Buying Property An explainer
Thinking about buying a house can be a terrifying prospect. Not only is there the reality of having to give up smashed avocado on toast, but it’s a financial commitment that will likely stretch on for many years. On top of all this, it’s often just straight up confusing. Thinking about entering the property market is like staring out into the void, where all you can hear are whispers of words like “conveyancer” and “first home owner’s grant”. Here’s a step-by-step guide to help shine some light on what otherwise looks like a long and winding road.
Part I: Preparation
This is the bit where you figure out the kind of property you want, the area you’d like to live in, your budget options, and who you’d like to get involved.
Get clear on how much money you’ll need
The first thing to get clear is your budget – this will help determine the kind of properties you can put offers on. Most people aren’t going to be able to buy a property outright, which means that the first step to buying a home is getting a loan approved.
“Before approaching a lender for financing, it’s important to have a good idea of how much you think you’d like to borrow and how much you can actually afford to repay each month,” Chris Screen, Westpac Group Head of Home Ownership, explains.
For the actual deposit, Screen says, “Some first home buyers forget that to apply for a home loan, you need around 10 percent of the purchase price saved. If you have less than 20 percent of the purchase price, there’s a good chance you’ll need to pay Lenders Mortgage Insurance, a one-off cost which is added to your home loan and protects the lender if you’re unable to meet your repayments. And this insurance could cost several thousand dollars.”
The amount you can borrow depends on a number of things “including your income, employment history, existing financial commitments, living expenses, credit rating and the size of your deposit,” explains Screen. But you also need to remember to “factor in post-purchase expenses such as government stamp duty, building and pest inspections, legal costs, registration fees and Lenders Mortgage Insurance, as these can eat into your savings and impact the size of your deposit.”
In other words, you’ll usually need more savings than you think you will.
Look into the First Home Owners’ Grant
While it’s tempting to just go to the bank and leave your research there, outside of lending it is a good idea to look into what other financial options or grants might be available. “There is still a First Home Owners’ Grant that assists buyers with a reduction in Stamp Duty on the purchase of a property,” says Syd Sherrin, Sales Manager at Real Estate Agency, W.B. Simpson & Son. (Stamp Duty is a tax your state government imposes on the selling or buying of land and property).
These grants are state-specific and have conditions, so do your research. “You might like to contact the Australian Tax Office and view the current status of the First Home Owners’ Grant, the prerequisites, and what action the buyer is required [to take] to apply for this grant,” says Sherrin.
Your financial options are also impacted depending on whether you’re looking to buy a home to live in, or an investment property. Screen explains that loans differ depending “whether you’re applying for an owner-occupier loan (which is a loan for a home you plan to live in), or an investor loan (which is a loan for a home you plan to rent to tenants). Investor loans are typically the more costly of the two.”
Even though investor loans are likely to be more costly from a lending perspective, Screen also points out that investors potentially have access to a range of tax benefits allowing them to claim on deductions such as repairs, council rates, insurance and maintenance.
Screen outlines some of the things you need to consider ahead of applying for a loan as an investor. “How you approach an investor loan is different to how you’d approach an owner-occupier loan. You need to be clear on your property investment strategy. Are you going for high rental returns for the short term or long term capital growth? You’ll also need to think about what features you need in a loan to suit your strategy. These decisions can feel a bit overwhelming, so if you’re thinking about investing in property for the first time, it’s important to seek professional advice.”
Set your expectations and get pre-approval
Once you’ve met with a lender, it’s a good idea to then seek a home loan ‘approval in principle’ from them, Screen explains. “Approval in Principle or Pre-approval is when a lender assesses your financial situation and tells you an approved amount you could borrow. It’s an important step to consider and will show vendors that you’re serious about making an offer.”
Having a figure to work off also allows you to have a realistic image of which properties you should be researching and putting offers on. Maybe you want the library from Beauty and the Beast with the gazebo from The Sound of Music and the gardens from Downton Abbey – sure thing, but perhaps you can’t have all this in the middle of the city.
