Buying Property For Dummies Page 25
Your lender authorises payment of the loan money to the vendor’s lender.
Your solicitor or conveyancer authorises the vendor to collect the deposit money from the estate agent where it has been held in trust.
Your solicitor or conveyancer pays adjustments or receives reimbursements such as taxes, council and water rates that are listed as prepaid by the vendor.
Your solicitor or conveyancer hands over the Transfer of Land document, as well as the certificate of title, to the lender, who holds it in trust until the home loan is completed.
Your solicitor or conveyancer pays the stamp duty on the home loan.
You have the keys and the house is yours.
You take time to celebrate!
Using the devil in the detail to default legally
If either party fails to have all the legal and financial proceedings tied up on settlement day, the transaction can be cancelled by the other side — without a forfeit penalty. Settlement day happened just this way to a friend of mine — to his relief.
Soon after my friend exchanged contracts to a home, he discovered he had to move interstate for work purposes. While he’d resigned himself to the idea of becoming a landlord instead of a resident in his own home, he was delighted to hear from the vendor’s solicitor that the settlement papers weren’t ready on the nominated settlement day.
He had an option to give the vendor the benefit of an extension, but took advantage of this unexpected turn of events to exercise his rights to pull out of the purchase, leaving him free to buy his new home interstate instead.
Insuring Your Biggest Asset
Before you celebrate you must do one more thing before you can truly relax into home ownership. You must, absolutely must, organise home insurance. Taking out building insurance on your home is required for final approval for a home loan. The lender wants you to protect what is actually its asset until you pay the loan off in full. You should also consider insuring the contents of your new home. (See the sidebar ‘Ensuring your property is really insured’.)
Protecting the biggest asset you may well ever own makes perfect sense. Too many home owners find out the hard way about the costs of skimping on insurance. The consequences of a number of high-profile disasters around the country in recent years, such as bushfires, cyclones and even hailstorms, have been a very vivid illustration of how people can be left thousands of dollars out of pocket, and in some cases homeless, because they ignore the possibility of the worst-case scenario of their home being damaged or destroyed.
Insuring the building
Insuring the actual building (building insurance) is cheaper than insuring its contents (contents insurance, see the section ‘Insuring your possessions’ later in this chapter) because the likelihood of your home being destroyed by fire or some other natural disaster is much lower than being burgled.
Ensuring your property is really insured
Officially, the responsibility for your new home goes to you on settlement day, so you should ensure that any insurance policy you take out begins the day you get the keys in your hands. However, the previous home owner may not have home insurance. So, if you want to be absolutely sure that you’re going to be compensated if by some quirk of fate your new home is burnt down, flooded or damaged in some other way before you move in, you may want to start your insurance as soon as you exchange contracts.
Insurers offer the following policies on building insurance:
Sum insured policy: The most common type of building insurance policy in Australia is the sum insured policy. This policy insures your building for a particular amount. You nominate how much you want to insure your home for and the insurer agrees to pay costs up to this figure. The higher the sum you choose to insure for, the higher the premiums you pay.
A sum insured policy puts the onus on you to make sure you have enough cover. It can be tempting to underestimate how much rebuilding your home really costs and so keep the costs of premiums down. But, if something happens to your home, you have to cover any costs above the maximum sum insured yourself. In the 2003 Canberra bushfires, at least half of those who lost their homes were found to be underinsured.
Total replacement policy: This policy covers the total cost of rebuilding your home to its current standard and quality. There is no agreed maximum figure and the insurer charges you according to what it thinks rebuilding your home is going to cost. Premiums for this kind of policy are more expensive than for a ‘sum insured policy’ but you’re guaranteed to have all your costs covered.
Indemnity policy: This policy is often also called a market value policy. Instead of paying for new materials to rebuild your home, the insurer only pays an amount equivalent to the current state of your home. The older your home is, the lower the amount the insurer pays.
The financial services watchdog, ASIC (Australian Securities & Investments Commission) has a very helpful series of articles on home insurance on its consumer education website www.fido.gov.au (‘fido’, watchdog, get it?). It also has tips on how to shop around for a lower-cost policy without compromising your cover. To access the information, go to Products and click on Insurance.
