Rent is often referred to as dead money and even though this
isn't strictly true - because you are paying for shelter - it is
certainly a nice thought to think those rental dollars could be
going towards paying off something you will eventually own, rather
than what someone else will.
However, before you start looking in real estate agents' windows
for your dream home, you need to work out whether being a home owner
makes financial sense for you. If such a move will stretch your
finances, you may be better off continuing to rent and placing the
money you would have used as a deposit into some other growth asset
like a managed fund or shares. These investments are more liquid
than property, which is useful if you need to sell up quickly.
Okay – you're determined to buy. But should you choose the
location first, or be sensible and look first to what you can
afford? There's no harm considering both but you should really
determine what you can comfortably afford before you go falling in
love with a property that's way out of your financial reach. What
you can afford comes down to how much you have as a deposit and how
much you can afford in repayments.
The general rule is that your repayments should not be more than
35 per cent of your gross income. While you can borrow up to 95 per
cent of a property and in some cases 100 per cent, you usually have
to take out mortgage protection insurance if you borrow more than 80
per cent of the value of the property. This insurance protects the
lender against your defaulting on the repayments but it can be an
added burden to someone already financially stretched. Breaching the
80 per cent threshold for a first home is highly likely, especially
in cities such as Sydney where the average price of a property is
more than $200,000.
There are many fees and charges associated with home buying that
aren't apparent and push the cost of borrowing even higher. Some of
these fees are: solicitors' fees, bank application fees, property
valuation fees, stamp duty, building and pest inspections, and
mortgage protection insurance if you borrow more than 80 per cent of
the value. The costs continue once you've moved in with payments for
removalists, cleaners, building and contents insurance, connections
for gas, electricity and telephone and ongoing maintenance fees such
as council and water rates.
If you are about to buy your first home, you may be eligible for
the Federal Government's $7,000 first-home buyers grant.
For more
information on the first-home buyers grant go to the Governments'
website
With more than 3,000 different home loans available, how do you
find the right one for you? Do you go to the traditional lenders
such as banks, building societies and credit unions or try the
emerging non-bank lenders such as Aussie Home Loans, Rams or Wizard.
If your after a general understanding of the different loans and
fees charged, try our mortgage
comparison table.
Bear in mind that the real rate of interest (the average annual
percentage rate or AAPR) is a more accurate reflection of the cost
of the loan than the one that lenders usually advertise. The AAPR is
also a more effective tool to use when comparing loans.
The lender and the type of mortgage you choose will depend on
your circumstances and you might want to go through a mortgage
broker who can help guide you through the maze of options. Be aware
though that mortgage brokers tend to only offer mortgages from a
selection of lenders so you should still do some of your own
research. So which broker do you choose? Generally the mortgage
broker market is split between those who charge a fee to the
customer and those who receive a commission from the lenders. The
independence of the recommendation is important to you if you're
after the best deal.
These specialist lenders catering for those who don't qualify for
a home and personal loans through the main banks and non-bank
lenders.
However, categories are not set in stone across the market.
Borrowers should be aware that a lender may often be unable to quote
a rate "on the spot" or over the telephone without a detailed
assessment of individual circumstances.
An alternative lender will look primarily to the following
criteria in making a risk assessment:
Overall credit history
What you should consider
Carefully weigh up the pros and cons of using a con-forming
lender as they usually charge a higher rate of interest due to the
perceived higher risk in giving the loan. This could amount to
thousands of dollars over the life of a loan. Lenders usually also
impose stricter repayment conditions.
However, one or two years of on-time loan repayments under these
arrangements helps demonstrate creditworthiness and establish a good
credit record. Borrowers previously failing to obtain funds using
traditional forms of finance may use the alternative loan market to
regain access to mainstream sources of credit.
Types of mortgages and features
Variable versus fixed
The two most common home loans are variable or fixed. Each has
different benefits. If you think interest rates will rise or you
prefer to have some certainty about your repayments over the term of
the loan, a fixed loan may be more suitable. However, if you lock
into a fixed mortgage and rates fall, you'll miss out on the lower
rate unless you want to pay a penalty for terminating the fixed loan
so you can move into a variable one. Traditionally fixed loans don't
offer the same flexibility as variable ones, so check out what each
lender offers. Fixed terms are usually for one, three or five years,
with the rate varying between each.
