Author: Willow & Reed Private

So, with the RBA’s cash rate at an all-time low, the question being asked by many home owners is “should I refinance?”, the answer is, “it depends”. This is why coming to us, or finding a mortgage broker that understands your needs, is so important.

Before any decision to refinance can be made (or any lending decision for that matter), you should consider the ‘3 dimensions’ to lending, the purpose, the lender, and you:

1. Why do you want to refinance? What purpose will it serve? Do you want to pay down more of your mortgage? Are you looking to take equity out of your home? Are you looking to simply reduce your payments? These are just a few of the very important questions that can help find your purpose. The purpose is just as, if not more important than finding the right lender or the best rate.
2. Are you happy with your lender? Do you feel they have offered or can offer you a better rate? Do the features you have suit your purpose, or are they outdated?
3. Has your situation changed? Have you got married? Have you had your first child, or maybe it’s your 3^rd or 4^th or more? Did you get a promotion or pay increase from your employer? Have your living expenses changed?

Understanding what’s changed for you, what you want out of your lender and what’s your purpose all play a vital role in deciding whether you should refinance or not. Remember, refinancing may not always be the right solution for you, and chasing short term wins is not enough of a reason to refinance, and that’s ok, other options might be available to you or, it may be best to wait a little longer until the time or right reason comes around.

When refinancing might not be right for you:

• You’re in the home stretch of current loan (i.e. 10 years left on your 30-year loan) and you refinance to a longer-term loan. It’s a known fact, in the early years of any home loan, you end up contributing most of your regular repayments towards interest and less towards the principal. Once you reach the half way point of your term, the reverse starts to happen. Therefore, refinancing at the latter stages of your loan term means the process of more interest over principal starts again as the loan is renewed, you’ll end up paying more interest over the course of your borrowing journey.
• You’re looking to move in the short term (i.e. 5 years or so). Refinancing comes at a cost. In order to leave one loan or lender and commence another or with another, there are costs; costs for leaving and costs for joining. If you are intending to move again or feel that a move is on the cards due to work or other factors, then staying put might be the best option, even if it means paying a higher interest rate for the short term. The reason. It might be a few years before you break even from the impact of the exit and entry fees, the cost of refinancing might not outweigh the benefits.
• You’re looking to spend on life’s little luxuries, such as a new sports car or motorbike or caravan or designer jewellery, etc. Whilst all of these sounds exciting, the cost of funding these luxuries might end up putting you in a worse position than when you started. Remember, each of these luxuries will be secured against your home, so whilst you can make the repayments today, what happens if/when you can’t, are you willing to give up your home to pay for them? If it doesn’t add value to your home, are provide security to your financial position then don’t refinance for it. Simple.
• Your household income or credit history has been impacted (i.e. you’re down from two salaries to one, or you’ve defaulted on a number of credit card repayments). An obvious one, but one that still deserves a mention, especially in these troubling times. The temptation to refinance to improve your financial position is one that is hard to resist, however fight against it, because chances are, it won’t. Lenders usually look at job security, credit scores, the financial well-being of borrowers and, in the case of refinancing, the amount of equity you have built up within your existing loan, if any of those factors impact the serviceability of the new loan then chances are you will be declined, not something you want added to your credit record, especially if your situation is temporary and will likely improve over time. A better idea could be to budget, spend less on the luxuries and pay down your credit cards, it’ll require a bit of willpower but you’ll thank yourself in the long run.
• You currently have a fixed rate loan. Whilst it’s not impossible to break a fixed rate loan, the question is, is it worth it? If you’ve fixed it for 2 years and your 2 months in, then probably not. If your 22 months in on a 2-year loan then it maybe an option. The key here is, what are the break costs? What other fees are applicable for discharging the loan? What fees apply to the new loan? Once you’ve work all of that out, then compare what you’re current repayments are vs what your new repayment will be on the current variable rate or ‘re-fixed’ rate PLUS the break costs, if the difference won’t be recouped within the remainder of your current fixed term, then it may be a good idea to stay put until the term ends.

