5 key questions to ask yourself before you buy

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!

Buying a second property? Consider all options first

Buying a second property requires hard work with a disciplined and strategic approach. If done correctly, a second property as an investment can set you on the path to building greater wealth for your future.

Just because you have purchased one property doesn’t make the second one any easier and below you will find some areas to consider before you buy again.

Managing your finances and cashflow

The most critical and initial question you should ask yourself is are you covering your current home loan repayments comfortably? A comprehensive analysis of your current financial situation and projected future outlook will provide you with the understanding as to whether you can embark on a second home loan.

Considerations

  • If you lose your job will you be able to cover two loan repayments until you find your next job?
  • Have you considered the impact of pregnancy on your financial situation if you plan to expand your family in the near future?
  • Do you have a back-up plan if any unforeseeable issues or major life changes arise in the future?
  • Have you factored in the additional costs of the investment property such as body corporate, rates, maintenance and repairs?

Lenders want to see that you have the capability to service two mortgages as well as your ongoing cost of living. A comprehensive assessment will be undertaken to assess any existing assets and liabilities along with projected income verses expenses. This is fundamental to ensure a positive cashflow to fund the costs of holding both properties.

What to buy?

Having a clear goal in mind is fundamental when researching to buy your second property. Are you buying to renovate and develop? Are you buying a beach house or rural property to spend some time in? Are you buying to rent it out as an investment property?

These key questions and reasons why one option is more suitable than another must be considered when researching the location and market situation of the ideal property. Your decisions regarding the type of property you’re after will guide the purchasing process so ensure you have clearly thought it through and have confidence in why you are buying again.

Loan structure and choosing the right mortgage

The mortgage type and structure is dependent on how much you can borrow in accordance with your current equity in your home, property valuation, income, expenses and the asset you are looking to buy. A full assessment of products with the right loan features to match your investment goals is essential to ensure a free-flowing purchasing process.

Buying a property with friends

If you’re looking for a creative way to overcome being locked out of the property market by rising prices, buying a house with a group of friends may be a solution to consider. It can also be a minefield though, so here’s how to avoid a blast.

While the excitement of banding together in such a life-changing moment can put everyone on a bit of a high, you need to plan for situations in which things might go wrong.

It’s essential you have all been completely upfront from the start about what you want to achieve by purchasing property together, as well as your personal expectations about timelines for purchasing the property, paying it off and selling it. And all of this must be documented in a co-ownership agreement.

Your mortgage broker can refer you to a solicitor or conveyancer with experience in working on co-ownership agreements, who can advise and create yours and make sure it’s suitable for your circumstances, whilst providing the necessary legal protection for everyone involved.

The big question will be what structure your ownership takes. There are two options: joint tenants and tenants in common. Joint tenancy is the most common ownership structure in Australia, as it is how most family homes would be owned.

However, because friends are less likely to share assets and long-term debts than a couple, and less likely to will their assets to each other, the ‘tenants in common’ model would usually be more suitable for this situation.

Under this model, each person owns a specified share of the property’s value. These shares may be equal, but don’t need to be. So, if you are willing to contribute $500,000 to the price of a property, but your two friends are not quite at that stage and only comfortable contributing $250,000 each, you could own a 50% stake while they each own a 25% stake. Keep in mind that each stake is in the property’s value, not control of the property. Legally, under this model, each owner has the right to full access to the entire property.

The co-ownership agreement created in collaboration with your conveyancer should set out how the costs of maintenance and insurances are divided, as well as how sale proceeds will be divided.

It should also cover plans for depreciation and capital gains tax, selling a share of the property to another co-owner, choosing tenants or determining rent, selling a share of the property to a third party (otherwise there are no restrictions on this under the tenants in common model), and selling the property altogether.

If all purchasers are planning to occupy the property, the agreement should make plans for if one wants to move out but continue their ownership. Under the tenants in common co-ownership structure, the other owners occupying the property would not be obligated to pay rent to the one who has moved out, as long as they are not restricting that co-owner’s access to the property.