Learn more: Jump
on a fixed bandwagon, Sydney Morning Herald, 10 Oct
2001
The strategy:To pick the right time to fix my home loan.
A standard variable home loan is far more flexible, with many
offering additional features such as redraw facilities, chequebooks,
the ability to make lump sum payments or to transfer your loan to
another property in the future. A basic variable home loan is
generally about 1 per cent cheaper but offers few added services.
Either way, with a variable loan your repayments tend to change as
interest rates change. If they go up, so do your repayments, but if
they fall, then you benefit from reduced mortgage repayments.
A way to take advantage of the features offered by both is to
split your mortgage 50:50 with half fixed and half variable. But
check your lender doesn't charge you twice for a split mortgage with
two sets of establishment fees and two sets of ongoing fees.
Home equity loan
The more you pay off your home loan, the more of the property you
own or the more 'equity' in the property you build up. With a more
flexible banking system these days, it is possible to borrow against
this equity for further investment; a second property, shares etc.
The advantage of borrowing against this equity rather than taking
out a personal, investment or business loan is that the interest
rate will invariably be lower – the better the asset you put up as
collateral, the better the terms a lender will offer. But remember
the security for this loan is your home.
Learn more: Have
house, will borrow, Personal Investor, February 2003
Home
equity loans a great way (for some) to boost investment
return.
Honeymoon rates
Many lenders offer so-called honeymoon rates. These loans can be
significantly lower than the prevailing variable interest rate. But
they are only for a limited time – usually six to 12 months. Then
they revert to the standard variable rate. In some cases, lenders
lock you into a variable rate for a number of years after the end of
the honeymoon period, so it's worth checking whether this is the
case.
Learn more: Enjoying
your honeymoon, Sydney Morning Herald, 16 Nov
2000
Sweetheart loans designed to attract first-home buyers
require careful investigation.
Interest-only rates
Another mortgage option is an interest-only loan, although these
tend to be taken up by borrowers looking to buy an investment
property. Here you don't pay off any of the principal, only the
interest. For investment properties, such a loan can make it easier
to estimate the true returns. A tax advantage is that the interest
payments for investment properties are tax deductible, while
payments off the principal are not.
Do you redraw?
A redraw facility allows you to make additional repayments on
your mortgage, and then have access to the additional repayments if
you need to.
While may seem great, nothing is for free, the facility is
normally only available on Standard Variable loans, which are more
expensive than basic variables. Before you make any decisions,
understand the conditions attached to the redraw facility as it may
include a minimum amount and a fee when you use it.
Learn more: Just
don't, Sydney Morning Herald, 30 Oct 2002
A redraw facility
is nice to have if you leave it alone. Denise Cullen
reports.
Bridging finance
Bridging finance has long been viewed as the expensive answer to
the dilemma of having bought one home without having sold your
existing property. Most banks have some form of bridging finance,
which are generally negotiated on a case-for-case basis. One
solution is to capitalise the extra interest and pay it back when
you terminate the bridging loan.
Learn more: Bridging
the gap, The Sydney Morning Herald, 19 Feb 2003
With the
property boom all but over, selling and buying at the same time
requires some planning, reports Nick Bruining.
Deposit Guarantee Bond
Another problem when buying your second home is the need to raise
the deposit for the new property when all your capital is tied up in
your current house. Many lenders offer a Deposit Guarantee Bond
which allows you to borrow the funds for the deposit at a very
affordable rate, e.g. $20,000 for as little as $220 for a period of
up to 18 months.
Learn more: Risky
business for some , The Sydney Morning Herald, 19 Feb
2003
Deposit bonds are an innovative way of breaking into the
property market but investors should not ignore the dangers,
reports Michelle Innes.
Talking to lenders
When you talk with a potential lender, you need to provide them
with certain information. After all they are going to lend you money
and that carries some risk for them. Just as you wouldn't lend just
anyone money without knowing something about their ability to pay it
back, your lending institution will want to know something about
you. There's no reason to feel defensive. They are just trying to
calculate what kind of a risk you pose as a borrower.