When refinancing could make sense:

• The value of your property has increased. This creates a number of opportunities. If you’re LVR has now dropped to below 80%, you might qualify for an even greater discount on your interest rate compared to the advertised rate, making your repayments more manageable or allowing you to make extra repayments to your loan using the savings. An increase to the value of your property might provide access to equity you previously didn’t have, allowing you to add value to your home through renovations, put a deposit on an investment property or to tidy up your current short-term debt.
• To secure a more competitive interest rate. One of the best reasons to refinance is to find and secure a lower interest rate for your current loan. If the math makes sense, reducing your interest rate not only helps save you money, but it also improves the rate at which you build equity in your home, as well as potentially decrease your regular repayment amounts. Any savings you make each month can then be put back into your loan as extra repayments, further reducing the life of the loan and the amount of interest you pay over that life.
• To consolidate debt. This one can be tricky if not managed correctly. Debt consolidation makes sense when you are trying to replace high interest debt (i.e. credit cards and personal loans) with a low rate mortgage. This can help improve your debt management (especially if you are struggling to keep up with the individual repayments and have not defaulted yet), but more importantly, the savings can help pay down the debt sooner (albeit stretched over a longer timeframe). Moving debt around is not the same as paying it off, so clearing your credit cards only to build up the debt again does not make this an effective solution. You will need to consider a budget, or even cancellation of your credit cards to make refinancing for debt consolidation a viable solution.
• You’re wanting to buy an investment property. If building a property portfolio is one of your goals then refinancing (or a cash-out loan) might make sense. If the value of the property has increased or you’ve made extra payments to your loan, then refinancing can allow you to access the equity in your home, potentially at a lower interest rate, to serve as a deposit on an investment property. This strategy only works if you do not exceed the 80% LVR on your current loan and your deposit makes up 20% of the deposit on the new loan, or else you could end up paying Lenders Mortgage Insurance across both loans, not to mention the fees and charges associated with acquiring a property (i.e. stamp duty, transfer fees, etc).

The bottom line

Refinancing is not for everyone, but where it makes sense, it does serve a purpose.

It is a good idea to be checking and reassessing your home loan every 2-3 years (at least) and comparing not only against other loans in the market but also new loan products offered by your current lender. By doing this, you can determine if your current loan continues to be the best product for you or whether there are features and flexibilities another product can provide you, or whether you’re paying too much in fees and charges on your current loan compared to other products in the market.

For help refinancing or any of your lending needs, please contact us, we would love to hear from you.

What to consider before buying a commercial property?

Buying a commercial property may seem like a daunting task, however, if the numbers make sense and you’re prepared for the long game, then the principles are much the same as buying a residential property. Now, that’s not to say building a commercial property portfolio is easy, or that it doesn’t come with it’s added level of risk, but like any investment opportunity, if the numbers stack up and thorough research is conducted, the risk could end up being very rewarding.

So firstly, you do not need to be a business or in business yourself to invest in commercial property, but you do need to understand the target market of the property you are purchasing or the market in which you want to tenant your property with. If you buy a property with a commercial tenant already attached, spend the time researching the business that the tenant is in. Understand the viability of the business and the quality of the lease, take notice of local amenities and proximity to local transport, also assess the level of difficulty it would be to convert the property for different tenant needs, understanding all of this (and more) will help uncover whether the property is, and continues to be, a sound investment. Remember, unlike a residential property, trying to replace a tenant or even sell the property is much harder and takes a lot longer. However, if done right, and you manage to secure the desired tenant for the long term, you could start to see your commercial property really working for you by producing a healthy, regular income stream for the foreseeable future.

 

The advantages of investing in commercial property

• Higher income opportunity, and improved cashflow – unlike the average 3-4% rental income offered by residential properties, commercial properties tend to be higher, typically between 5-12%, which means, depending on how the loan is structured, you could find yourself with an investment that is positively geared or cash flow positive;
• Annual rent increases – to further reinforce the income advantage, commercial lease agreements typically have fixed rental increases built into the terms of the contract;
• Longer lease terms;
• Expenses and upkeep are usually funded by the tenant – unlike a residential property investment, tenants under a commercial arrangement usually fund all of the day-to-day expenses of the property, i.e. council rates, land taxes, insurance, maintenance and repairs. This also means commercial tenants tend to keep the property in good shape.
• It can be a tax-effective investment – depending on the entity structure you choose to purchase a commercial property (i.e. under a company, through a trust, within a self-managed super fund, or a partnership), and coupled with the broad scope of depreciation you could claim, you may be entitled to significant levels of tax benefits. We suggest talking to a qualified solicitor, accountant and/or financial adviser before making any decisions based on you tax position or outcome, we are not qualified to give this advice and the information presented above is general in nature and does not take into account any personal circumstances.

