Buying Property For Dummies Page 18
If you have to take time off work while you’re working on your home, you lose income from your regular job.
If you squeeze the work into weekends or evenings, the job can take a lot longer than if builders were working full-time on the job.
As an owner–builder, you have more control over the quality of the work and the costs of materials and fittings.
Builders and tradespeople add a margin of between 8 and 20 per cent to the costs of materials and fittings.
Builders and tradespeople are often able to get substantial discounts on materials and fittings because they buy in bulk. This discount can often be as much as 50 per cent.
You may find getting a home loan for a home you build yourself more difficult. Talk to a couple of lenders before you launch too deeply into your plans to avoid disappointment on this level. See Chapter 10 for all your home loan options.
The responsibilities of the owner–builder
As an owner–builder, you have the same responsibilities as a professional builder does. You’re responsible not just for the actual construction of the home, but also for fulfilling all the legislative requirements that may apply in your state or territory. Refer to Chapter 7 for full details of the requirements of each state and territory.
You almost certainly need to get an owner–builder permit or licence. Check with your state or territory’s department of consumer affairs or building services department for other requirements. Ordinarily, owner–builders in any part of Australia are responsible for the following:
Certificates for specific works: You must obtain certificates certifying that specific works such as waterproofing and pest treatments have been carried out to the appropriate standard.
Council permits and approvals: You’re required to obtain all necessary council permits and approvals, such as development approvals, planning permits and building permits.
Financial requirements: You need to ensure that everyone — including subcontractors and suppliers of materials — is paid on time.
Home warranty insurance (also called home indemnity insurance): This insurance protects anyone who buys your home in the future from defective work carried out in the process of building or renovating. Owner–builders need to take out this insurance themselves and it is compulsory in all states and territories. Refer to Chapter 7 for further details on home warranty insurance.
Insurance: Owner–builders are advised to take out Construction Risk Insurance (also called Builders All Risk Insurance), which covers construction projects in the event of fire, theft and vandalism and also for public liability.
Occupancy certificate: The occupancy certificate (also known as final inspection certificate or completion certificate) is issued by your building surveyor to show that the work meets the standards set by the Building Code of Australia and that the building is ready to occupy.
Safe working environment: Owner–builders are obliged under the Occupational Health and Safety Act to provide a safe working environment for any subcontractors, and for anyone else — such as family or friends — who work on your home during the construction process. Contact your state or territory WorkCover authority (refer to Chapter 7 for contact details) for more information on the minimum safety standards you need to comply with.
Tax: Subcontractors and suppliers charge you GST on their materials and services. Ensure you factor these extra costs into your budget. Note: As an owner–builder, you can’t claim back the GST.
Trade licences: You’re responsible for ensuring that your builder, as well as any plumbers, gasfitters and electricians you use, is properly licensed with the relevant state or territory authority.
Each Australian state and territory can provide you with important information about your responsibilities as an owner–builder, as well as useful tips and guidelines:
Australian Capital Territory: Planning and Land Authority, www.actpla.act.gov.au
New South Wales: Office of Fair Trading, www.fairtrading.nsw.gov.au
Northern Territory: Building Advisory Services Branch, www.nt.gov.au/lands/building
Queensland: Building Services Authority, www.bsa.qld.gov.au
South Australia: Planning SA, www.planning.sa.gov.au
Tasmania: Department of Infrastructure, Energy and Resources, www.wst.tas.gov.au
Victoria: Consumer Affairs Victoria, www.consumer.vic.gov.au
Western Australia: Builders’ Registration Board, www.builders.wa.gov.au
Looking at your options
You can operate at three different levels as an owner–builder, depending on your skills and expertise, and the amount of time you have available.
Level one: You build everything yourself (except in areas where licensed tradespeople are required by law, such as electricians and plumbers).
Level two: You do some of the work yourself and oversee the project through to completion, but hire subcontractors or tradespeople to do part of the building work (such as framing or roof tiling).
Level three: You don’t do the building yourself, but you act as the project manager, where you organise all the materials and subcontractors (including perhaps an accredited builder) to build your home.
