Buying Property For Dummies Page 5
Western Australia: No stamp duty on homes up to $500,000 or vacant land up to $300,000, and a partial exemption on homes up to $600,000 or vacant land up to $400,000.
Stamp duty concessions, rebates and grants for first home buyers change regularly depending on government priorities, so you’re best to check with each state’s and territory’s revenue office for up-to-date information.
Stamp duty on the mortgage
No states or territories currently levy a stamp duty on mortgages at the $450,000 price level.
Paying off the lawyers
Buying a property is a major legal transaction, and lawyers cost money. You pay for the lawyer’s time in handling the transfer of your property from the seller to you, and you also pay for what’s known as disbursements — the cost of other services undertaken during the transfer process. Disbursements cover such things as title search fees, the land transfer registration fee levied by the state government to cover the transfer of the title of your new property, checks on any outstanding matters with council and utilities, right down to the cost of your lawyer’s phone calls, stamps and faxes. (You can find more detailed information about the legal processes involved in buying a property in Chapter 13.)
This whole process is known as conveyancing, and it culminates in settlement, which is the final handover of the property in exchange for your money. The cost of conveyancing varies enormously. A number of non-legal practitioners have stepped into this field in recent years, offering fixed-fee conveyancing services. A local specialist conveyancer may well have as good a knowledge as a solicitor of the kinds of issues you’re likely to face with your specific property. Some people, however, believe that a property purchase is too large and too important a transaction to leave to anyone other than a qualified solicitor.
Counting every last bit and bob
If you want to properly budget your property purchase, you should factor in other costs, such as the cost of searching for your dream home. Additional costs may include
Body corporate or owners’ corporation fees: If you buy a unit or an apartment that is part of a property that has more than one owner, you need to make allowances for the additional costs involved with maintaining and insuring the property. These costs may include annual body corporate or owners’ corporation fees that cover general administration, maintenance, insurance and other ongoing costs, as well as contributions to a maintenance fund.
Home building insurance: Most lenders require you to take out home building insurance for your own property in case of fire or other structural damage. (After all, until you’ve paid it off, your property actually belongs to the lender, so the lender has an interest in protecting ‘its’ asset.) You might be able to get away with the bare minimum but, given the money you’ve just invested in your home, making sure you’re covered at least for the replacement value of your home is in your best interests.
If you buy an apartment, the building insurance that is included in your body corporate or owners’ corporation fees only covers the exterior and common areas of your apartment building, not the internal walls or any fixtures or fittings of your individual apartment. As such, you still need separate home insurance to cover you for any damage to your flat or apartment caused by an internal fire or flooding.
Building inspection: As soon as you find a property you’re keen on, you should arrange to have a building inspection done before you finalise your purchase. A building inspection can range from an overview that tells you about significant building defects or problems, such as rising damp, movement in the walls (cracking), safety hazards or a faulty roof, to more detailed and expensive inspections that include an estimate of the cost of fixing major problems, a list of minor problems and a recommendation of the repairs and maintenance work needed. If the property is located in an area where termites are known to be a problem, you should also consider getting a pest inspection done.
Contents insurance: You should also consider contents insurance to cover you for loss of your valuables and other possessions by fire, flood or theft. (You can find more information on insurance in Chapter 13.)
Removal costs: You have to move home, a task that, depending on how much furniture you need to relocate and how picky you are on the process, could range from $100 for the hire of a truck and one strong man to several thousand dollars for the kid-glove treatment. Add to this amount the costs of making basic repairs and buying new furniture and you have a more accurate picture of how much you’re going to be up for in order to move into your new home.
Travel expenses: You’re likely to go through quite a bit of fuel if you’re looking for a property or attending auctions almost every weekend for three months or so. Then your lunch and refreshments, which, unless you pack your own, could add $50 or so to your search costs every weekend.
Calculating Your Monthly Outgoings
After putting together a realistic picture of what your initial outgoings are going to be when you purchase the property, you need to look at how much you can afford on a monthly basis. In this section, I cover the sort of costs a home owner has to pay on a regular monthly basis, and also discuss costs you may incur in the future that you haven’t yet considered.
Many home-lending websites have calculators that give you an insight into exactly how much you’re going to be up for when you purchase a home, depending on its purchase price, how much you want to borrow and which part of Australia you live in. But be cautious of the amounts they suggest you can borrow. Some assume that you can spend half your household income on mortgage repayments.