 

The disadvantages of investing in commercial property

• Prone to greater market sensitivity – the nature of any business is the demand for goods and/or services, therefore any change in the economic cycle that disrupts that dynamic could have a severe impact on your commercial property. It’s for this reason, as an investor, it makes sense to keep your finger on the pulse and understand how the economy is performing and the impact it will have on the tenants leasing your property;
• Increased vacancy periods – unlike residential property, which is usually quicker to turnover tenants, commercial property (generally) isn’t. You’ll need to be prepared to service the loan and all outgoings for the property should you endure extended vacancy periods, all while covering the costs of fixing up the property and preparing it for the next tenant (which is why finding a property that can cater for different types of businesses is crucial during your research phase, this can help reduce the vacancy periods).
• Expensive to repair and renovate – following on from the point above, repairing and/or renovating a commercial property while it is untenanted is a lot more expensive than doing the same for a residential property. This is especially true if the previous tenant left the property in a sub-par condition or they had extensive fit outs done throughout the course of their lease which you now have to dismantle or demolish;
• Leasing agreements are more complex – unlike residential agreements, which are fairly standard, commercial agreements can be prone to lots of negotiation and significant variation, which means you may need to employ the services of an accountant and lawyer for assistance.

What can be used as security against the commercial property?

Fortunately, there a several options available to you.

You can consider using either your principal place of residence, another residential property you might own, or, the commercial premises itself that you intend on purchasing. The key here is understanding the impact of using a residential property vs a commercial property as collateral to secure against the loan.

One of the disadvantages of owning commercial property, which we didn’t mention above, are the more stringent finance terms lenders place on you as the borrower. Lenders generally perceive commercial loans as a higher risk investment and therefore typically require a larger deposit (sometimes up to 30-40%), coupled with a higher interest rate (compared to residential loans) and higher administration fees. On the flip side, lending has evolved so much so that you could consider using a residential loan for commercial purposes, again, only if there is capacity and the numbers make sense.

The advantages of using your home or residential property, as security against your commercial purchase, means you can access a lower interest rate, pay fewer fees and even borrow up to 100% of the property’s value. In addition, if your home or residential property has the capacity to do so, you could consider using the available equity as your deposit rather than having to save up cash. These, and other benefits, could make servicing a residential loan for commercial purposes much cheaper, just be careful not to over commit and run the risk of defaulting on any of your loans, especially if you’re using your home as collateral.

Whilst commercial loans have evolved over the years, there was a time when lenders would only lend up to 65% of the commercial property value, the loan term would be no more than 5 years and they would charge exorbitant fees due to the level of risk commercial property presented. Nowadays, lenders are more inclined to ease their LVR levels to around 80% and even extend their loan terms to 15, 20 and even 25 years. However, don’t be fooled, their appetite for this level of risk still remains the same, which is why you’ll find most commercial loans tend to be funded with an interest rate based on their ‘risk adjustment’ factors. The simplest way to look at it is, the greater the risk for the lender to lend to you and/or a higher LVR, the higher the interest rate you will be charged.

To sum it all up

1. Do your research;
2. Use the people and resources available to you, you don’t need to go at this alone, there are experts who can help at every turn of this journey (i.e. financial planners, accountants, lawyers, etc);
3. Plan for the worst-case scenario, make sure you have enough funding, make sure you can service the lending even when the property is untenanted;
4. Don’t go for an untenanted property. Even if you you’re getting it for a steal, chances are there’s a reason for that. Begin your commercial property journey as hassle free as possible, and buying one which is tenanted with a long lease or recently renewed lease will get you off on the right foot.
5. Don’t get lured in by advertising. Crunch the numbers, don’t be fooled with advertised rates, research other businesses and properties in the area. Goes back to point 1, research.
6. Don’t rush the decision. Unlike residential property, if you jump in too quick it’s a lot slower to undo and the risks will end up outweighing the reward;
7. Don’t be afraid to look out

If you’d like help finding the right lending solution to fund your first or next commercial property, please contact us, we’d love to hear from you, and help make this journey a dream.