As is the case with any property purchase with any structure, each co-owner should have an up-to-date will that specifies who inherits their stake in the property.

There are many more considerations when buying property jointly, so speak to an expert early on to make sure you’re doing it the right way.

What to consider before renovating

The decision to renovate is a common sticking point for homeowners, who can spend hours weighing up the cost benefits. Whether your motivation is to add value to your property or to add a touch of your personality to the home, renovations are expensive and debt often follows. It is important to find the right solution that benefits your long-term goal, rather than hindering any future plans.

A survey by Finder.com.au found only 27% of homeowners think refinancing their home loan to renovate is a feasible option to raise funds for the next big step. In this survey, 93% of homeowners who refinanced to renovate, said they had concerns over whether they would be able to afford the repayments, and whether the proposed renovation would actually add value to the property.

It’s important to reassess your current financial position, run through your plans and future payments, and decide if you can afford to take on more debt.

Laying the foundations

The next step is to investigate and calculate how much you need to borrow to renovate. Work out the specifics of your renovation, what the average cost to renovate is in your area and how much you are eligible to borrow. Aim to spend no more than five per cent of your property’s value on a renovation.

If renovations are likely to take over your living quarters for an extended period of time, you may need to also consider the additional cost of accommodation for the renovation period – another cost to factor in to your budget.

Getting bang for your buck

Once you decide to renovate, if you are trying to add value to a house to resell, it is important to look at the rooms and areas of the house that will add the most value. These are average renovation prices for key rooms, however prices will fluctuate based on the city and suburb.

  • Kitchen: If you are a fan of any renovation show, you will know that kitchens sell houses. According to realestate.com.au, the average renovation cost you should be spending on a kitchen is between $12,000 and $16,000.
  • Bathroom: The average bathroom space in Australia is six square metres. So look to spend around $9,000 to $12,000 as the bathroom is a highly trafficked space and needs to appeal to a wide variety of investors.
  • Other areas: An extra bedroom or a deck outside adds appeal, more living space and improves the standard of living for the homeowners.

Finishing touches

The final hurdle to look at when deciding to renovate is the council fee. The council can charge you up to $2,000 for an application fee, although prices can vary depending on your suburb. After speaking to a broker and finalising the renovation, make sure you account for an extra 10 per cent in your funds, to cover any unexpected costs.

Deciding on the type of loan   

If after the initial assessment and investigation you do decide to renovate, there are three types of loans to consider in helping refinance and renovate your house: a line of credit loan, a construction loan or increasing your existing home loan.

These options suit different people for different reasons. It is important you seek the right advice to determine what is going to work for your particular circumstances.

The added costs of purchasing property

Buying property isn’t just the purchasing price, a number of hidden costs are associated. So don’t forget to account for these extra costs in your considerations. In addition to the cost of moving, a change in council rates, strata fees, the cost of any renovations and furniture, homebuyers face additional fees to complete the purchase of a property.

Stamp Duty

Stamp duty, a state tax imposed on the purchase value of the property or the market value, must be paid in order for the mortgage documents to be legal and to transfer the property. But since July first homebuyers no longer have to pay the stamp duty fee, if the property is purchased for below $600,000 – a considerable drop in those additional costs of buying property.

Legal Costs

To transfer the ownership of property, a solicitor, conveyancer or a settlement agent are required. They will perform property and title searches to ensure the seller is entitled to release the property, which may include checking the strata body corporate records.

Inspections

Building and pest inspections are an added cost, but one which may save you from further expenses in the future – particularly any major building work required. This amount will vary depending on the size of the property.

Agent Fees

First-home buyers don’t have to worry about paying any commission, since it is charged to the vendor of the property, most often as a percentage of the sale price. However, if you’re selling your current home to buy another property, you’ll probably have to take these fees into account.

Borrowing Costs

Lenders have application, valuation and settlement or loan approval fees that vary depending on the lender. Mortgage Brokers are familiar with these fees and can help you take them into account when choosing a lender that’s right for you.