Money for curtains
When I was 13, we moved to a new housing estate. All around us new houses were being built. Many of them were bigger and fancier than our own, but one thing struck me. So many of these grand new houses had sheets screening the windows instead of curtains. I wondered, ‘If they could afford to buy such a big new house, why can’t they afford nice new window coverings?’ Just years later, I realised that it was possible for mortgage repayments to take up almost your entire disposable income — leaving you with little money for curtains, plants or furniture, let alone entertainment or holidays.
Traditionally, lenders preferred borrowers’ mortgage repayments not to exceed a quarter of their pre-tax income. In the past ten years or so, lenders have become a lot more generous — or greedy, depending on how you look at it! The idea now is that repayments should take up no more than 30 per cent of your income. If repayments go beyond this percentage, home buyers are said to suffer from mortgage stress (that is, the cost of repayments makes it difficult for them to cover the cost of other essentials). Even so, recent research from the Australian Bureau of Statistics indicates that on average Australians are paying 34 per cent of their income, more than $1,900, in mortgage repayments (which means many are paying a lot more).
Your ongoing costs don’t end with the mortgage repayments. The costs of owning and maintaining a property can come as quite a shock to those who have been renting or living at home with family. In Table 2-2, I set out the costs a home owner repaying a $405,000 loan at an interest rate of 7 per cent may expect to pay each month.
Table 2-2 Checklist of Monthly Home-Owning Costs
Expense
Cost
Mortgage repayments on $405,000 principal and interest loan (at 7% interest over 30 years)
$2,694
Maintenance, house-painting, gutters, etc.
$250
Insurance
$150
Rates/Body Corporate fees
$150
TOTAL
$3,244
Home maintenance costs
When you’re renting, if the plumbing suddenly dies on Christmas Eve, the problem is the landlord’s. The landlord is also the one responsible for ensuring the outside of the property gets a paint job every five years, for paying rates, insurance and so on. When the property is yours, all those costs fall on you, and if you’re putting every last cent into just covering the mortgage rep
ayments, those extra costs may well be the last straw.
Setting up a separate savings account with $2,000 or $3,000 to cover ongoing maintenance and repair costs is a good idea — and keep it topped up as you go along. If you have the money readily available, if something disastrous happens — like the hot-water system packing in just before the rellies come to stay — you don’t have to scramble around for funds, or eat into your holiday savings. The money in your savings account could also cover the cost of attending to one big maintenance job each year — say replacing gutters, repairing the roof, painting the exterior of the property — that may well save you thousands on the flow-on problems that can result if you ignore such maintenance jobs, such as water damage from broken tiles on your roof.
Rates, fees and insurance
Other ongoing costs you need to budget for include council rates and insurance. If you buy a unit or an apartment, you’ll also need to factor in body corporate or owners’ corporation fees.
Council rates can add another thousand dollars or more to your annual outgoings, depending on the city or region in which you live and the value of your home. Most councils now allow you to pay rates on a quarterly or even monthly basis, and you need to account for that in your budget.
If you own an apartment, flat or strata-title unit, you also need to allow for regular body corporate or owners’ corporation fees, which go towards the general administration and upkeep of the common areas. These are usually annual fees, but you can also pay them quarterly.
As the owner of an apartment or unit, you may also be asked to contribute to a special levy to cover one-off large-scale repairs or refurbishments to your building. Before purchasing your property, find out if any such payments are required in the near future.
While you may be required to take out home insurance as part of your mortgage establishment, you also need to take account of this as an ongoing cost. You should also add contents insurance to your coverage, and many insurers give a discount for bundling home and contents insurance. You may also get further discounts if you also insure your car with the same provider. You can make these payments on a monthly basis, but don’t neglect to review your coverage each year to ensure you are properly covered — especially as you start collecting more expensive belongings around your home.
Regular living costs
To get a sense of how much you can really afford to pay on a mortgage, you should set out all your regular expenses, including your food bill, your telephone, internet and electricity costs, clothing, health insurance and car running costs. Don’t forget entertainment, holidays and gifts — while recognising that you might need to cut back on these expenses in the first couple of years of your mortgage. After you clearly establish your spending each month, you have a better idea of how much you can really afford to repay each month.