It’s one thing to say that you’d like to pay off your home loan faster, and it’s another to take action. For most of us, the former is more our reality. We all want the dream of owning our home outright and saving money as we do it, but unfortunately, life takes over. There is usually never enough time in the day, or we get complacent, we start to run on autopilot and we put strategies we know are good for us in the too-hard basket to be looked at another day, or in some cases, not at all. The good news is, there are some simple things you can do to help shave years off your loan term and reduce the amount of interest you pay to your lender, all of which can be made easier with our help.

1. Consider fortnightly payments instead of monthly

One of the simplest and best strategies for reducing the term of you loan, as well as the costs and potentially your exposure to rising interest rates, is to make your regular repayments on a fortnightly basis rather than a monthly one. For those who get paid fortnightly, align your mortgage repayments with your income payment period.

By switching to fortnightly repayments means you’ll end up making the equivalent of 13 months’ worth of repayments instead of 12 in a year, an extra month’s payment each year will go a long way in helping you own your home sooner.

2. Make extra repayments where possible

Making extra payments on your mortgage can cut your loan by years. For every dollar you commit to your loan, over and above your regular repayment each month, goes completely towards paying down the capital/principal portion of your loan. This can significantly reduce the life of the loan as well as the amount of interest you pay over that loan term.

With a loan value of $500,000, taken over 25 years, contributing even an extra $500 each month, on top of your regular repayments, could reduce your loan term by around 5 years, not to mention, potentially save you approx. $50,000 in interest repayments (source: www.canstar.com.au).

3. Shop around for a lower interest rate

An obvious choice, by an effective one nevertheless.

Find a loan that not only has the right features for you but also offers a lower interest rate. But first, understand what features of your current loan you want to keep, then, compare those features with similar loans that offer a lower interest rate. If you can find a better rate elsewhere, first ask your current bank if they can match it, it’ll save you money but also the time and effort to move lenders, if not, then consider moving.

It may sound like a simple idea but switching out of your current arrangement and taking out a loan at a lower rate can mean the difference of years as well as thousands of dollars in savings. Before you make any move, consider if there are any exit fees on your current loan and/or establishment fees on the new loan which could prevent you from moving.

4. Continue making higher repayments in a falling interest rate market

A good way to get on top of your mortgage is to pay it off as if you were on a higher interest rate or, if you refinance to a lower rate, continue to make your repayments at the same level you were paying prior to the rate reduction. For those of you in autopilot, or working on a budget, this one is a good strategy, nothing changes with your outgoings but in the background your money is working harder for you, paying down more of your mortgage and reducing the life of the loan without having to think too much about it.

5. Take advantage of using an Offset Account

Whilst an off-set account isn’t usually available or practical during a fixed rate term, it can do wonders for those with a variable rate loan, or the variable rate component of a split loan.

Instead of earning interest, having an offset account linked to your mortgage reduces (or offsets) the amount of interest you pay on your mortgage (it won’t always be a 100% offset but any little but will help); the more you have in your offset account, the more you end up savings in interest payable to the lender. With the savings you can contribute more to the principal of your loan, potentially shortening the life of the loan. One way to make the most of this facility and reap the benefits, is to have your salary or other sources of income paid directly into your offset account.

To learn more about the advantages of an offset account, go to our Our Thoughts page or click here.

6. Where possible avoid interest-only terms

This might make sense for investment properties given the potential tax benefits, but even then, it can be a gamble especially if the property value doesn’t rise. As for your principal place of residence, this strategy does nothing to reduce the loan term or associated costs over the term, it just does not make sense.

Interest only terms usually come with a higher interest rate compared to a principal and interest loan, so you may end up paying more in interest over the life of the loan. An interest only term also means nothing is paid towards your principal, therefore, unless the value of your property rises, you’ll have no equity built up in your home, which could pose significant problems if there is a market downturn and you need to sell quickly or you need access to funds in the short term.

7. Direct all your income to an Offset Account

To compliment the benefits of an offset account, directing your salary and income to an offset account means you can save on interest over the life of the loan, and as we know, any savings can then be directed straight to the principal consequently paying down the mortgage sooner.

