Buying Property For Dummies Read online

  When my husband and I decided to buy our home in 1999, we thought we were buying at outrageously high prices that were sure to drop in a year or two, but the market has continued to rise over the years, even if there have been a couple of periods of slower growth along the way. The problem is that you don’t get a bell ringing at the bottom or at the top of the property market and, if you wait for the perfect time to buy, you may end up waiting forever.

  Of course, enormous variations exist in the rate at which the value of property increases, depending on where it is and what it is. Properties in areas of high demand, close to the centres of major cities and other high employment areas tend to increase in value faster than properties in a fringe suburb or a country town a long way from desirable amenities. Scarcity value also affects the rate at which a property’s value increases. Prices go up when more people want to buy properties than properties are available. A shortage of land in a sought-after area — say, near the centre of a city or on waterfront locations — makes that land increasingly valuable over the years. Conversely, some apartments may be less likely to grow in value as fast as houses, partly because it’s easier to build more of them, but also because they have a lower land to value ratio. (See Chapter 3 for an explanation of land to value ratio.)

  Ordinarily, the value of property is rarely completely wiped out, unlike (occasionally) the value of a company’s share price. Even if you do happen to buy at the top of the property market and prices go flat for the next few years, if you can afford to hang on for a few more years, you’re likely to catch the next boom that may push prices up to a more comfortable level.

  Searching for Your Ideal Home

  As soon as you make the decision to buy, get ready to have the job of home hunting take over your whole life for a while. Looking for a home — the perfect home — can become rather obsessive. You can spend your days scouring property pages, your nights pondering whether a particular place fits your bill, and your weekends traipsing down one hallway after another.

  Having a system that culls down the available properties according to your set of criteria can save a lot of time and hassle. (Chapter 5 is full of hints about how to organise your search strategy.) Scaling down your hopes and expectations to fit the reality of what you can afford to buy may be one of the first challenges. But after you learn to look for potential, instead of expecting to find the perfect home, the home-seeking process may actually become more exciting.

  Smartening Up Your Home

  One of the nicest things about owning your own home is that you can make it your own. If you don’t like the colour of the walls, you can paint them however you like — with lime green feature walls or elegant aubergine. You can knock down walls and create your entertaining paradise (subject to council approval). (See Chapter 7 for the rules and regulations and lots of tips on renovating a property.) Or you can build a peaceful garden retreat that no-one can disturb without your permission.

  Some of these changes can add value to your home when you come to sell it, although not always by quite as much as you may like to think. One of the most challenging tasks you have, though, is to find the right people to help you realise your makeover dreams — the designers, builders and various other essential tradespeople who are crucial to making sure this kind of project doesn’t end up as nightmare. (Chapter 9 has plenty of guidance for dealing with the design and construction process involved in building or renovating a home.)

  Chapter 2

  Squeezing Your Foot onto the Property Ladder

  In This Chapter

  Counting the costs of buying a home

  Working out what you can afford each month

  Pulling together the money you need

  Buying a home is a huge financial commitment — the biggest you’re probably going to make in your life. So, home ownership isn’t something you should rush into or be pressured into doing before you’re ready, financially or psychologically. Unless you’re lucky enough to have come into a windfall or a big inheritance, you’re almost certainly going to need to borrow a hefty sum from the bank — which usually means you have to come up with quite a bit of money upfront as a deposit. You also need to have the means to keep up the mortgage repayments for years to come, as well as pay all the other costs associated with owning a property of your own.

  Before you launch yourself into home ownership, do the maths and work out what you can afford to repay on the mortgage each month. Banks can be only too happy to lend you as much money as they think you can afford, ignoring the fact that you occasionally like to go out to the movies or take a holiday now and then.

  While covering your financial commitments may well mean making sacrifices in some other parts of your life, making payments on your home shouldn’t stretch you so thin that you have nothing left to cover other essentials — such as health insurance, good food and exercise and the occasional night out with family and friends. You may, however, have to rein in your taste for fancy shoes and the latest techno gizmos and learn to cook and eat at home instead of eating out most nights.

  Don’t lose sight of the fact that, over time, that huge amount of money you owe on your mortgage is going to shrink. Inflation and rising property prices are the friend of the home owner. If you’re renting, your rent tends to rise over the years with inflation. But as a home owner, as long as your loan amount and interest rate remain the same, your repayments eventually decrease as a proportion of your income.

  In this chapter, I set out all the costs involved in becoming a home owner — from putting down the initial deposit right through to paying the legal fees and the removalist. I explain the kind of regular expenses a home owner may expect to pay, and then discuss your options for raising the necessary finances.

