the outset and outlines what your expectations are and seriousness of the commitment. As a co-ownership agreement is a legal document, there will be clear steps to follow in a disagreement. •Determine how property costs will be shared •Have an exit strategy. Whatever can go wrong might go wrong so you need to plan for the worst and hope for the best. Things to consider are: o What happens if one of you dies, becomes seriously ill or disabled? o Loses their job o Goes bankrupt o Develops interpersonal problems with partners, friends or family o Your property has to be sold at a loss •Choose the correct title on the property. A ‘joint tenants’ title means that, following the death of one of the borrowers, the property will automatically transfer to the co-owner and not those specified by the deceased in a will. Tenants-in-common is the other type of title whereby the death of a co-borrower results in the property rights passing onto those nominated in their will. This is the better situation for passing on assets to a spouse, relatives and dependents. •Understand how the title you choose affects your borrowing power. •Get adequate property insurance cover. You will be bound by a co-borrowing agreement so it is important that you are covered if the conditions are proscriptive during times of financial stress. Consider life insurance options, health cover, income protection and home and contents insurance. RENTING OUT YOUR PROPERTY You’ll need a real estate agent’s assessment for that. We at First National Balwyn North will give you an obligation free appraisal for your property and manage it for you too. PAYING OFF YOUR PROPERTY To pay off your property: •Plan to pay a little more than the minimum monthly repayment. This makes a big difference in the long term. •Get a Tax Depreciation Schedule to maximise your tax benefits (when renting your property out) •Talk to our property manager for advice about what you could do to obtain more rent •Pay your mortgage twice monthly, rather than monthly, to pay off your loan faster •Speak to a financial advisor or mortgage broker to understand the full range of alternatives BUYING AN EXISTING HOME OR A BRAND NEW ONE Buying old •Older properties are sometimes cheaper than new ones, depending on the location and condition of the property •Older homes offer charming period features and, often, higher ceilings, quality timber floors and unique architectural features •Older properties may need renovation of major systems such as heating/cooling, wiring, plumbing, roofing. But, they can offer significantly more margin for turn around and profit Buying new •New homes are designed to suit today’s fashions and lifestyles. They’re more likely to appeal to a wider market of tenants if well located •New properties may be entitle you to claim depreciation, giving you extra tax benefits INSURANCE It’s wise to insure from the moment you have signed a contract to buy your home. Risk passes from seller to purchaser, immediately upon purchase, even though you have not settled and taken possession of your new home. RENOVATING FOR THE GREATEST RETURN Renovating a property can pay dividends, but you owe it to yourself and your wallet to make sure whatever projects you undertake offer a high return on investment. A new coat of paint, built-in wardrobes and replacing carpet with hardwood floors may make a home more attractive to renters and buyers, but not all renovations are created equal. Focus on kitchens and bathrooms An open plan living room may set prospective buyers to salivating, but kitchens and bathrooms tend to be of greater importance. This means it can pay off big to update your kitchen and bathrooms with new fixtures and appliances. Of course, completely redoing a kitchen or bathroom can be an expensive endeavour, so don’t gut a space if a simple facelift will do. Upgrading appliances, installing new lighting fixtures and refinishing surfaces can go a long way. Avoid high-price items A swimming pool may be a luxurious and sought-after amenity, but it very rarely equals a significant return on investment. Firstly, installing a swimming pool will cost you plenty. Secondly, many home buyers are simply unwilling to pay the extra costs that come with maintaining a swimming pool. For every buyer a pool might attract, many more may be turned off by it. Also keep in mind the safety issues and higher insurance premiums that often come with swimming pools. Appeal to a wide variety Renovations can be a great way to express your personal tastes and passions, but remember that renovations that maximise return should appeal to the largest number of potential renters and buyers possible. This means avoiding design choices that may turn off most people even if they please you. Changes and styles that last and appeal to a wide variety of people are a much better investment than singular renovations that might age poorly.