Although the interest you pay is debited each month (or fortnight), it is calculated on a daily basis, so leaving your salary untouched even for a few days or staggering your living expenses over a few days instead of all in one day could save you (in some cases) hundreds of dollars in interest costs each month.

8. Focus on your principal at the early stages of the loan

It’s a known fact, in the early years of any home loan, you end up contributing most of your regular repayments towards interest and less towards the principal. It may require you to combine some of the other points mentioned in this article to achieve this (i.e. make extra payments, give up on some of the luxuries, etc), but develop a strategy to attack your principal in the early stages of your loan, this will make a significant difference to your loan term and cost savings down the line.

9. Consider consolidating your debts

One of the best ways to ensure you continue to stay on top of your loan repayments and protect yourself against interest rate rises, is to consolidate your high interest debt with your low rate mortgage. Whilst this strategy can help improve your debt management, more importantly, it can allow you to use the savings to help pay down you mortgage sooner. However, where this strategy doesn’t work, is moving around the debt to only build it back up again (i.e. credit cards). You’ll need to consider a budget, or even cancellation of your credit cards to make the debt consolidation strategy a viable solution.

Debt consolidation can also help improve your credit score – having one loan to service would reduce the potential of late payments or missed payments trying to service multiple loans.

10. Give up some of life’s small luxuries

Every little bit helps.

Whether you buy 2-3 coffees a day, smoke a packet of cigarette’s a week, buy lunch or eat out regularly, or even subscribe to the multitude of different streaming services, think whether you could cut back on some or all of these luxuries.

For example, a $4 coffee, purchased twice a day is $8 per day, $40 a week, $160 per month, $2,080 per year. Subscriptions to Netflix, Stan, Spotify, Heyu, etc might total $50 per month, that’s $600 per year. Redirecting these funds to your home loan can shave years off your loan term and reduce you interest payable during that time.

11. Are you a doctor, lawyer or accountant? You may be eligible for a professional package loan, packed full of discounts.

Some lenders offer discounts in the form of reduced interest rates, waived or reduced LMI, waiving of some fees, etc to specific professional groups (i.e. mainly those mentioned above) or members of professional organisations. Ask you lender if your occupation qualifies, and if you do but you don’t meet the eligibility criteria is there anything you can do to change that, asking the right questions and making the necessary changes could save you money in the long run.

If you’d like to know more or, if we can help you find the right lending solution for your needs, please contact us, we’d love to hear from you.

Offset vs Redraw: which one is best for you?

Let’s be clear, both can save you money on your interest payable, and both can potentially reduce your loan term if used correctly. What else do they have in common? They both give you access to your excess or extra repayments. So, what’s the difference? Well, that’s up to you. Each have their place, depending on your needs and objectives.

Why an Offset account?

An offset account works very much the same as an everyday bank account or high-interest earning account, which is linked to your mortgage. You can get access to your funds at any time, and some lenders will also provide you a debit/access card for additional convenience. However, rather than earning you interest (like the high interest account), an offset account saves you interest on your mortgage, the more you have in your offset account, the more you end up savings in interest payable to the lender.

Let’s compare a very simple example, $20,000 in a high interest account earning you 1.5% p.a. in interest vs an offset account (with the same amount) linked to a home loan with an interest rate of 2.9% p.a., and a loan value of $450,000. For every dollar in your high interest earning account, you earn 1.5% p.a., in this example that’s $300 p.a. or $25 p.m. to which can be used to contribute towards your loan repayments. If the same amount was in an offset account, the interest calculation will be based on a $430,000 loan, not $450,000, which means your monthly repayments would reduce from $1,088 to $1,040, a saving of $48 p.m., that’s an additional $23 saving over the money earned from your high interest account. This means your high interest account is only doing (roughly) half the job for you.

Interest is calculated on a daily basis, therefore (as mentioned) the more you have in the offset account, the less interest you end up paying on the mortgage, and with those savings you can look to contribute more to principal of the loan, therefore (potentially) shortening the life of the loan. One of the best ways to exploit the benefits of this feature is to have your salary or other sources of income paid directly into your offset account.

Why a redraw facility?

One of the main differences between an offset account and a redraw facility, an offset account is designed to reduce the value of the loan for which interest is calculated, but is not in fact a contribution to the loan, whilst a redraw facility allows you to make extra repayments towards the loan (on top of your regular repayment amounts) in an effort to reduce the loan term, and interest payable.

