Financial boot camp – preparing for your home loan

Applying for a home loan can be a frustrating and lengthy process, especially in an ever-increasing difficult credit market. 2019 has demonstrated a softening market creating opportunities to first home buyers who are ready with the right finance.

A big part of being ready for your purchase is obtaining pre-approval. When doing so, responsible lending laws require the lender to undertake a ‘serviceability assessment’ to stress-test your financial position and capacity to repay a loan. Recently banks have been applying a higher degree of application scrutiny.

Some lenders require as much as 3 months transaction statements from your transactional account to help verify your monthly cost of living.

As a result, many of my clients are undertaking a ‘Financial Boot camp’. The notion of knuckling down for a concerted 3 month period will let you financially experience exactly what it would be like to have your home loan while proving to the lender that your cost of living is not too exorbitant to afford a home loan.

Best Tips for your Boot Camp

Set a plan and stick to it

Super charging your savings takes dedication and sacrifice so sticking to your plan is critical. A three-month savings boot camp will prove to a lender that you are diligent with your savings and demonstrate that you are a financially responsible and a desirable client.

Minimise and reduce any unsecured debts

Credit cards are factored into an applicant’s monthly expense at around 3% of the value of the limit. This means a card with a limit of $10,000 has an assumed monthly cost of $300. Even if you pay off your cards on time or don’t use them that often, banks need to include the debt as an expense as you may use it in the future. Reducing credit card limits or even cancelling cards can be a big help in ensuring your borrowing power is not impacted too heavily.

Be financially savvy

We all have those little habits that we know are limiting our cash flow. When saving for a home, it is a great time to be motivated to change your ways. With so many ways to overspend in our daily lives, focus and control is fundamental to minimise unnecessary spending. Some quick wins include: clearing credit card debt, spending more time making dinner as oppose to going out, review your car and health insurance premiums, restrict yourself to 1 take away coffee a day.

Get your friends and family involved

Being open about your saving goals and reducing expenditure to friends and family is an okay thing to do. It may come as a surprise but most people do share the same views in looking to save a dollar here and there. If you are open and transparent with your friends and family then they can understand your goal and possible set in place some alternate ways to socialise which are budget conscious.

It isn’t about cutting yourself completely off from engagements with friends and family but rather stick to your budget and make well thought out decisions on what you can spend your money on.

What benefit does a Buyer’s Agent offer to my property search?

A buyer’s agent is a real estate professional who represents buyers in the purchasing of property. In the competitive Melbourne market, more prospective buyers are turning to Buyers Advocates to assist them in their search for the right property.

Top 3 Reasons to Use a Buyer’s Agent?

  1. Knowledge of particular neighbourhoods

Buyer’s Agents are experts in researching and understanding the key underlying metrics that determine price values in any given suburb. A sound understanding and knowledge of recent property data can provide a buyer or investor with invaluable knowledge of recent market trends and potential capital growth. This data and information can ensure that buyers are aware of property values and locations reducing the chance of making an ill-informed investment decision.

Your Buyer’s Agent will also sit with you and very clearly define what you are after in your property search. Their in-depth knowledge of what is possible will enable your list of priorities to be appropriate to your budget and search area.

  1. Negotiating and bidding

Bidding or negotiating a purchase can be a daunting task. Where emotions can interrupt, Buyer’s Agents will stick to the bidding range and will not be swayed under the heat of the moment in an auction environment. Knowledge of the likely competition and strategies to adopt will provide prospective buyers with an advantage and best possible outcome.

In an off market negotiation, a Buyer’s Agent will really come into their own. As they negotiate on property every week, they have experience with all the negotiating tricks to ensure the deal goes in your favour. 

  1. Time saving

Finding the time to attend inspections or analyse properties while managing all other priorities in your life can be tricky. Buyer’s agents take the stress and time out of searching for properties by doing the legwork and then presenting only the select properties that match your needs. For some, the major drawcard of engaging with a buyer’s agent is having a team strategically and quickly provide options that may otherwise take you twice to three times as long. 

Is there a fee in using this service?

Buyer’s agents typically charge a flat fee for service or charge a percentage of the property purchase. Other fees such as representing bidding at an auction may come into place and an initial fee for service before the property search even begins. It would be good to budget around 1% of the purchase price.

How do you find a Buyer’s Agent?