  Note: Interest rates and other costs involved in buying a home — for example, building inspection fees, mortgage fees and so on — may change, even while you’re reading this book. So too may government legislation regarding home purchasing and mortgages change in the various states and territories. Always stay aware of current costs, especially during the purchase process.

  The Costs of Buying a Home

  The median Australian house price changes over time. The median price means the middle price of all the sales that have occurred in a particular period. At the time of writing, the median Australian house price was $533,243, while the median price for a unit was $384,000. However, first home buyers tend to buy at a lower price point. According to a 2010 report by www.ratecity.com.au, the average (not the median) price for a house bought by a first home buyer was just under $300,000. I use $450,000 for calculations in this book, because that’s closer to what first home buyers are paying in capital cities around Australia.

  Based on a $450,000 purchase price and taking a 10 per cent deposit as average, you may need to come up with $45,000 just to be able to get a bank to lend you the rest of the money to cover the whole purchase price of your house. You may be able to get a home loan with a deposit of just 3 per cent, but the bigger the deposit you can save the more likely a lender is to give you the money you need to borrow.

  The deposit isn’t the end of the costs you have to cover out of your own pocket when you buy a property. Each Australian state and territory imposes levies on the actual purchase and on the land transfer, and most impose a stamp duty on the mortgage itself as well (although only on mortgages over a certain amount). You also have the costs of establishing the mortgage and the legal fees associated with the transaction. The following is a full list of your cost factors, which I explain further in this chapter:

  Building inspection fee

  Deposit

  Legal fees

  Mortgage establishment fee (also known as an application fee)

  Mortgage insurance (if you borrow more than 80 per cent of the value of the property)

  Mortgage registration fee

  Registration of transfer of land

  Stamp duty on purchase

  Stamp duty on mortgage<
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  Title search fee

  Valuation fee

  Table 2-1 is an estimate of the costs involved in the purchase of a property for $450,000. The amount of stamp duty levied varies between states and territories, as I explain in the section ‘Government slugs and sweeteners’ later in this chapter.

  Table 2-1 Expenses for a $450,000 Property Purchase

  Expense

  Cost

  Building inspection fee

  $350

  Deposit of 10 per cent

  $45,000

  Land transfer registration fee

  $131 (Tas) to $2,896 (SA)

  Legal fees

  $1,000

  Mortgage establishment fee

  $600

  Mortgage insurance

  $6,700

  Mortgage registration fee

  $90 (Tas) to $135 (WA)

  Mortgage stamp duty

  $0

  Petrol costs

  $200

  Stamp duty

  $0 (NSW, NT, Qld and WA) to $18,970 (Vic)

  Title search

  $15

  Valuation fee

  $250

  TOTAL

  $54,336 min to $76,116 max

  When you hear stories of people who bought an inner-city terrace 20 years ago for $60,000 or so that is now worth ten times as much, worth remembering is the fact that, back then, $60,000 was a lot of money. Down the track, the twin effects of rising wages and rising property prices have steadily eroded that amount, making the original outlay seem outrageously small. The same is likely to happen with the home you buy now — eventually. The short-term sacrifices you make now are going to be worth it in the long run.

  Drumming up the deposit

  Be careful not to go in over your head with your borrowings — you need to make sure you can cover those repayments for the next few years.

  If you can manage to raise a deposit of at least 20 per cent of the value of the property, you benefit from not having to pay the substantial extra cost of mortgage insurance. Mortgage insurance doesn’t protect you; it is insurance you pay to protect the interests of the lender against the risk that you default on the loan. Mortgage insurance can add almost $7,000 to the costs associated with buying a $450,000 home. With a 20 per cent deposit, you also benefit from lower monthly repayments and have a larger equity stake in your home that you can draw on if necessary down the track. For most people, though, coming up with a 10 per cent deposit is enough of a challenge, leaving them with little choice but to cop the cost of the mortgage insurance. (See Chapter 10 for more information on mortgage insurance.)

  Bear in mind that if you buy at auction, you’re expected to pay a deposit (usually around 10 per cent of the purchase price) on the spot. If you make an offer for a property through a private treaty sale, you’re ordinarily expected to pay a holding deposit that can range from $1,000 to 10 per cent of the purchase price. (This holding deposit doesn’t guarantee your purchase — for more information see Chapter 12.) You need to come up with the 10 per cent deposit (or whatever other sum you negotiate with the vendor) at the time you exchange contracts for a property purchased through a private treaty sale. If you don’t have money for the deposit on hand, you may be able to raise the amount through a short-term loan or a gift from family, or through a deposit guarantee (see the sidebar ‘Deposit guarantees’ at the end of this chapter). Depending on how much finance you’re able to raise through your lender, you may be able to pay some or all of the loaned money back when it comes to finalising the transaction on settlement day.

