Smart Investor: Getting Started, June 2012

Smart Investor, June 2012: Getting Started

Buying a house

It’s the Aussie dream: owning your own home. Most of us will do this at some point in our lives, but it’s easy to forget just how daunting it is to get started in property ownership. It’s perhaps the most significant investment you’ll ever make, and not one you want to get wrong.

Where to start? Find the dream home, right? Well, not really. One has to start out with a dose of pragmatism and work out what you can actually afford. In order to work that out, you need to know how much you can borrow, and that takes you into the intimidating world of mortgages.

Publications like Smart Investor’s Blue Ribbon Awards edition highlight some of the leading mortgages in the industry, including those tailored for first-time buyers; or you can use a mortgage broker to shop around for you and give you some suggestions. Usually these brokers get their money from the banks rather than you – but do check this – so there’s nothing to be lost in getting their advice.

Any mortgage provider will want to know this about you: how much you earn; how much your partner earns, if you have a partner who is going to be a party to the mortgage; how long you’ve been earning it; and what else you owe – such as car loans and credit card debt. They want to be certain you’re going to be able to make repayments on your mortgage even if interest rates go up, and you want to be certain of that too. When you do your sums, assume that rates WILL rise at some point in the future, and leave a little bit of wiggle room. The conclusions a mortgage provider makes will determine what they will lend you, and it will normally be calculated as a multiple of your salary.

Remember, too, that above a certain value, you will pay stamp duty and you must factor this into your calculations. Stamp duty varies from state to state and there are many calculators available online.

Once you have a clear idea of what you can borrow, and have sat down and worked out how comfortable you are with the repayments that would be involved, it’s time to go and find the home. Realestate.com.au and domain.com.au are the most popular national real estate sites. Very few of us end up living indefinitely in the first place we buy; we start small, save more, trade up, perhaps buy a family home, and later in life may even downsize again. So in that first purchase, it’s important to get something that suits your immediate needs, but also has some prospect of capital growth and is not going to be too difficult to sell. Working this out, of course, is far from straightforward, but some basic common sense is worthwhile: for example, if a property is going at a bargain price because of subsidence, that might look like good value, but good luck in selling it again.

When you have a property in mind, look again at the mortgages you considered. Most providers have a maximum percentage of the home value they are prepared to lend – it’s rare to get more than 80% these days – which means finding a deposit for the rest. This is the single hardest part of getting started, and nearly everyone has a clear memory of scratching together the money to climb this very first rung of the property ladder, committing everything they have. A big moment, for sure.

Getting started is becoming progressively harder for young Australians, so many states have first home owner grants to help you out. The position varies from state to state but real estate agents will point you in the right direction – after all, it’s in their interests that you find the money to go ahead.

If the finances still stack up (and by now you will also have made some decisions on the type of mortgage you want – fixed or variable rate, offset account, and so on, which we’ll cover in another edition) you’re ready to make an offer. On a property with a set price, very few people offer the asking price; indeed, few sellers expect to get it, instead putting it on the market at a price with some latitude to manouvre. There then follows a merry dance with an estate agent (who, remember, gets their money from the seller and is ultimately in their corner) as you try to work out if there really are other interested parties and whether you should increase your offer.

If the property is sold by auction, that’s a whole other kind of stress. Be aware there is an irksome practice of agents giving an auction guide well below what they expect to get in order to attract a scrum of hungry buyers. Have a set figure in your mind, and don’t go beyond it, no matter what. If you miss out on this one, there will be others.

With your offer accepted, it’s time to get things rolling. Tell your mortgage provider you’re going ahead and begin assembling the mountain of ID and paperwork they will require. Appoint a lawyer; a lender will suggest one, or if you have a trusted lawyer already, go with them. The lawyer will then also advise on anything else that needs to be done – record checks, conveyancing – and will usually coordinate that for you. Next step is to pay the deposit, which will be a pre-agreed percentage of the total price; then there’s a set period of time before completion, within which time all your finances must be arranged. That period of time is up for negotiation, but it’s best to be guided by your lender and lawyer as to how much time they need. All the various cheques usually go through the lawyer, who will present a clear itemized account of where it all went at the end of the process.

Completion is an extraordinary day. You sign something. Your lawyer gives you the keys. And you realize you have a home. You have got started in property ownership, and it is a day you will never forget.