Calculating the costs of rebuilding your home
One common way to work out how much it can cost to replace your home is to take a valuation of your home and subtract the value of the land (as set out on your rates notice). Theoretically, this method leaves you with the cost of the actual building. However, working out the value of your home this way is likely to leave you seriously underinsured because it ignores the real costs of materials as well as all the other costs involved in rebuilding, such as
Demolishing and removing debris from the site.
Living in alternative accommodation while your house is being rebuilt.
Hiring architects or other professionals to draw up plans.
Lodging plans with your local council.
Replacing the garden and landscaping and/or retaining walls.
Rebuilding on a difficult site.
Most home insurers provide online calculators (or web calculators) on their websites to help you make a more accurate estimate of actual rebuilding costs. But, a 2005 report by ASIC, ‘Getting home insurance right — a report on homebuilding underinsurance’, points out that the results that the websites come up with can vary enormously depending on what approach they use. (Find the report at www.fido.gov.au)
The two main methods of calculating rebuilding costs are as follows:
The cost per square metre method: This method uses a calculation based on the size of the house and the material it is built from. These calculators apply an average figure to each house and don’t take into account the age of the house nor any other features that may make the house more expensive to rebuild.
The elemental estimating method: This method assesses in detail the different elements of the building to price rebuilding costs ‘from the ground up’. More detailed versions use local wage and material rates and other construction data.
The more questions a web calculator asks you about your home, the more accurate its estimate is likely to be. A good calculator asks how many bathrooms you have, whether your house is on a slope, its age and about the quality of the internal finishings. You may spend up to 15 minutes completing the questionnaire but you end up being confident that the estimate properly reflects the costs of rebuilding your home.
To get the best out of using web calculators, ASIC makes these suggestions:
Check if the calculators ask for your postcode or merely which state you live in. If it only asks for your state, the calculator is likely to be using average figures for building costs that may not be right for your home.
Test the calculators by using a friend’s new-home details to see whether the figure it suggests is close to what it cost your friend to build. This way you get an idea about which calculators are more accurate.
Use a number of calculators that ask different questions to see what figures they come up with.
This method gives a much better idea of rebuilding costs than using just the one calculator.
Insuring your possessions
After you scrimp and save for the deposit on your new home and shell out for stamp duty, legal fees and building insurance, the last thing you may want to do is voluntarily pay out more to insure your belongings.
Depending on factors such as where you live, premiums on contents insurance can be as much as double the cost of building insurance (refer to the section ‘Insuring the building’ earlier in this chapter). But you need to balance that cost against the very real possibility of being burgled, or of your possessions being damaged or destroyed in a fire or flood or some other accident. After you add up the replacement cost of what you own, it may well be worth paying out a few extra hundred dollars a year in contents insurance to cover the considerable costs of replacing them.
The cost of your premium depends on how much you choose to insure your belongings for. Once again, it may be tempting to underinsure but, if your home is cleaned out in a burglary, you only get back the maximum you insure for. For example, if the amount stolen adds up to $35,000, and the maximum you insure for is $15,000, you’re out of pocket $20,000 if you want to replace everything.
You can pay lower premiums. Here’s how:
Bundle policies: While you can buy building insurance and contents insurance separately, most insurers also offer combined home and contents insurance policies. You may want to shop around to see whether you can get a better deal with a bundled home and contents insurance policy.
Take on a higher excess: The excess is the amount you pay towards the cost of a claim. For instance, accepting an excess of $1,000 on a claim can halve your annual premium.
Tell the insurer
• If you have a security system.
• If the house is usually occupied during the day.
• If you haven’t previously made a claim on an insurance policy.
Calculating the value of your possessions
Take the time to list your possessions in detail. Here’s how:
Get a notebook and do a stocktake of everything you own — room by room. Don’t forget things like blinds, carpets and light fittings.
Make an estimate of the replacement cost of each item.
Use a digital camera to photograph each room, including particular items. This documenting helps as proof if you ever have to claim on your insurance. Keep a copy of the photos on a portable memory drive and lodge it somewhere outside the home for added safety, or upload them to one of the websites that let you store your photos online, such as Flickr (www.flickr.com) or Picasa Web Albums (picasaweb.google.com).