There are a multitude of Buyer’s Agent services across the country however word of mouth is a great place to start. Ensuring that the service has a good reputation and is familiar or works within the area that you’re looking to buy is an important consideration to make.

At 40 Forty, we have select partners we work with depending on what area of Melbourne you are looking to purchase.

What you need to know before making a pre-auction offer

Unlike auctions, there is minimal legislation to guide you in negotiating a deal pre-auction. Agents can adopt multiple rules of engagement so it is important that you use a trusted and transparent real estate agent that establishes the rules from the outset, or that you ensure an agreement on these rules. It must be understood that an offer accepted less than three-clear business day before the auction date will not have a cooling-off period.

Some agencies elect to conduct a boardroom auction whereby competing buyers bid against one another within the real estate agent’s office. This method reduces any lack of transparency as both parties bid against one another without the risk of manipulation from the agent or being bluffed.

‘Best and highest’ is a method adopted by some real estate agencies whereby a pre-auction deadline is set and the buyer’s best and highest bid must be made. The outcome of the process can be twofold with some buyers achieving a more favourable purchasing price when they may have otherwise being outbid at an auction. By contrast, some may find themselves in a position where they have stated their best and final bid however their guessed price is well in excess of the market price. This can lead to disappointment and regret as you are simply flying blind during this process.

Bidding over the phone or email is another approach some agents or vendors prefer. This approach is essentially like an auction, minus the crowd, whereby a number of bids back and forth occurs with the highest bid winning.

These techniques reveal the roller-coaster ride many encounter when negotiating a price for a property. The reliance on trust and transparency of the agent is key to ensuring that you as the buyer are well informed and can act confidently. It’s it important to separate your emotions from negotiation and you hold your cards close to your chest. This is to ensure no rash decisions are made and you are not compromising your negotiation power. In depth knowledge of what you are buying backed by extensive research into the value of the property and surrounding market is important to ensure you are laying down the right price. Furthermore, a sound and clear understanding of your financial capacity is fundamental in knowing your upper limit. This is done via pre-approval which can be arranged by 40 Forty Finance so you can bid confidently.

5 tips to save for a home deposit

Saving a deposit remains the hardest part of any home purchase. Although Melbourne’s prices are in a slight decline, the average time it takes to save a 10% deposit for a First Home Buyer is still around 5 years.

Here we list some tips that can be adopted to super charge your savings and potentially land your first home quicker.

  1. Create a budget and stick to it

This sounds easier than reality however hundreds of dollars can be saved if non-essential items are avoided. Taking the time to analyse your current financial situation with focus spent on areas that you can improve is a great start. Print off a 3-month bank statement and understand where you tend to spend money that is not essential. This approach will identify areas that need to be held back or avoided entirely. Dining out, drinks with friends and clothing purchases are just some areas that really chew into savings that otherwise could be put towards a deposit.

Another simple way to reduce weekly expenditure is to take your lunch to work. If you tend to purchase your lunch at work with an average cost of $10 per day then you could be looking at a cost of $2,000pa. Taking your lunch can save you at least half of that cost.

  1. Deal with your existing debt

Dealing with existing debt should be one of the first areas to be addressed as you embark on your savings journey. Eliminating credit card debt will not only ensure you don’t incur high interest repayments, but it will also help your borrowing power when you apply for a home loan. If you tend to be an impulse buyer and use credit cards for most purchases then it may be worth considering removing that access entirely by cancelling your cards.

  1. Move back in with your parents

The largest outgoing for most First Home Buyers is rent. If you have the capacity to move back in with your parents then this approach will allow you to grow your savings. Although not the most exciting idea, it can be viewed as a short term solution to get you ahead quicker.

  1. Create a second income stream

Do you have any skills that are in demand by others? The gig economy has never made it easier to advertise yourself and find people that are willing to pay for the smallest of tasks. Not only will this provide extra funds towards your savings goal but may also reduce the opportunity to be out spending money entertaining yourself during your downtime. Working two jobs is not uncommon so a well-researched and time managed plan will ensure you can keep your life in balance while earning a few extra dollars.

  1. Look for bargains

Taking advantage of cheaper alternatives is a smart approach to getting your savings to the level needed to land that home deposit. Shopping smarter for groceries and purchasing second hand products is a good way to eliminate expensive purchases that chew into your hard-earned savings.