Having a budget lets you see what ideas to keep and what ones to finesse. At this point, you may choose to involve a buyer’s agent (a licensed professional that will search, evaluate and negotiate the purchase of a property on your behalf) but this isn’t essential – agents take a fee and if you already know your own budget and do your own research, you can buy a property without one.
Part II: Scouting
This is when you start heading out to inspections (and where you’ll most likely have your heart broken over and over again).
Homebuyers notice how they start to see the same people popping up at all the same inspections as them and about the strange, friendly, but also demoralising competitiveness this inspires. It makes sense; people with the same budget will be looking in the same places. They’re your competition.
By the time you get to this stage, you’ve probably already settled on property size and location, so this is where things start to get really nitpicky. Recent homebuyer Robert Crisci explains some of the things you should be looking out for:
- Cracks on the walls;
- Signs of mould on the walls or ceiling, particularly in wet areas;
- That the taps and toilets are functional and that they don’t leak;
- Structural integrity: as a buyer it’s an investment to get a builder’s report completed (caveat emptor – as the buyer it’s your responsibility, and yours alone to make sure that you know what you’re paying for. If six months in you find that the house is sinking to one side, it’s going to be your problem, not the seller’s. Do your research!)
- The title of the property (eg. If it’s part of a group, is it strata or community title?);
- The age and condition of heating and cooling units;
- The age and condition of the hot water service;
Much like a pet, a property is not for Christmas. It’s forever (or, at least for quite a while) and it is the responsibility of the buyer to make sure they’re happy with what they’re getting.
“Buyers should be concerned about the building structure” says Sherrin. “It is a good idea to get professional advice from a builder or architect, and also [carry] out a pest inspection.”
In addition, you need to think about lifestyle stuff – not just for now, but into the future. Is there good natural light? Is it going to heat up like a tinderbox in summer? Is there public transport nearby, and if so, is it any good? Are you a light sleeper moving in near a loud venue? Is it in a school district you’d be happy with? These sorts of things – even if they don’t impact you right now – might in the future, and because property is usually a longer-term investment, it’s good to think ahead.
Part III: Going all in
You’ve done all the preparation, your budget is set; now it’s time to start making offers.
Now it’s time to get that loan approved
After weeks, maybe even months of traipsing all over the city, after having your heart broken and your hopes raised and then dashed, finally you’ve found The One. (You think). Once you’ve found the place you’d like to make an offer on, it’s time to sure up your home loan. Screen notes: “It’s important to remember that ‘approval in principle’ is only the first stage of the loan approval process and is not yet an agreement.” Having done all the research, you should then present your lender with the property you intend to buy. “This is when your lender will do an assessment based on your property of choice and your current financial situation.”
Screen also highlights the importance of thinking through what kind of home loan you’d like to commit yourself to. “Ask yourself which features of a loan will be most important to you. For example, do you want to make lower repayments at the start of your loan or would you prefer to pay it off as quickly as possible? Do you want the flexibility to switch home loan products in the future? Do you want to be able to access the equity in your home? Lots to think about!
There are also upfront and ongoing costs associated with a home loan, including redraw* and early termination fees and charges, loan service, loan establishment and account keeping fees.”
*Redraw is when you’ve been so on top of loan repayments that you overpay your mortgage in a set financial period and are entitled to request some of that money back. It’s good because paying back more than the minimum can bring down the amount of interest you are being charged, but if you claim back some of the money you paid over the minimum, the downside is that it will make the interest charges go up.
Actually making an offer
There are a couple ways you can buy a property including the most common private sale or auction.
For a private sale, you make an offer and the seller can either accept or reject it. For an auction, it’s important to go in with a maximum amount you are willing to bid to; it’s common for buyers to be swept up in the excitement and competition of a bidding war, so having a figure you will not go beyond will ensure you don’t over-commit yourself financially.
You can also research bidding strategies ahead of time, but much like training your poker face, practising these techniques could be highly variable.