When you apply for a home loan you'll need to supply
your potential lender with an array of information about yourself.
See the checklist
to know what to take with you.
Check your credit rating
When you apply for a home loan the lender will check your credit
rating. This gives them an idea of what type of borrower you are.
And don't think because you've never bought a house before that you
will have a perfect bill of health. Have you ever borrowed for
anything? How about during your student days? Did you ever default
or were you ever late in making a repayment? If you did and it
happened less than five years ago, you might have a black mark
against your name when it comes to your credit worthiness. How do
you check whether you have?
The key credit rating agency in Australia, Credit Advantage, will
have this information on record, assuming the loan company reported
it. So before you even think of approaching a lender, apply to
Credit Advantage to make sure you have a clean bill of health.
Obtaining your personal credit record is free, although if you want
it within 24 hours it will cost $17.60.
Go to Credit
Advantage for a credit check.
If you think a previous problem with repayments may be an
issue when you want to borrow for a home loan, be upfront about it
with your potential lender as you will appear much more responsible
than if you tried to keep it hidden.
What you'll learn in this step: You have the finance, now
it's time to start looking for a property. Calculate how much you
can afford before you begin.
What type of property?
There are a number of different types of dwellings that suit
various lifestyles and budgets such as units, town houses,
semi-detached and free-standing houses. If you want to live close to
the city and enjoy a low-maintenance lifestyle, then a unit may suit
you. In the city, a unit is often the choice for first-home buyers
in order to get them onto the property ladder. If you're planning a
family, maybe a home in a nice leafy suburb with a good-sized
backyard is right for you.
Learn more: Strata
scheming, Sydney Morning Herald, 10 Aug 2000
There are
many traps for the novice buyer, but most strata schemes work
well.
Case study
It's one of the biggest decisions
you'll make, probably the most money you'll ever pay for
anything (unless you have a weakness for Lamborghinis). And
it's up there among the top 10 most stressful things you can
do other than to get sacked, divorced or contract a terminal
illness.
Real the full
case study Sydney Morning Herald, 4 Nov 1999
|
A loan in
principal is not a guarantee of a loan. It's only an indication you
appear to qualify. It will usually expire within four months.
Can I afford to buy in the area I want?
You may know the location you want to live in and you may know
the type of dwelling you want. But whether you can buy that type of
house in the area you want to live in is another matter. How do you
determine whether you can afford a house in the suburb you want? You
can do this by checking out recent sales in the area, go toDomain to find out. However, if
the prices are too high then you might consider travelling a few
kilometres to see if you can afford a neighbouring suburb. Some
suburbs are more expensive just because of their name and you may
find by choosing to live just outside such areas, you can save
yourself thousands of dollars. It all comes down to how willing you
are to compromise.
Research, research, research
You can't over-research property buying. Other ways to make sure
you're well educated about the area you want to live in is to ensure
you spend an adequate amount of time going to auctions in the area
or visiting and talking to local real estate agents. Some potential
home purchasers take cameras on their inspections because looking at
a large number of properties can leave you confused at the end of
the day.
How much can actually afford? Use our affordability calculator.
What you'll learn in this step: Do all your homework
before you enter an auction, and find out the strategies for making
a winning bid.
Find the house and make the bid
See plenty of properties in the area that interests you. Unless
you educate yourself, you won't know a bargain home from one that's
overpriced. When you have found a property you want, contact the
vendor through the agent and make an offer. You needn't offer the
full asking price, but an unreasonable offer will almost certainly
be quickly rejected.
Even if your offer is accepted, neither you nor the vendor is
legally bound to go on with the deal until a written contract is
signed. Until then, you're in danger of being gazumped.
Gazumping sounds as though it might be a painful experience.
Indeed sometimes it is. It occurs when the owner of the property for
sale accepts a higher bid, even though your offer has already been
accepted. In the meantime, you may have spent a small fortune on
surveys, solicitor's fees and other costs. There is little you can
do to prevent this, apart from suing, which can prove to be
expensive. The best guarantee is move quickly from an exchange of
contract to completion.
A loan in
principal is not a guarantee of a loan. It is only an indication
from a lender that one is likely. It will usually expire within four
months.