The challenges of reaching the deposit required to purchase your first home are not impossible to overcome, but do require a level of discipline and focus.

 

Renovate vs moving

It is one of the toughest decisions to make: Sell and upsize or renovate your existing home. Growing families who are weighing up their options must consider all factors before committing to a potentially stressful and expensive journey.

For some, moving into a new house may be a desirable approach without the pressures and disruptions of a renovation. For others, the challenge, freedom and sense of creativity is more appealing when choosing to renovate. Either way a well-researched plan detailing the financial outlay and lifestyle needs is fundamental to achieve a successful outcome. 

Renovating

Prior to committing to a renovation, you need to consider if the condition of your existing property is capable of the upgrade. Some houses are heritage listed which prevents certain areas of the property from being altered. This overlay is set and reviewed by the local council and therefore owners are restricted in what can and can’t be changed. The other obvious consideration when choosing to renovate are the disruptions and possible costs of moving temporarily to a rental property. This can not only add stress and inconvenience but also increase costs in leasing and the cost of multiple moves.

Another risk is the danger of ‘over-capitalising’ where you spend more money on renovations than what the property is actually worth. Avoiding this by researching similar properties within your area will provide you with the necessary framework to plan and avoid this situation.

Renovating can however be a cheaper option and exciting challenge. Avoiding the costs of selling and purchasing is a major drawcard so long as the house does possess the qualities to be improved and will sustain your family’s needs for the long term.

The key questions to ask if you choose to renovate;

  • Are you going to achieve an outcome that is financially worthwhile?
  • Functionally are you going to achieve an improvement on the existing situation?
  • What level of disruption may occur?
  • Does your house have the capacity to be renovated?

Being aware of what you can spend and what should be spent are two different questions. It can be very easy for a budget to be blown out when planning for a renovation so financial discipline must be applied and the opinion of different personnel.

Moving

Selling and moving does come with a huge financial outlay but for some the commitment may save the dramas involved with a renovation. If you were to sell a home for $700,000 and buy another for $1,000,000 then roughly it could cost you 10% of the newly purchased price. With an estimate of $90,000 – $100,000 of fees including stamp duty, legal fees, agent commission fees, loan fees and removalist fees then you need to consider if this outlay fits the current situation. The price of selling up, improving your current family needs and requirements and the style of property required are all fundamental questions should this route be taken.

Renovating or moving is a complex decision however a thorough plan outlining the risks vs benefits should be considered in depth. Aside from the numbers, the emotional attachment to stay in the existing location or move to a new area with different amenities may be the underlying question. Understanding all costs involved and exploring all options will dictate future property and family goals so ensure the decision taken meets your criteria.

The bank of Mum and Dad

With the challenges of high housing prices and strong competition, first-time buyers are looking towards financial assistance from their parents to get their foot on the property ladder. According to Digital Finance Analytics, an estimated 55% of first-time buyers are now receiving help from mum and dad or other family members in order to kick start their property journey.

With slow wage growth and records high property prices, saving for a deposit can take years to achieve. Many are now looking to bypass that struggle with parents now tapping into their own savings or assets to assist and provide security.

How are mum and dad helping?

Parents are assisting in three key ways:

  1. Offering funds toward their child’s deposit as a loan. In this case, the terms of the loaned funds need to be clearly set out in a loan agreement that is recommended to be drawn up via a lawyer
  2. Providing funds toward their child’s deposit as a gift. In this case, a statutory declaration needs to be signed by the parent stating that the funds are a ‘non refundable gift’
  3. Guarantor loans have increased 14% year on year for the last 3 years. This is where the parent offers up an existing property to act as security for their child’s purchase. This will ensure their child avoids having to pay Lenders Mortgage Insurance on their finance application 

The bank of mum and dad has been seen to be an increasing trend however it must be understood that is this action does come with risks that need to be managed.

Risks and arrangements to consider

Setting in motion a clear agreement is an important step to understand the terms of the contribution and expectations. Although the intention of the financial assistance is to ensure a smoother passage to home ownership, it can result in problems further down the track if the terms of the assistance is not clearly understood and agreed to.

Below are some questions that are commonly asked when a parent is considering to offer financial assistance to a loved one:

  • Is the financial assistance expected to be repaid?
  • What is the timeframe in which the assistance needs to be repaid?
  • Will there be interest charged?
  • Will there be a formal agreement?
  • What happens if there is a relationship break-up or unforeseen events?
  • What happens if the parents need their money back ahead of time?