Part IV: Once you’ve gotten the green light
They’ve accepted your offer and you’ve finally bested your competition. What next?
Sign the contract in a million places
Here is where everything gets very, very paperwork-y. Get out your magnifying glass. It’s not a case of ticking “accept all” without reading the fine print.
The contract lists all the conditions of the sale. Sherrin explains that A Vendor’s Statement must be attached to a Contract of Sale: “Under Section 32 of the Sale of Land Act, this statement must detail all the Title details, the services connected to the property, the outgoings, the Planning Certificate, and any other relevant information that the buyer requires to know about the property.”
The Section 32, despite its terrifying name, is actually a pretty straightforward thing and is designed to protect the buyer. It is prepared ahead of the contract being signed, and provides information that the potential buyer needs to know about the property. It’s pretty extensive, and in addition to the nitty gritty legal minutiae, it includes stuff like an inspection report, including defects, information about any financial commitments connected with the land the property is built on, planning and zoning information, history of building permits (stretching back seven years), and any government or council notices or orders regarding changes or aspects relevant to the property (so if the buyer is aware that they are going to change roads nearby, or mess with sewerage, this all goes into the report.)
The point of it is to protect and forewarn potential buyers – not providing an honest Section 32 with the contract can lead to hefty punishments. Read it in detail and think if any of the information will impact on you wanting to buy that property.
Cooling off period
This is pretty much what it says on the packet. Things happen – maybe you got caught up in the excitement or frustration of property hunting and made an offer on a property while deliberately overlooking some rather large flaws. “Sure, I can use an outdoor toilet for the rest of my life” you said to yourself as you settled into the exhaustion of your 12th house inspection for the day. “So what if the whole house is on a 45 degree angle?” you shrugged. There are also bigger reasons – maybe your financial situation changed, or a report comes back from a builder that doesn’t cast the property in a good light. This is the time when the dust settles and you can think about things with a cool head.
If you’ve bought through private sale, once the contract is signed, the cooling off period begins. The cooling off period is the time after signing a contract for the sale of a property in which a purchaser may cancel their obligation to purchase the property. This period of time varies from state to state so ask your solicitor or conveyancer for details.
It’s important to note that there is no cooling off period for auctions; you’re committed from the get go. Very important information.
This is when the property officially becomes yours. The dates are worked out at the time you sign the contract but on average is about six weeks after signing. To make sure this all happens, you’ll need a conveyancer, or a solicitor acting as a conveyancer. What’s that? A conveyancer’s role is to ensure the mortgage documents and funds are in place. Crisci explains: “The conveyancer also ensures that all relevant documents are completed and signed-off as required to assist the transaction… and also typically attends the Lands Titles Office to ensure the property settles.”
It’s best to do your research and find a conveyancer yourself – both the seller and the buyer will each have their own. There are people whose sole job is conveyancing, or you can have a lawyer act as a conveyancer. When it comes to signing the contract and entering settlement, you’ll be asked to provide your conveyancer’s details, so it is best to have researched, contacted and selected one ahead of time so you’re all ready to go.
Buying a house is a lot like running a marathon. Most of the hard work is in the preparation. It is equal parts gruelling and exciting; there will be disappointments and periods of elated hope. In the end though, once all the “i”s are dotted and the “t”s are crossed, you can smash through that finish line tape and finally pick up the keys and walk into your new property.
Your weekends will no longer be spent shuffling from inspection to inspection, and your laptop tan from evening research into conveyancer options will start to fade. Hire the moving van, get excited about being able to paint the walls any colour you choose, and head out for a celebratory breakfast – just so long as it isn’t smashed avocado on toast, of course.
You can learn more about the steps involved in applying for a home loan on the Westpac website or by talking to one of the lending experts at your local Westpac branch.
Elizabeth is the editor of Voiceworks, and has been published in Junkee, Film Ink, Metro, The Punch, and Lip Magazine. She tweets terrible puns @ElizabethFlux.