How are properties sold?
Houses are usually sold by private treaty or at an auction.
Private treaty sales can be conducted via the owner or real estate
agent. An auction pits a number of buyers against each other at a
specified time and place. The main difference between the two
processes is that buying through a private treaty generally allows
for a cooling off period whereas an auction does not. There are also
differences in the amount of the deposit required.
Buying through private treaty
Even if a property is advertised as going to auction, if you have
found a property you like, contact the vendor through the agent and
make an offer. You needn't offer the full asking price, but an
unreasonable offer will almost certainly be quickly rejected. If
your offer is accepted, neither you nor the vendor is legally bound
to go on with the deal until a written contract is signed. Until
then, you as the purchaser, can always be gazumped.
Gazumping occurs when the owner of the property for sale accepts
a higher bid after accepting yours. This process can prove to be
expensive as you may have spent a small fortune on surveys,
solicitor's fees and other costs. Gazumping becomes more common when
the property market is undergoing a boom and there is little you can
do to prevent it. The best course of action is avoidance by moving
quickly from an exchange of contract to completion.
Learn more: Treaty,
yeh!, Sydney Morning Herald, 26 Sept 2001
In the ongoing
Money series on buying a home, Jane Burton Taylor looks at the
pros and cons of buying by private treaty.
Buying at auction
If the property you want is being
auctioned, you must have your finances in place beforehand. This is
because when the hammer falls on your bid, you must pay a 10 per
cent deposit then and there. This is when a deposit guarantee bond
comes in handy. Most properties being sold at auction have a reserve
price that is the lowest amount the vendor is prepared to accept. It
is not usually revealed to potential purchasers. If the highest bid
is not accepted or the reserve price is not reached, the property is
'passed in'. If the reserve price is not reached, the highest bidder
usually has the first opportunity to negotiate with the seller
through their agent. There are many tips to buying at auction, here
are some pointers:
- Set yourself a maximum price and stick to it.
- If you think you'll get too emotional during the bidding and
are likely to exceed your limit, get somebody to bid on your
behalf.
- Go to as many auctions as you can so you know how they work.
- Pre-arrange your finance.
- Make sure your solicitor has seen the contract before the
auction.
- Have all pest and building inspections conducted beforehand.
- You decide in what increments you can bid. Even if the
auctioneer wants to up the bids by $10,000 each time and you want
$1,000 increments, what you say goes.
- Making a bid just beyond a rounded figure can often win the
deal. For example, $301,000 versus $300,000.
- Stand at the back of the room, so you can see what's going on.
- If there is a bidder you cannot see, ask the auctioneer to
identify them.
Learn more: You've
got to be bidding, Sydney Morning Herald, 3 Oct 2001
In the
Money series on buying a home, Jane Burton Taylor looks at the ups
and downs of auctions.
Do as much research about
auctions before attending the one where you want to bid for your
dream house. There are many tricks of the trade practiced by estate
agents and experienced bidders and the more familiar you are with
auctions, the more you will know what to look out for.
Exchanging contracts
When you exchange contracts, you're not
only agreeing to purchase the property, you're also agreeing to be
bound by the terms and conditions of the contract so make sure
you've read every page. After contracts are exchanged, you are
usually allowed four to six weeks to settle. You may be keen to move
in as soon as possible but in reality, settling for less time than
this is really cutting it fine. You'll need this time to insure the
property, sign mortgage documents, pay stamp duty and find the
balance of the purchase price.
Ensuring you have a competent solicitor to help you through the
maze of legal jargon is essential.
Learn more: Legally
speaking, Sydney Morning Herald, 11 May 2000
Finding a
property is only the start. As soon as the real estate agents go,
the lawyers arrive.
What you'll learn in this step: The more frequent your
payments, the faster your loan will be paid off, but be aware of
traps for undisciplined borrowers.
Making more repayments
One of the most common ways to pay off your mortgage early is to
make more frequent payments. Making a payment once a month only adds
up to 12 payments a year, while paying fortnightly means you are in
effect making an extra month's payment each year as there are 26
fortnights in a year.
Learn more: Pay
the house off quicker, The Sydney Morning Herald, 13 Nov
2002
The strategy: to make my extra home loan repayments count.