Awareness is key

Despite contributions from mum and dad, many forget that lenders do require evidence of clear and consistent savings in order for a mortgage to be obtained. Validating the capacity to save so the applicants can prove they are ready for a mortgage is a key step when entering the property market. Nearly all lenders what to see savings statements to understand an individual’s financial capacity to acquire a home loan aside from any financial assistance.

Using parent’s money can provide opportunity and eliminate costs however there are risks and pitfalls that need to be acknowledged. Setting concise terms through a formal arrangement will provide the certainty and confidence should any expected events occur. Researching and finding alternatives are also encouraged with the recommendations of consulting with a professional to gain an opinion and insight.

What happens on auction day?

Most of us have seen an auction where a frenetic auctioneer waves their hands up and down and yells out numbers until you hear “SOLD”. But what actually occurs on the day of an auction and is there any structure to it?

Auctions can be a stressful event however confidence can be gained through the knowledge that an auction is the public sale of a house and it’s an indication of what people are willing to pay at a given point in time. Knowing what the competing offer at all times is a benefit when purchasing at auction as oppose to private sale or negotiations where you can’t read your opposition.

Bidding

Preparation is key and being aware of your upper limit, the reserve price and method in your bids are all important factors to ensure a successful outcome. Researching the market, speaking to several estate agents and acquiring independent information are all fundamental processes to prepare for the auction.

Opening bids will commence by which the auctioneer will then typically set incremental values such as $5000, $10,000 or even $1000 for bidders to follow. It is up to the auctioneer’s discretion to accept or not accept bids. Making false or misleading bids is referred to as ‘dummy bidding’ and is classified as an illegal action that can incur significant penalties.

Reserve Price

This is when the property is on the market and typically the lowest price that the vendors are willing to sell at. Once bidding starts and the reserve price has been met then it is the highest bid that wins the auction. Should the reserve price not be met then the house is not on the market and it is up to the bidding parties to negotiate a price that the vendor is happy with.

What happens if the property is passed in?

This occurs when the bidding doesn’t meet the reserve price and the auctioneer states that the property has been ‘passed in’ or ‘withdrawn from the auction’. A process of negotiating a price between the highest bidder with the seller will occur to find an agreeable sale price. Should the seller not agree to a price then the auctioneer may involve the second highest bidder to negotiate or turn down all offers and not agree to sell on the day.

Signing the contract of sale

If you have been successful at auction then you will be offered a ‘contract of sale’ which is a legally binding contract outlining what you have purchased. If you sign this contract then both you and the seller are agreeing to the formal offer made. Once this has been completed then a deposit is required and all relevant cheques and transfers.

Deposit

If you’re the winning bidder then an immediate deposit, typically 10% of the purchase price, is to be paid after the auction. This can typically occur through online transfer however a discussion with the real estate agent will be able to provide you with the necessary requirements and actions to be taken.

Auctions may be daunting however in-depth planning and preparation can ensure that you are fully aware of your purchasing position and expectations. If you don’t win at an auction then move on, go back to the drawing board and start planning for your next opportunity. Sometimes walking away from an auction is a better decision than continuing beyond your capacity.

Is pre-approval that important?

The term ‘pre-approval’ is a commonly used phrase that circulates the lending world but what does it actually mean?

Pre-Approval is a term used when an application has been made to a lender and a loan amount has been approved in principle. This approval provides you with the confidence and knowledge of your maximum available funds when you search for your ideal property.

Having a pre-approval is not a requirement to bid or negotiate on a property however without one it places you at risk of overcommitting on a purchase price that is unrealistic. Additionally, not having a Pre-Approval can leave your property search unfocused, as you don’t know your buying limit. Having a pre-approval makes you look more attractive during a property negotiation as the seller has confidence your offer will not fall over due to financing.

How do I get Pre-Approved by a lender?

Applying for a pre-approval is a deep dive process by the banks to assess if you are suitable to their credit policy. In order to do this, a full Asset and Liability position along with supporting documentation will be needed. Once the lender’s assessment team have gone through your application, they will issue a pre-approval stating any terms and conditions.

The pre-approval will always be subject to a full valuation of the property you purchase. Your pre-approval typically lasts anywhere from 3-6 months depending on lender.