In each of preceding scenarios, you take on the responsibility for financing the construction, paying for insurance, supervising the work and all the legislative requirements.
Taking a course for owner–builders
In some states and territories, you’re required to do an approved owner–builder course and apply for home warranty insurance before you can get an owner–builder permit. Check with your state or territory’s department of consumer affairs or building services department for a list of approved courses.
Most other states and territories also offer owner–builder courses. These courses are less about the technical aspects of building than about project management issues, budgeting, estimating, scheduling and dealing with relevant authorities during the building process. Owner–builder courses are often provided by TAFE colleges or adult education centres. They usually run over a couple of days, or can be done by correspondence. Course costs are in the region of $100 to $300. (For more information on owner–builder courses, refer to Chapter 7.)
Getting council approval
One of the most onerous tasks when you’re building or renovating your own home is applying for council permits. Depending on the scale of your proposed building, you may require a development permit, a planning permit or a building permit (and sometimes all three).
Be aware that meeting council’s requirements and getting the application approved can take time, sometimes a long time, especially if the proposal is likely to meet objections from neighbours. You may want to allow several months, and even a year, for the planning process to go through council and for you to obtain final approval to commence work.
If your development application is a complex one, or carrying out these kinds of administrative tasks isn’t your cup of tea, you may want to outsource the work to a town planning firm that specialises in preparing planning submissions (look in the Yellow Pages under ‘town planners’). Building surveyors can also help navigate you through the process of getting permits for the actual construction. Getting help with a complex development application may add several thousand dollars to the budget, so you may want to get a quote from two or three firms. Ask for examples of successful applications and appeals, and for details of how they managed the process to success.
(Refer to Chapter 7 for more details on meeting your local council’s requirements.)
Getting on with tradespeople
As an owner–builder, you have a close relationship with the tradespeople and contractors who work on your home. You’re, in effect, their boss, and you need to develop the management skills to make sure they do the work properly and within the proper time frame. Things can get especially difficult if some tradespeople rely on others to complete a task so they can get on with their work; for example, the tiler can’t start work in a bathr
oom until the underfloor plumbing is finished. You don’t want to have people charging you an hourly rate while they hang around for several hours waiting for someone else to get their job done.
Every trade has its own jargon and way of working. If you’re going to be an owner–builder, learning the terms and the processes associated with each trade can help you to talk intelligently about what someone is doing at any time (see the earlier section in this chapter, ‘Taking a course for owner–builders’). Having tradespeople come up to you and start talking about flashing and bargeboards can be very embarrassing or intimidating if you have no idea of what they’re talking about. (Chapter 7 has more information about dealing with builders and tradespeople.)
Part III
Borrowing For, Buying and Protecting Your Home
Glenn Lumsden
‘Sold! Sold to the lady whose husband has just collapsed.’
In this part . . .
For many people, particularly first home buyers, the thought of the word mortgage, let alone the sheer number of loan options, is intimidating. In this part, I help you to cut through mortgage-related jargon and choose the best type of loan for you and your lifestyle. I also cover the pros and cons, and processes, of buying at auction or by private treaty sale. And I guide you through the final steps to owning your own home, including considering the contract of sale and what to look for, exchanging the contract and deposit, and the all-important key stage, settlement. The motivation to complete this technical process appropriately may convince you of the importance of getting a good solicitor or conveyancer to help.
Chapter 10
Climbing Aboard the Mortgage Merry-Go-Round
In This Chapter
Knowing what a mortgage entails
Checking that you can get a loan
Finding the best loan for you
Choosing the best lender for you
Looking at non-conforming loans
Viewing your credit file
Looking at non-bank lending options
Unless you receive some kind of windfall — an inheritance or a lottery win — get ready to acquire a rather large loan along with your new home. The Real Estate Institute of Australia, a major source of real estate data and statistical research, supplies figures related to housing affordability. The average home loan in Australia for first home buyers is around $283,000 and, if you live in New South Wales, the amount is more like $300,000. (However, in this book I have assumed the typical first home costs $450,000, so I have also assumed the typical first home loan, at 90 per cent of that amount, to be $405,000.) Because you may be paying your loan off for a long time, be prepared to become as familiar with your new mortgage lender as you plan to become with your new neighbours.