Calculate how much you repayment costs will be with our
repayment
calculator.
If you made extra repayments, what would you save?
Calculate the savings with our extra
repayments calculator.
Offset accounts
With offset accounts, the rate of interest you would normally
earn on a deposit is set off against your mortgage. Say you have a
home loan of $100,000 and an interest rate of 7 per cent is charged.
You also have an interest offset account that comprises cash that
you've deposited of $20,000. Instead of receiving interest on the
deposit, the value of the offset account is deducted from the amount
outstanding on the mortgage. In this example, only $80,000 will be
charged interest at 7 per cent ($100,000 minus $20,000). Because
offset accounts are generally priced higher than other loans it pays
to see whether you will really benefit from deciding on this option.
While offset accounts hold out the promise of knocking many years
off your loan they are really only for disciplined borrowers who can
stick to a budget. This is because they involve putting your salary
into your mortgage account and making your everyday purchases with a
credit card. If you cannot stick to a budget, you can be worse off,
as credit card interest rates are significantly higher than those
for home loans.
Refinancing your mortgage
If you're unhappy with your current mortgage then it may be worth
considering refinancing. But if you are in a fixed mortgage you may
find the cost of switching prohibitive with the exit penalty as high
as three months' interest payment. A variable loan exit penalty is
much cheaper - on average $800. If you get a better offer elsewhere
make sure you talk to your existing lender as they may be happy to
match the deal to keep your custom.
Learn more: Double
the trouble, The Sydney Morning Herald, 12 March 2003
Tread
carefully if you want to save money by refinancing your loans,
warns Nick Bruining.
Refinancing may be
a good move if you have a number of debts - personal loans,
outstanding credit cards, car loans - as well as your mortgage there
may be some value in rolling them all into the one loan at the lower
home loan rate of interest. But be mindful that you are turning some
short-term debt into long-term debt so it's important you put the
savings you make through the lower interest rates to good use by
making more than the minimum payments.
Renovating
Learn more: All
costly roads lead to home, Sydney Morning Herald, 12 Sept
2001
When it comes to renovating a house purely for financial
gain, the advice may be to leave well enough alone.
Learn more: The
money traps, Sydney Morning Herald, 26 Oct 2000
When it
comes to renovating a house purely for financial gain, the advice
may be to leave well enough alone.
10 tips for maximising returns on renovating property
- Purchase a property that is structurally sound.
- Choose a location in an area of strong demand and without
major impediments.
- Assess a property's profit potential before purchase with a
design and cost analysis.
- Ensure the structure is suitable for the renovation envisaged.
- Check the planning regulations to avoid costly court appeals.
- Don't overcapitalise with design, finishes and fittings.
- Include in the design lifestyle features that are in demand in
the market.
- Make additions compatible with the existing structure.
- Investigate the track record of the architect and builder you
intend to use.
- Check the sale prices of similar projects and talk to local
agents about the market's requirements.
Not coping with repayments
Heading for a mortgage meltdown? There are several steps you can
take at the outset to make sure you do not end up struggling to meet
mortgage repayments.
- make extra repayments where possible to reduce your exposure
to higher rates and falling prices
- don't switch to a fixed rate without checking the flexibility
of such loan arrangements. Extra repayments? Early payout
penalties?
- consider carefully further borrowing against the equity built
up in your home – can you afford higher repayments if rates are 7
or 8 per cent?
- rather than for further spending, use home equity finance to
consolidate existing higher-interest debt at the lower home loan
rate.
If you are in trouble the best advice is to seek a
meeting with the bank as soon as possible and work out what your
options are.
Get help: Moneymanager's
debt special
Learn more: Finding
the right medicine, The Age, 02 Dec 2002
Drowning in debt?
Unable to meet the mortgage payments? Hang on, there's still hope,
writes Christine Long.
Learn more: No
pain, no gain, The Age, 27 Nov 2002
How can you save
thousands by cutting the life of your home loan
Case study
Marika, 36, and Ivan, 32, an office
manager and a public servant respectively, have a substantial
mortgage and a credit card debt. They want to stop living hand
to mouth. Go to the case
study The Age, 4 Nov 2002 |
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