The benefit of a redraw facility is that, whilst your regular repayments might (usually) be split between a principal and interest portion, any extra repayments over and above this amount does not attract an interest component, meaning every dollar over your regular repayment contributes entirely towards reducing the principal portion of your loan. Much like an offset account, you can still have access to the extra repayments however this usually comes with a fee or a limit in the number of times you can withdraw funds before a fee is charged.

So, which is better?

The short answer, “it depends”.
If you are diligent with your money and have a strict savings and spending policy, then an offset might be the right solution for you, you might not be tempted to withdraw money out of the offset account to buy that new 75” TV or home theatre system, instead, you’re intention is to save the money for when you really need it.

The convenience and easy access to funds might not be the ideal solution for some, therefore, a redraw facility might be the ideal alternative. It still aims to achieve the same goal as an offset account (i.e. reduce the interest payable and reduce the life of the loan) however, it comes with a cost if you try to take money out too often, some lenders might limit the number of times you can withdraw, may impose a fee to do so and might set a minimum amount per withdrawal, all great deterrents for spend thrift borrowers looking to pay down their home loan quicker.

Another consideration might be the tax implications for those with investment property loans, using a redraw facility might help pay down the loan quicker but if you access those funds at any time during the life of the loan you may not be able to claim the extra repayments as a tax deduction, unless you can prove that the withdrawn funds are being used for further investment purposes. On the other hand, using an offset account and having funds sit there to reduce the interest payable might still avail you of a tax deduction against the full loan amount. We suggest talking to an accountant or financial adviser before making any decisions based on you tax position or outcome, we are not qualified to give this advice and the example used above is general in nature and does not take into account any personal circumstances.

If you’d like additional help making sense of which option is best for you, please contact us, we’d love to hear from you and help find you the right solution to care to your needs.

What you should consider

Buyer beware, investing in property can present some fantastic opportunities to grow your wealth and secure a healthy income, however, if not timed carefully or applied for without sufficient research, and the right kind of help, property investing can present serious challenges to any borrower.

Whilst investing in property can offer you a steady stream of income, one of the biggest reasons most borrowers get into the property market is for the potential capital growth, not to mention the possible tax benefits you could receive over the life of owning the property (you will need to speak to a financial adviser regarding the last point).

Purchasing an investment property should not be considered a short-term solution, it is a long-term investment and should be given the respect and thoughtful consideration it deserves. Yes, if timed right and researched well, property investing could turnover a great profit, however, if or when that happens, you’ll need to consider the impact owning an investment property will have on your after-tax cash flow and your standard of living. Think carefully whether to invest in a property if the intended cash flow it produces significantly impacts your everyday living expenses or brings into question your serviceability across ALL your debt; the last thing you want to do is have to live off bread and water or worse, run the risk of not only losing your investment property but also your family home if you can’t service the loan.

The key to property investing, understand the ‘why’.

Why are you wanting to invest in property? Is it for capital growth? Is it for the income?

Once you work out the why, the next step is working out what type of property you want, and where. Do you want a house or an apartment? Do you want to buy in a certain suburb? Are you looking to develop? All of these questions (and more) must be asked before you can even begin your search. The approach to property investing must be targeted, know what you want before you start looking or else it’ll be information overload and you’ll most likely end up with a property that doesn’t meet you brief and doesn’t achieve the result you intended.

Another factor to consider when investing in property (and probably the most important), are you financially ready for this level of commitment? Don’t assume the income an investment property produces is guaranteed or whether (at times) it produces any income at all. How will you continue to service the loan if it’s vacant for an extended period of time? What if you have to reduce the rent, will that impact your living expenses? How will you fund the shortfall? These, and many other important questions, need to be addressed before you commit to investing in the property market, especially if you are using your principal place of residence as security.

Are we telling you all of this to scare you away from buying an investment property? No.

Quite the opposite. Buying an investment property can be one of the most exhilarating experiences of your life, and if done well, could potentially improve your wealth significantly, but only if it’s thought-out properly and managed with the proper help. This is where we come in.

If you’d like help finding the right lending solution and/or restructuring your current debt to assist with funding your first or next investment property, please contact us, we’d love to help and be a part of your journey.

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.