Plans for the future
Don’t forget to plan for the future. What happens if you want to go back to study or travel for an extended period? What if you decide to have children and lose part of your household income for some time? What if, as is always likely, interest rates rise by a percentage point or so? A rise from 7 per cent to 8 per cent doesn’t seem that big, but if you’ve borrowed $405,000, it can add almost $300 or so a month to your repayments. Building a buffer of 10 per cent or so into your monthly budget is a good idea and allows for those kinds of contingencies.
A bit scary isn’t it? You can understand why people often don’t have enough money left to buy curtains in their first year or so of home ownership.
Looking at Funding Strategies
How are you going to pull together that $55,000 to $75,000 you need upfront to buy a $450,000 home? If you’re saving up from scratch, you need to put away around $2,500 a month for two years to save that amount of money. Doing that isn’t a bad discipline, given you’re going to be paying that much on your mortgage after you’ve bought your property. But it may be a challenge if you’re paying rent or have other financial commitments, such as a car loan.
So what are your options? You can try to increase your income by asking for a pay rise or taking on a second job. You can reduce your expenses by forgoing unnecessary spending on entertainment and luxuries. Or, as long as both you and your parents are happy about this option, you could choose to stay at home rather than move into a rented property while you save up your deposit. Alternatively, you may decide to lower your sights and look for a less expensive property. In this section, I discuss various ways of funding your property-buying venture.
Where’s the best place to save for your deposit? The high-interest-bearing online savings accounts that have proliferated in recent years are hard to beat. These accounts offer interest rates as high as, and sometimes higher than, term deposits, and let you access the money within a day or two of requesting a drawdown rather than having to wait for a maturity date to be reached, as would be the case with a term deposit. You can also easily set up this type of savings account to automatically deduct a fixed amount from your primary bank account whenever you’re paid.
First Home Savers Accounts
First Home Savers Accounts were set up by the federal government in 2008 to help first home buyers save for their first home. The big benefit of the accounts is that, at the time of writing, the government contributes an extra 17 per cent to the first $5,500 you save in the account in any year. The other benefit is that any interest you earn on your savings is taxed at just 15 per cent instead of at your marginal tax rate, as would happen if you saved the same amount in a regular savings account or other investment.
To be eligible for these benefits you need to be aged between 18 and 65, be a genuine first home buyer (not an investor) and contribute at least $1,000 per year for four financial years before withdrawing the balance. Anyone can contribute to the account on your behalf, but the maximum account balance is currently $80,000. (This maximum account balance and the contribution threshold are indexed to the CPI, and are adjusted periodically in increments of $5,000 and $500 respectively.)
Most of the major banks offer First Home Savers Accounts, including the ANZ, the Commonwealth Bank and ME Bank, as well as several credit unions and building societies. Interest rates offered on these accounts vary from around 3 per cent to 6 per cent.
Using a First Home Savers Account can mean you end up with more funds for your deposit. For example, if you save $400 per month for five years in a First Home Savers Account, you end up with nearly $32,000, around $5,000 more than the $26,700 you end up with if you put the money into a regular account instead.
More information about First Home Savers Accounts is available at www.homesaver.treasury.gov.au and www.firsthomesaver.com.au
Staying with the parents
Children are staying at home much longer than ever before, often well into their twenties, and sometimes longer. Part of the reason is the huge expense involved when children move out on their own — saving up a deposit on a property while you’re paying market rent is very difficult. And if you and your parents get on well enough, staying in your parents’ home is probably the best way you can quickly save to buy your own property.
The important thing is to ensure the arrangement works for all parties concerned. If you’re going to live at home, a couple of rules can make life easier for everyone. Remember to
Carry your weight around the home. Help with the cooking and cleaning and the numerous everyday chores of daily living. Just think of it as good practice for when you’re living on your own in your own home.
Pay rent. Another guideline is that if you have a job and you’re living at home beyond the age of 21, you really should pay your parents some kind of rent or board. What you pay may be well below market rates, but the gesture is important: It shows respect for the fact that you’re living at home beyond a reasonable age, covers the considerable costs of feeding and housing you, and is a good practical discipline.
Some parents arrange to have their child’s board, or part of it, put into an account
as a form of forced savings for the deposit on that child’s future property purchase. If your parents are considering doing this for you, you may want to be able to use these funds as proof of savings when you come to apply for a home loan down the track. If so, ask your parents to put the account into your name rather than theirs, and perhaps into a First Home Savers Account (see preceding section). See Chapter 10 for details of the kind of things lenders look for when they receive an application for a loan.