  Begging to borrow

  You might think that lenders would be satisfied with the more than $1 million you’re to pay them back over the next 30 years on the $405,000 you originally borrow to buy your $450,000 property. (That scenario assumes an interest rate of 7.5 per cent over 30 years. As interest rates go up, the total amount you pay back is more, while lower interest rates result in a smaller interest bill.)

  But, guess what? You also have to pay upfront and along the way for the privilege of borrowing that money. Expect to pay your lender the following:

  Mortgage establishment fee: Most lenders charge an upfront mortgage establishment fee of around $600. This fee covers the lender’s costs of processing a loan and mortgage; it can also be referred to as an application fee.

  Service fees: Along the way, depending on your loan, you may also pay ongoing administration or account-keeping fees to cover the lender’s cost of maintaining the loan account. These fees may be levied on a monthly, quarterly or annual basis and can add another few thousand to your costs over the life of your loan.

  Valuation fee: This fee covers the lender’s cost of valuing your property to ensure that it is really worth the price you’re planning to pay for it. This fee is generally around $250, although some lenders may include the valuation fee with the mortgage establishment fee.

  All these costs can sometimes be negotiable, depending on the size of your loan, whether you have other facilities with the lender, and how hard lenders are currently competing with each other for business. (Turn to Chapter 10 for more tips on how to reduce the costs of your loan.)

  Government slugs and sweeteners

  Government charges such as stamp duty are the next biggest sums you have to cough up when you buy a property. If you haven’t factored these costs in at the beginning, they can really blow out your budget. There’s nothing more disheartening than having scrimped and saved for a deposit for the home of your dreams, only to find out that you’re going to be slugged with another several thousand dollars on top of it, depending on which state you live in.

  Every state has its own stamp duty levels, established for various historical quirks. In many states and in the Northern Territory, first home buyers receive concessions on the stamp duty they pay, usually up to a maximum purchase price. At the time of writing, for a property bought for $450,000 you’ll pay no stamp duty in New South Wales, Northern Territory, Queensland and Western Australia. In the ACT you’ll pay $17,750, in South Australia you’ll pay $18,830, in Tasmania it’s $15,550, and Victoria demands the biggest slug of all at $18,970. (Remember, these figures can change so keep an eye on your government’s legislation.)

  As well as these stamp duty concessions, there are other incentives to assist first home buyers to buy their first home. At the time of writing the federal government is offering a $7,000 First Home Owner Grant. States and territories may also offer their own grants and incentives on top of this amount. First home buyers in Victoria, South Australia and Queensland can receive First Home Buyer Bonuses for buying a new home, while in Victoria and Queensland you can get an extra incentive again for buying a new home in a regional area.

  Here is a summary of the stamp duty concessions and other first home incentives offered:

  Australian Capital Territory: First home buyers who earn up to $116,650 may be entitled to a partial stamp duty concession on homes of up to $375,000.

  New South Wales: No stamp duty on homes priced up to $500,000 and concessions on duty on homes valued between $500,000 and $600,000. (NSW also has First Home Plus One, which allows first home buyers who buy at least 50 per cent of a property, with a non-first home buyer buying the rest, to still qualify for some concessions.)

  Northern Territory: A concession of up to $26,730 off the duty payable on the first $540,000 of the property’s value and phasing out on houses costing less than $750,000 and land costing less than $385,000.

  Queensland: A stamp duty concession of up to $8,750 for properties valued at up to $500,000 and phasing out on purchases above $550,000.

  South Australia: The stamp duty concession for first home buyers has been replaced by the First Home Bonus Grant of up to $8,000 for new properties of less than $450,000.

  Tasmania: A stamp duty concession of a maximum of $4,000 for homes priced up to $350,000, or of $2,400 for vacant land up to $175,000.

  Victoria: For first home buyer’s with at least one dependent chil
d, a full exemption of stamp duty on homes up to $150,000 and a concession rate of duty on homes of up to $200,000. Victoria also offers a First Home Bonus of $13,000 for new homes values at up to $600,000 (up to June 2011), plus an additional $6,500 if you buy a new or established home in a regional municipality in Victoria.