Does having a Pre-Approval mean I am guaranteed a loan?

No. A Pre-Approval is not a full or final approval. Once you have successfully purchased a property, a valuation on the property plus a review of your financial position will be undertaken to ensure there have been no significant changes since the initial Pre-Approval application. For example changing jobs, taking out additional credit (Car Loans, Credit Cards) or the birth of a child will alter key information that was used to issue the initial pre-approval.

How do I choose a bank to get Pre-Approval with?

Selecting a bank for your pre approval is dependent on a range of financial factors. Anything from your deposit amount, income level, existing debts and account needs can change the selection process. Seeing a mortgage broker allows you to shift through what is going to be most important for you and ultimately put together the strongest application possible for your pre-approval.

The bank wants to see ‘genuine savings’. What does that mean?

Applications for a home loan greater than 90% of the value of the property require you to prove to the lender that the funds you are contributing are classed as ‘genuine savings’. This policy is in place so the bank has confidence you are able to save funds and be financially disciplined over a prolonged period of time.

Classification of what makes up ‘genuine savings’ can be confusing with lenders having different policies or hurdles in place for you to clear before approval can be issued to you.

Examples of what may be considered as genuine savings:

  • Personal savings or funds held in an account or accumulated for three months or more
  • Equity in an existing residential property with ownership evidenced by a rates notice
  • Term deposits held greater than three months
  • Shares or managed funds held greater than three months
  • Work bonuses or commissions evidenced with income verification requirement

What isn’t considered as genuine savings:

  • Gifts or inheritance. (Inheritance can be classified in some instances where they have been held in the borrower’s account for a period of time, typically three months or more).
  • First home Owner’s Grant/Government Grants
  • Funds held in company or business accounts
  • Personal loans
  • Winnings such as casino or gambling proceeds

How do I get a loan without genuine savings?

  • Rental payments/history over the last 3 months may be used in some instances to mitigate a borrower who cannot demonstrate accumulated funds in a savings account over a period of less than three months. The banks recognise that the commitment to paying your rent is showing financial discipline
  • Sale of assets other than those listed above may be considered as genuine savings
  • If your available deposit is 20% or more and in your own bank account, then most banks do not require you to demonstrate how those funds have been saved

The ever-changing landscape of lender policy can make the application for a loan confusing and complex. The Genuine Savings policy is just one of a range of policies that can determine which lender is going to be right for you.

If you are unsure about lender requirements when applying for a loan then be sure to get a in contact with the team at 40 Forty Finance to be fully aware of the process of home loan lending.

Why should I speak to 40 Forty Finance?

Trying to navigate your way through the lending world can be a complex and confusing process. If you are looking to buy a property or refinance an existing loan there are numerous stages that need to happen for the end result to be a success.

It is becoming increasingly more common that people are turning to Mortgage Brokers to guide them through the finance and lending markets. Over 50% of consumers are now utilising their services and engaging a Mortgage Broker within their financial team to apply for a home loan. That percentage is even higher when you limit the data to 25 – 45 year olds who often are too time poor to manage appointments within bank opening hours.

Recently awarded the Best Finance Broker VIC/TAS Better Business Awards 2021, and MFAA Young Professional of the year VIC/TAS for 2020 and 2019, 40 Forty Finance takes a holistic approach in understanding the overall financial position and tailoring a solution that is going to best suit your needs. A ‘client for life’ philosophy enables us to recommend the most suitable and appropriate lending solution for the most important and biggest monthly expense in one’s current and future life plans.

Broker Vs Bank… the key advantages

  • Advise on the most appropriate and suitable home loan option for you from a list of over 30 lenders
  • Project manage the tricky world of a loan application on your behalf
  • You are not just another number in a big banking system. You have a single point of contact for the entire deal
  • Ability to meet at a time and location that is convenient to you
  • Committed in ensuring you are fully aware of all stages throughout the loan application and ensuring all milestones are met in a proactive manner
  • 40 Forty Finance is remunerated by the bank you decide to get your loan with so there isn’t a charge for our services
  • We rely on referred and repeat business so a positive outcome for you is the most important thing to our long term success

With more and more borrowers looking outside of the Banks for advice, 40 Forty Finance focuses on providing a customised solution that puts client satisfaction at the centre of the process.

If you wish to arrange an appointment then please don’t hesitate to get in touch.