A guide to buying a house
The dream of buying a home, especially in this day and age, may seem out of reach for some people, but it doesn’t have to be. It’s quite simple. With a good budget, a little discipline, and even having a basic understanding of what to expect, you could be well on your way to achieving your dream of owning your own home.
Whether you’re starting out, or well into the journey, the key to the whole process is getting the fundamentals right; saving for a deposit and finding a lender is only a small part, you need to do your research, understand the jargon, decide what type of buying method will get you the best price, and so much more. We’ve put together some helpful tips to get you started.
1. Work out your budget
Most people skip this step. Instead, they go straight to step 6 and start looking for the house, and then decide on what their budget should be. This is definitely a road to disaster or disappointment. Remember, get the fundamentals right.
Understand what you can afford, and to do this, you need to know intimately, what your income and expenditures are each month. There are plenty of apps or websites that can assist you with this step or, you can keep it simple, either way, identify how much you can afford to save and how much you can afford to repay. Remember, if you’re renting currently, and you’re purchasing a home to live in, don’t include your monthly rent in your calculations, this expense will cease if you’re successful in finding your own home.
2. How much can you borrow?
Once you understand what your savings or repayment capacity is, the next step is determining how much you can ‘comfortably’ borrow. Lenders and intermediary websites usually have calculators readily available, free of charge, to help you assess your borrowing capacity. These modelling tools usually use current interest rates or allow you to input your own rate, be smart, and be conservative, use a rate that is 2-3% higher than the current rate, this will give you a true indication of how much you can borrow and whether you can service the loan if interest rates rise.
We recommend coming to us, as mortgage brokers and finance experts, we can provide guidance on which lenders would likely offer you a loan based on your financial position, number of dependants, propensity to save, etc.
3. Save for a deposit
Once you’ve established a rhythm with your budget, stick to the plan (just a tip, remove as much short-term debt as possible, i.e. credit cards, and personal loans, lenders like this, it improves your credit score and counts higher towards your eligibility for a loan). Discipline is key at this stage, and to create some motivation, start to do some research about the type of house you want to live in and the location. Get a feel for what you are saving for and decide whether it is achievable in the timeframe you have set yourself. Remember, you are not finding a home, you are understanding the market only.
A typical savings goal is 20% of your property value, so that’s $100,000 for a home valued at $500,000, but as we mentioned in step 2, you have to also think about stamp duty, transfer fees, government fees, insurance, etc. If 20% is a stretch in the timeframe you have allotted yourself, that’s ok, you’ll just need to factor in Lender Mortgage Insurance (LMI) on top of the other fees mentioned above. The closer you can get your deposit to 20% the less you’ll end up paying in LMI. There are strategies we can discuss with you to manage LMI and other fees, contact us to discuss.
4. Find a loan product and lender that suits your needs
We live in one of the most competitive times in the lending market, use that to your advantage, find a loan product that suits your needs. Don’t choose a lender or loan based purely on the interest rate, and if the rate is too good to be true, then it probably is, chances are then lender has loaded the product up with fees and other charges, or they will make it really difficult for you to leave if you ever want to refinance or shop around down the track. Research, research, research.
Features of a loan are just important as the rate itself. Work out what is important to you; do you want to make extra repayments, do you want access to those extra repayments in case of an emergency, do you like knowing how much your repayments are going to be each month, do you want to pay fortnightly instead of monthly, etc. Write a list of ‘must-haves’ in your loan and then shop around for a lender with the best rate.
5. Get pre-approval
Getting pre-approval can be one of your most powerful assets when it comes to step 7: negotiating and making an offer to buy a house. Seller’s look favourably on buyers who have come prepared, are ready to do a deal and, if you find the right seller looking to sell quickly, they tend to gravitate to buyers who have the capacity to do so.
Once you have found a lender you want to partner with, follow their procedures to obtain a loan pre-approval. What this means is, subject to a few conditions (which generally includes a valuation of the property you are purchasing to make sure you aren’t paying too much it), the lender is happy to progress through to the final stage once you have found a property that you’re happy with. Pre-approvals are usually valid for up to 6 months, if this is about to expire, you can work with lender (or us if we are your servicing broker) to extend the term or re-apply. Keep in mind, pre-approvals don’t commit you to a loan, nor is it a loan offer, it’s designed so can shop around knowing your affordability levels. To get a pre-approval, you’ll need to produce evidence of your income, tax returns, proof of your savings history and other statements that may be required by the lender.
6. Search for a house
This is the fun part. But don’t get carried away.
Know what you are buying, but just as importantly, why you are buying it.
Are you looking to start a family or even grow your family? Would a house instead of an apartment be a better fit? Do you want to renovate? Do you want to build? Where do you want to live and why do you want to live there (i.e. family community, close to transport, bars, shopping centres, cafes, etc). Focus on your must-haves over your nice-to-haves if you’re ever caught deciding over several property’s.
Keep an open mind but stick to your budget, do plenty of research, talk to real estate agents, use (free) property data websites, go to property inspections, attend auctions and most important, don’t rush, give this decision the time and respect it deserves.
7. Negotiate and make an offer to buy your house
When you’ve found the home you want to buy, don’t let your emotions get the better of you, remain calm and level headed, this approach will be key to negotiating the best price before making a final offer.
Much like you wouldn’t buy a car before test driving it, don’t make an offer on a house before having it inspected. Get a building and pest inspection down on the property by a professional of your choosing. A building inspection checks for structural issues, dampness, electrical faults and/or safety, and will uncover additional cost for repairs or maintenance. A pest inspection will look for termites, rodents or other pest issues. Depending on the result, you might want to walk away from the property or, build the costs for repair into your negotiations. Do not gloss over this step, it could mean the difference between the house of your dreams or your worst nightmare.
You’ll also need to decide how you want to purchase the property, either via a private sale or auction. Be aware, if you decide to buy through an auction, attend a few beforehand, get a feel of the environment and how to bid, it may even be worth taking an experienced person along or hire a buyer advocate to do your bidding. If you are successful at auction, you will be required to pay the deposit immediately (usually 10% of the purchase price) and there is no cooling off period. Private sale is probably the most common method to purchasing a house, which is usually done through a real estate agent. Ask for the ‘Section 32 Vendor Statement’ and provide to your solicitor for review; essentially, the Section 32 contains all the information about the state of the property that is required, by law, for the seller to provide to the buyer. The next step is to make a verbal offer to the real estate agent or buyer directly. If agreed, you will need to either make a conditional or unconditional offer, in writing, to the real estate agent or buyer. The seller will then prepare a contract of sale which will include the deposit amount required and the timeframe it needs to be paid in.
Take the time to read over the contract of sale, if you’re unsure, employ a solicitor or conveyancer to review the documents and report back to you any adverse findings. If you want to make any amendments to the contract, no is the time to do it. Make sure you are comfortable with the terms of the contract before signing.
8. Finalise your loan
Once you are happy with the terms of the contract, contact your lender to now finalise your loan. You will need to provide a signed, executed copy of the contract of sale and pay your deposit to the seller.
You’ll also need to source home and contents insurance for the new property with the commence date to be on or before the settlement date. This is usually a condition before your loan can be finalised.
9. Settle on your new home
The settlement date is the day when the title of the property is transferred into your name, in exchange for the seller receiving the full purchase price of the property. Typically, your solicitor or conveyancer will finalise the settlement between your lender and the seller and instruct the lender to disperse your funds to pay for stamp duty, transfer fees, government fees, etc.
If you’d like help finding the right lending solution to fund your first or next property purchase, please contact us, we’d love to hear from you, and help make this journey a dream.