Managing Director John Hronis or Big John as we like to call him in the office has created a simple guide to reference when looking at buying a property.
1. What is my borrowing capacity?
This is the term used to describe what is total amount that you can borrow and service (repay). It’s based on a number of factors including:
- Your income – Does your income comfortably cover the likely repayments on your loan, in addition to home ownership costs (insurance, council rates, repairs or strata fees) while ensuring you have enough of a surplus to live off.
- Other commitments – Do you have any other loans, liabilities or dependants which can affect your ability to repay a loan. Things they take into account are: credit card debt, personal loans, car loan repayments, student debt.
Based on these factors one of our brokers will then be able to tell you what you’re able to borrow and service. This gives you a price guide to work with when you start searching for a home.
Unfortunately, over the years too many clients have fallen in love with a place to later find out that they can’t get approval as they don’t meet loan requirements. It pays to talk to us early on to avoid unfortunate situations like this. We strongly recommend clients obtain pre-approval.
2. Factor in all the costs
While the purchase price is daunting there are a number of additional costs which once added up are substantial and need to be budgeted for.
This is the largest additional cost when purchasing a property. There are two duties that need to be paid:
- Duty on the property transfer (from the previous owner to you)
- Duty on the mortgage registration (registration fee associated with mortgage charge over the property)
In some circumstances State Government concessions apply which will reduce or potentially remove duty fees payable. These are based on whether you’re a first home buyer, buying a new home and the state and territory you’re buying in. Our brokers will ensure if there is a concession available that it’s applied.
Legal Costs & Building and Pests
Building & Pest – Paying for a building and pest inspection provides peace of mind as it will identify any defects or issues regarding the property. Inspection fees are ~$350.
Conveyancing Fees – The legal costs associated with the transfer of ownership of the property you are buying. Also, title & strata searches are often bundled under the one conveyancing service fee. If moving into a strata property it’s important you have your legal representative inspect the body corporate records. We work will a handful of trusted Conveyancers who will review the records to ensure everything is as it should be.
Depending on the loan and product features there may be additional fees associated with your application. Often these are – application, valuation and settlement fees. Our Brokers clearly state and disclose all fees upfront so you know the total costs associated with your loan.
Behind stamp duty this is often the second largest cost associated with a home purchase. There are a number of different types of insurance policies that could apply to you:
- Lenders Mortgage Insurance – If you have to borrow more than 80% of the purchase price, you’ll most likely need to pay Lenders Mortgage Insurance (LMI). This is a insurance policy which protects the lender in case you default.
- Building/Property Insurance (non strata) – A basic default requirement by lenders that borrowers take out building insurance. This is an annual fee and needs to be taken out at the time of settlement.
- Contents Insurance – Highly recommended as it covers fixtures and personal belongings.
Often overlooked (especially with first home buyers), you need to keep in mind costs such as:
- Moving costs – removalists or storage costs
- Renovations and furniture – Are you planning on doing minor works to the property, prior to moving in? Do you need whitegoods and other furniture?
All of these costs need to be factored into your budgeting before buying a home.
3. Types of Loans & Features
This is where things can get complicated. There are an array of loan products with vastly different features in the marketplace. Good news is that we’ll identify the best loan for you. But here is a summary of the key types of loans:
Variable Rate loans
The interest rate will adjust based on market interest rates. This is the most popular loan type in Australia, especially in the low rate environment that we are currently in. The downside is that in a rising rate environment a variable loan may be more expensive vs. a fixed rate.
Fixed Rate Loans
You pay the home loan rate with fixed repayments for the period which you’ve locked the home loan in (usually 1-5 years). This is a good outcome for those looking to certainty regarding repayments. However, fixed rate loans are often more expensive than the variable rate.
This is where you fix one portion of your loan whilst leaving the remainder at the variable rate. This gives the borrower a natural hedge as they get some protection and benefits from rising or falling interest rates.
- Offset – Where a savings or transaction account is linked to your loan. This is great if you’ve got spare cash or you want save the trouble of having both a savings & loan account. This can be an effective way to save whilst reducing your loan amount. You also have the ability to drawdown on the offset which in return increases your loan.
- Line of credit – This allows you draw a fixed amount to pay for whatever. Think of having a jumbo sized credit card. Strongly recommended for those who have the discipline to repay the money, or can easily service the additional borrowing costs.
- Packaging – This is where the lender will bundle other financial products to create an “ongoing discount”. Often you see a a home loan with a free credit card (waived annual fees) to entice you to stay with a particular lender. Whilst this can be appealing, it often isn’t cost effective.
- Low-doc – designed for self-employed or contractors who don’t have all the financial documentation to provide proof of income.
4. The buying part
The most important thing is to Keep It Simple Stupid (KISS)… Simple things like doing suburb research, setting a budget based on your pre-approval limit and factoring in lifestyle decisions such as: how far to work, is it near schools etc. de-risks you from having a property disaster.
Whilst we can’t there on buying day we can be there for all your financing needs. Organise a time with one of our friendly team members today.
The Dreamstreet Team