Category: Equity

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when the bidding doesn’t meet the reserve price and the auctioneer states that the property has been ‘passed in’ or ‘withdrawn from the auction’.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.

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.

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.

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.

After several years of exponential growth, Australian housing prices are on the downturn causing a falling property market. CoreLogic’s national index demonstrated dwellings within Melbourne and Sydney dropping by 3.3% and 3.5% respectively. This downturn is attributed to tighter lending standards, reduction in property investors and larger capital requirements enforced on Australian banks.

Property owners will see this downturn as a negative, however there is always opportunity in this market for the right buyers.

First Home Buyers (FHBs)

The recent housing market drop has been a favourable shift for first home buyers looking to get in to the market. With accelerated growth and the market previously being in the seller’s favour due to large competition and demand, recent events have enabled FHBs to get a foot in the door. Previous record high clearance rates that have priced FHBs out of the market have now fallen which has in turn reduced the pressure on this demographic. Furthermore, the tightening of lending to investors has significantly reduced competition in the entry level price point of the market.

In short, lower prices and less competition puts the FHB back in the strong seat.

Next Home Buyers

With record high purchasing prices previously restraining buyers upgrading to their next house, a steady reduction in property prices enables this buyer to take the next step now. A property once driven out of your price range may very well be achievable for next-home buyers as the market backs off.

The challenge is all around timing. If you are planning to upgrade, then you will most likely need to sell your current home to do so. If you sell for what you think is 5% less than what you may have achieved 6-12 months ago, this is fine as long as you get the same ‘discount’ on the new purchase. As you are moving up the property ladder, this 5% loss will be outweighed by the 5% gain on the next purchase. In other words, what you lose by selling in a down market you will make up when you buy in the same market.

Competitive Lending Options

With less transactions happening in the market, lenders have turned their focus to trying to attract those with an existing loan. Lenders are offering various bonuses and rebates to those who are willing to take the time to refinance. These incentives range from ‘cash-back’ offers of up to $2,000 or very competitive interest rates. It has never been a better time to review your lending

 

An offset account or redraw facility are common home loan features many lenders offer. These features give you the functionality to store additional repayments/savings against your loan while reducing the interest charged on your home loan. The funds remain accessible to you should you want to draw on them in at any point in the future.

Both these features have similarities but do operate in a slightly different way. It is important to understand the minor differences in order to decide which option is more suited to you.

Offset Accounts

An offset account is a separate savings or transactional account that is linked to your home loan. The easiest way to think of this account is like a ‘home base’ for your cash flow. Any incomes (Salary, Rental, Dividends etc) can arrive into the account and expenditure items can come straight out of the same account.

The key benefit of doing this is to save interest on your mortgage. The bank will calculate your interest repayments based on your Loan Balance minus your Offset Savings amount.

Example;

If you have a home loan of $430,000 and you have savings in a linked offset account of $70,000 then you will pay interest for the month on $350,000 ($430,000 minus $70,000).

On a 4.1 percent home loan, your $70,000 has saved you $273.33 in interest for the month and $3280 for the year.

Pros:

• Having an offset account can save money in interest repayments off your home loan
• An offset account works in the same way as a day-to-day transactional account does with money easily accessed at any time whilst simultaneously reducing your interest payments on your mortgage
• If you have large sums of money in a savings account the interest earned would be taxable. Alternatively, placing these funds in an offset account is not earning money (rather saving interest charged) so therefore there is no tax payable on these funds

Cons:

• Having an offset account tied to your home loan typically comes with additional costs in one of the two below forms:
  • Slightly higher interest rate
  • Higher annual fee (typically around $350pa)

 

Redraw Accounts 

A redraw facility is not a separate account but instead a feature of your loan account. This facility allows you to draw back funds that you have paid into your loan account ahead of your standard monthly loan repayments.

Example:

If your monthly loan repayments are $2300.00 but instead you pay $3000 (an extra $700), then at the end of 12 months you will have $8400.00 sitting in your redraw account. This amount can be redrawn to pay for whatever you like. Whilst the funds sit in your home loan account, you are reducing interest charged month to month.