Visit an insurer’s website for a calculator that takes you through every room and offers suggested replacement prices for commonly owned items. (Note: You can also add ‘special items’ that aren’t included in the list.) You can then use the total amount calculated to get a quote for the likely cost of premiums.
Some contents insurance policies don’t include items such as computers, bicycles, mobile phones or computer gaming equipment in their standard cover. You may be able to get cover for these as ‘special items’ for an extra cost.
Part IV
The Part of Tens
Glenn Lumsden
‘Call me a hopeless romantic, but I’ve always dreamt of buying a quaint, rustic cottage in the country, bulldozing it and building six units.’
In this part . . .
Every For Dummies book includes a Part of Tens. This part offers facts that are worth remembering and includes tips and more tips. The ten tips included here are essential for new home buyers. I’ve also provided a checklist of things to look for when inspecting a potential property, broken into the ten main areas you should focus on.
Chapter 14
Ten Things to Remember as a First Home Buyer
In This Chapter
Making sure you’re ready for the biggest financial commitment of your life
Keeping your emotions in check when you buy
Knowing that the mortgage eventually is going to reduce
Buying your first home is a huge leap. And it’s one made more difficult by the fact that property prices are high, no matter where you look. Most first home buyers always have a tough time, though. They usually have to look in areas outside their preferred location or buy a property that’s smaller or more rundown than they prefer. The important thing is to get your foot on the first rung of the property ladder — even if you have to lower your expectations a bit. But, not before you’re ready — financially and psychologically. This chapter offers some tips to help you take heart.
Buy When You’re Ready to Buy
When you’re looking for a property, everyone you know is an expert about when is the best time to buy. They tell you the market is going up fast, so you need to buy now, not in six months’ time; or that the market’s going to crash, so you ought to wait another year to catch the bargains when interest rates go up.
Ignore them! Yes, all of them. The right time to buy a property is when you’re ready to buy.
You know you’re ready to buy when
You find yourself dreaming about renovating your own home.
You find yourself incessantly looking at the property section of the local newspaper or browsing the real estate listings on the internet.
You start putting every last penny into the bank, rather than spending it on new clothes, going out or other treats.
Given the huge financial commitment involved in buying a property, you need to be psychologically ready for that step. Assuming you’re going to hang on to the property for a while and you find a property that suits at a price you can afford, who cares what the wider market is doing?
Think Outside the Square
If you can’t find anything you can afford in the suburb or area of your choice, you may need to think laterally or scale down your expectations just to get your foot on the first rung of the property ladder. Traditionally, first home buyers tend to look beyond their first choice to find a home they can afford.
To find somewhere more affordable, investigate suburbs just beyond those of your first preference. These nearby suburbs may have similar qualities to those you have your heart set on — they’re just a bit further out than you may like. They can also offer other unexpected benefits, such as bigger properties and bigger yards and a neighbourhood more conducive to raising a family in the longer run.
Don’t forget, you’re not alone. The middle suburbs and many country towns are filling up with people just like you who are priced out of suburbs closer to the city and who eventually put their own stamp on the ‘new’ area.
Another alternative to your first choice is to buy a property still within your chosen area but that needs a lot of work — or one that originally may not have been a residence at all. First home buyers are a creative-thinking lot and are able to convert old warehouses, factories or shops into interesting new homes. (Chapter 7 covers all your renovating options.)
Look at Your First Purchase as a Springboard
As property owners, Australians tend not to buy just the one property and stay in it for the rest of their lives. If the first property you buy isn’t the property you can imagine living in forever, think of it as just your first step onto the property ladder. In four or five years, you can sell it on to someone who is in the same position you’re in today. Between when you buy and that time, your equity in the property builds up — from the repayments you make on the loan and hopefully from the increase in the value of the property itself — and you can use that financial gain to buy a property that better suits your needs.
Borrow No More Than You Can Afford
Temptation can come knocking, especially in a hot market when prices are rising quickly. Before you know it, you want to go beyond your budget to buy the home of your dreams. And lenders are only too happy to lend you as much as they think your income can bear, even if you don’t have enough money, after making the
required mortgage repayments each month, to step outside your new front door for the next few years. (Chapter 2 gives you all you need to know about the costs of buying a home.)