So, you’re looking to buy a house. Looking for information about the transaction and the process is a good place to start, so you’re already on track. Owning a home is one of the most rewarding and hopefully profitable things you can do. You’re going to need three things to get the process started – money, patience and calm nerves (it can get stressful).
In the next few blogs I will explain the process and important elements of purchasing property.
There is no required or prescribed process, there is no formula that you need to follow. If you are reading this it is probably because you are not a super-billionaire and you don’t buy houses regularly. This series of blogs focuses on the process of buying a house for novices and I have therefore taken the conservative, safe path. I have seen people not take the safe path, ie purchase property at auction without having any loan approval, but of course I would never recommend that.
This blog looks at obtaining loan approval and getting the financial aspects of the process in order before you look for a house.
This probably isn’t news to you but houses aren’t cheap. If you plan on purchasing a property without borrowing money, wow, good for you, you can probably skip this blog. Before you start looking for houses you should talk to a mortgage broker, financial planner or banker (I’ll refer to this person as “your broker”) to see what price range you can afford. Shop around, there are lots of local bankers/brokers/financial planners and there are hundreds of mortgage ‘products’ out there. Really talk to your broker, pick their brain. You shouldn’t just accept their recommendation of a particular product. Ask why they recommend that product. Find out the fees, charges and costs payable for the application, during the loan and upon discharging the loan.
Your broker is going to look at your savings, your other assets and liabilities and your income. You should have documents evidencing these ready to provide to your broker at your first meeting. You should also provide them with identity documents. Think about what you may need – for instance, have you changed your name? If so, you will need to provide evidence of that change. Remember, the longer it takes you to provide those documents, the longer it will take your broker to get you loan approval. Help them help you and get organised early.
You should note that if you got married overseas the Australian registries of Births, Deaths and Marriages will not be able to issue you with a formal marriage certificate. You must obtain that from the jurisdiction in which you were married. Get the formal certificate early so you won’t have to wait for it if you find your house. By the time it arrives your house may be gone!
What to consider when asking for a loan
(a) What are the weekly/fortnightly/monthly repayments?
(b) How much will the weekly/fortnightly/monthly repayments be if the mortgage rates increase (remember, we are at all-time low rates of interest. They WILL go up eventually)?
(c) What other costs are payable during the transaction (see below)?
(d) What other monthly expenses do you have (see below)?
(e) Do you want a fixed or variable loan?
When you have decided on a broker and a loan, the broker will process your paperwork and (hopefully) give you loan pre-approval of a certain amount. Pre-approval is a very good start but ultimately you want unconditional loan approval. The difference is that pre-approval is where the bank looks at your personal circumstances and is satisfied that you can service a loan of that certain amount. Unconditional loan approval is where the bank checks your personal circumstances and the property you want to purchase and is satisfied with both.
You don’t really need pre-approval in writing. In fact, in the good
old days of the $14,000 first home owners grant and exemption from stamp duty, you could pretty much get loan pre-approval with a bus ticket, if you paid cash for it.
That reminds me, you should lobby your local member of state parliament to bring back the first home owners grant and exemption from stamp duty. That was gold.
Costs to consider when buying a home
(a) The price of the house (obviously).
(b) Stamp duty. See www.apps08.osr.nsw.gov.au/erevenue/calculators/landsalesimple.php for a stamp duty calculator (add $20 for the actual stamping costs).
(c) Legal fees.
(d) Pest and building inspection fees (if required).
(e) Title insurance costs (if required).
(f) Building and contents insurance costs (if required).
(g) Strata search costs (if required).
(h) Survey costs (if required).
(i) Council rates, water rates and water consumption charges.
We’ll go in to these more in later blogs.
Practical tips for when you start seriously looking for a home
(a) Don’t apply online for a loan. Apparently there are more mortgage defaults among people who apply for loans online and, as a consequence, the interest rates and terms are worse for those who apply online. Also, you really need someone who you can talk to in person, someone who will be personally accountable for their work and someone local. I have seen a number of matters where an online banker or broker has almost abandoned a client after the contracts have exchanged. If something goes wrong or if you have any questions, you need to be able to meet with your broker to discuss the matter.
(b) Listen to any recommendations made by your friends but still shop around.
(c) Make sure you know what the application fee, registration fees and lenders mortgage insurance (LMI) are and whether these amounts will be added to your loan advance (eg loan of $240,000 plus fees and charges) or whether the loan amount includes the fees and charges (e.g. $240,000 inclusive of fees and charges). In the two examples above the figure quoted by the broker is the same – $240,000 – but the amount your bank will provide on completion (also known as settlement) will be different. With the first loan your bank will provide $240,000 on completion. With the second loan your bank could provide substantially less. With the second loan your bank will provide $240,000 less registration fees, application fees and LMI, which could be up to $10,000 or more. If that is what you agreed then all is good But, if you were expecting $240,000 and your bank tells you two days from completion that they will only lend you $230,000, you have a problem. Make sure you are absolutely clear about the terms of your loan.
Some mortgage-related humour
Kermit the frog walks into a bank wanting a loan for $20.00 to buy a better lily to sit on. He walks up to his banker, Patty Black, and applies for the loan.
Patty asks Kermit, “What can you put up as collateral security?”
Kermit offers up a wooden elephant souvenir he bought in Thailand.
Patty, unsure, asks the manager whether that meets the bank’s requirements.
The manager studies the wooden elephant for a moment then replies’ “It’s a nic-nac, Patty Black… give the frog a loan.”
The above is not intended as legal advice. You should obtain legal advice in relation to your own specific circumstances.