You may have already worked out how much you think you can afford to borrow — based on your income and living expenses, as well as on how much you’ve already saved. (Refer to Chapter 2 for more help on the costs of buying your home.) You may also want to think about what kind of loan you want. Home loans come in various shapes and sizes and can offer features that can make them more user-friendly and flexible, or sometimes just more expensive.
This chapter looks at how a mortgage works and the smorgasbord of loans available to select from. You also learn what you need to do to qualify for the loan you want. And, if it all looks too difficult to deal with yourself, you can find tips on how to get the best from a mortgage broker.
Understanding How a Mortgage Works
You may remember from the board game ‘Monopoly’ how you can borrow money from the bank by taking a mortgage against one of your properties. You turn the card over and you can’t charge other players any rent until you pay back the money you owe to the bank. That scenario from the game is a pretty accurate picture of how a mortgage works. Except, in real life, you take out the mortgage against your property as soon as you buy it (and you can rent out a property even if it is mortgaged to a lender).
Taking, say, $450,000 as a typical cost for a first home, few people have that kind of money available upfront to buy their home. However, lenders are prepared to give you the money upfront in return for taking ownership of the property itself as security (as well as you paying lots of interest of the amount they loan you).
Most people tend to interchange the words ‘mortgage’ and ‘home loan’, but the mortgage part actually indicates via a written contract the ownership that the lender has over your home as the security for the loan. That ownership is reflected by the fact that the lender holds the title to your home until you pay off the last cent of your home loan.
For some people the fact that a lender owns most of their home is a depressing thought, and their main aim in life is to pay off their mortgage as quickly as possible and get the title to their home into their own bottom drawer where it belongs. But you can also think of paying off a mortgage as just one of the normal expenses of life, like the telephone or food bill.
Having a mortgage is certainly better than paying rent because, while rent goes up over time, your repayments on a home loan eventually decrease and the part of your home that you own (the equity) increases.
Qualifying for a Loan
Lenders make a lot of money from home loans. Over the life of your home loan you may be paying back as much again in interest as you originally borrowed — not to mention the upfront and ongoing fees levied by the lender to cover administration and other loan servicing costs. But, for lenders, the main concern is to ensure they’re not creating ‘bad debts’ by taking on borrowers who may not be in a position to pay back their loan.
If you default on your payments, the lender has the option to foreclose on your home (acquire your home, which is the security for the loan and why they own the title to it). However, this onerous and sometimes expensive step is one that most lenders would rather avoid.
Lending criteria
In order to establish whether you’re a reliable and upstanding person of sound reputation and therefore, financially speaking, safe to lend to, lenders look at a number of different criteria:
Your ability to service the loan: Lenders look at your income and your expenses (living expenses plus any other loan repayments) to determine whether they think you can afford to service a particular size of loan. They also take into account the number of dependent children you have.
Your assets: Your new home is probably going to be your biggest asset, but a lender wants to know what other assets you may have accumulated in order to get a sense of what you’re doing with your money. Your assets include items such as a car, furniture, tools and equipment, collectables and a share portfolio.
Your credit history: Lenders look darkly on instances where you have failed to make a repayment on a loan — including a credit card. They may also take note of instances where you have failed to pay bills or consistently paid bills late.
Never having had a personal loan or a credit card before you apply for a home loan isn’t always beneficial when applying for a home loan. A good record of having made loan repayments on time is an important guide to how you’re likely to approach paying off your home loan.
Your job stability: Ordinarily, you need to have an employment history with a single employer for at least 12 months to qualify for a loan.
If you’re planning to change jobs in the near future, you may want to get your home loan first and then go job hunting.
Your liabilities: These little gremlins are your debts, such as car and personal loans and what you owe on your credit card, all of which you need to continue repaying along with your mortgage after you buy your new home.
Even if you have a small debt on your credit card, or you pay it off in full each month, the lender is interested in its maximum limit, not the amount you have outstanding. That maximum represents possible financial commitments that may compete with your home loan in future. If you have credit cards with a high maximum limit that you don’t use very much, you may want to consider closing them before you apply for a home loan
.