Pros:

• Allows you to utilise any extra funds for required purchases
• Since the redraw account balance cannot be typically seen when withdrawing money from an ATM, you are effectively ‘hiding’ savings from yourself which may reduce temptation to spend
• Reduces interest repayments through voluntary contributions

Cons:

• Less flexible than an offset account as you can’t withdraw funds instantly from an ATM
• Some banks may charge you a fee for accessing and redrawing the funds within the redraw facility
• Some lenders may also set a minimum redraw amount thus forcing you to take out $500 or more at any one time

Choosing the right feature and understanding its potential is important to ensuring you are efficiently saving money and utilising your loan structure in the right way. By speaking to a Mortgage Broker you will be able to gain information regarding your home loan options and unlock the potential for you to reduce your mortgage faster.

 

What is overcapitalising?

Overcapitalising refers to the process of improving property beyond its actual value. For example, spending $100k renovating the kitchen and bathroom of a $600k property, doesn’t automatically mean the property is worth $700k. A sale price of your property is always going to be determined by what someone will pay for it. The ‘value’ that you have added to the property in your assessment may not be the same in the eyes of your potential buyer.

It is common for Real Estate Agents to tell their vendors (sellers) not to do any renovations as a buyer often likes to make changes/upgrades to personalise the space.

How to avoid overcapitalising

It’s easy to get carried away with renovating and believing that the hard work you are putting into improving the house will actually generate an increase in value. Being aware of your local market and what similar properties are selling for in your area is key to gaining an understanding of what your property may be worth. Understanding the median house prices or similar sale price of your property can provide you with a base to work off when deciding how much to spend on your renovations. You can acquire a full property valuation through multiple streams such as your Mortgage Broker, Real Estate Agent, your existing lender and or independent agents.

As a general rule, it is recommended that no more than 10% of the property’s value should be budgeted for aesthetic renovating.

What areas are likely to increase the value of your property?

Specific improvements such as the following are most likely to add value to your property;

• Kitchen renovation
• Updating or replacing floors and carpet
• Bathroom modernisation
• Updating lighting and fixtures
• A fresh coat of paint

With many people continuing to depend on property investments to meet their financial goals, it’s important to make sure you have the right information and tools on your side. Running your plans by an industry professional before you start the work will ensure you maximise your profitability of your asset.

Buying your first home is an exciting time but there are some key questions you need to ask yourself before you take the leap.

1. Is it the right time?

This question needs to be asked and then asked again! The notion of owning your own home is a fantastic ambition but is it the right time for you? Pressures in buying can come from multiple trusted streams such as family, friends and or colleagues and it is hard to know what is right for you. An important question to consider is are you are getting into the market because others are or telling you to or because you are financially and mentally ready?

2. Am I financially ready and how much money do I need?

A deposit, stamp duty fees, homeowner’s insurance, removalists, legal fees are just some of the costs to consider when purchasing a property. However, the most important question is are you going to be able to service the loan? Furthermore, will your salary be stable enough to make the required repayments?

A mortgage is a long-term financial commitment that should not be taken lightly. You can’t just opt out for a few months. A sound and comprehensive analysis of your current and possible future financial situation must be undertaken before you are in a position to buy.

3. What is the goal of the property?

If buying your first home is something that you desire and you have the finance to do so then the next question is around the property type that suits best suits your goals.

• Is it to live in for a few years, sell and move?
• Are you buying a property that will grow into a family home?
• Do you wish to purchase a property and rent it out as an investment?

These questions will guide the purchasing process along with the location that you wish to live in.

4. Are there any incentives?

As a first home buyer, you may be entitled to specific grants and or subsidies for particular types of properties. There are various benefits and concessions and it is important that you are fully aware of what you are eligible for when purchasing your first property. Please see SRO.vic.gov.au for more information.

5. OK, buying now is the right decision, now what?

Choosing a lender can be a confusing and daunting task with a decision on the type of loan and the abundance of options. A review of the lending market will find the lenders that are best suited to your needs. Then once the shortlist is obtained, it’s all about getting a good deal!