Insurance

Depending on your loan-to-valuation ratio (LVR), you may be required to take out lenders mortgage insurance (LMI). Although the borrower pays for it, LMI is not insurance for the borrower; it protects the lender should you default on the loan. You will also need building insurance if you are not purchasing a strata property.

Offset accounts: should you have one?

A common request from borrowers is that they ‘need’ an offset account. When asked to explain why, it’s amazing how many people say “my friend has one and they love it, so I thought I should have one too”. They suit most borrowers, but to know if one will suit you, let’s first understand exactly what an offset account enables you to do.

How do they work?

An offset account gives you the freedom to “park” your own funds (savings) in an account that is linked to your mortgage. The funds that are parked in there offset the interest charged on the total loan. These funds are freely available for you to use for your everyday transactions just in the same way you would use funds from a savings account.

In numerical terms, if you have a $100,000 mortgage at 5% interest rate with no offset account, your annual interest charge would be $5,000. If you had the exact same loan with $10,000 in your offset account, your annual interest charge would be $4,500.

The way to think of it is simple. The funds in your offset account don’t earn you interest, rather they offset the interest charged. When thinking about the opportunity cost, if the interest rate of your savings account is less than the interest rate of your home loan, then your funds will produce a more positive effect when held in your offset account.

Are they right for you?

For other people with owner occupied home loans, convenience and interest savings are the major benefits. The savings in interest are the same whether you use an offset or whether you pay the funds into the loan itself… but… having the funds in a separate account can provide convenience and flexibility especially when it facilitate transactions just like any other savings account. Your cash can be saving you interest right up to the time it is needed.

For investors, if you are claiming a tax deduction on the interest charged on your loan, then most accountants will advise you not to deposit your own funds into your offset account and draw them out. In the wash up, it is usually more beneficial to keep your investment debt high and personal debt low.

So, should you have an offset account? One of the great things about an offset account is that it can be beneficial no matter if you are a saver or spender. For a spender, you can have your salary paid directly into your offset account as the money will have an immediate impact on the amount of interest you pay.

If you are a saver, you may find that an offset account is more beneficial than a savings account as you may earn less interest on a savings account than what you would save on your home loan.

What’s on offer?

The majority of lenders offer products that can have an offset account attached to the loan. For this, some will charge a slightly higher interest rate, however some simple sums can see if the extra cost is worth it.

When researching and comparing home loans, it’s worth looking at any possible fees or restrictions to moving money around that may be associated with the offset account. Some lenders may have minimum transaction amounts and withdrawal fees if you decide to redraw money from your offset account and these fees could end up costing you more than the interest you would save.

Before making any decisions, you will need to carefully research your options and speak with your broker and weigh up their advice as to what will work for you.

 

What is the real cost of your daily coffee?

Having the financial commitment of a mortgage really makes you think about the value of your money. It forces you to watch your dollars a lot closer and brings into question the opportunity cost of doing one thing over another. It is surprising to see the impact that small financial habits, like your morning coffee, make over the long term.

If you’re a one-a-day coffee drinker, that is an annual cost of around $1,300. On a $500k mortgage over a 30 year period, if you were to forgo your coffee and put these funds towards paying back your loan, this would cut 2 years and 4 months off the length of your mortgage and save $30k+ of interest repayments.

As a Melbourne based broker, I know telling clients to give up coffee isn’t going to win me many friends… but… its more about the power of your dollars over the longer term. Do you have a regular financial outgoing that you could reduce or get rid of that could assist you in repaying your mortgage quicker?

  • Bring your lunch from home
  • Cancel your gym membership that you never use
  • Shop around for a cheaper health/life/car insurance product
  • Go out drinking only once per weekend
  • Book smarter holiday options
  • Do you really need that expensive car with large monthly repayments?

It may not be one thing in particular but the sum of multiple ‘sacrifices’ that can create financial gain in the long term.

Maybe you will think twice before ordering that second coffee for the day…