john ruddicks first home buyer guide - 2016
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131-STEP GUIDE TO BUYING YOUR FIRST PROPERTY IN NSW l
Your 31 step guide to buyingyour first property in NSW
2016 Edition
FIRSTHOME BUYER
MANUAL
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231-STEP GUIDE TO BUYING YOUR FIRST PROPERTY IN NSW l
John Ruddicks 31-step guide to buying your first property in NSW.
PREFACEIf you need to borrow money to buy a residential property in New
South Wales, I want to be your mortgage broker.
To apply for a home or investment loan you can either contact a
lender directly or speak to a mortgage broker. In recent years, more
than half of all Australian mortgages have been taken out with the
help of a mortgage broker. The advantage of a broker is we are
mortgage specialists who can introduce you to products from manylenders, including all the major banks.
The rising dominance of mortgage brokers can also be attributed
to the increasing complexity of the mortgage process. Government
and lender policies change frequently, and it takes a dedicated
professional to stay informed.
These 31 steps are a rough sequence of events for first-time
property buyers in NSW. But every individual and every mortgage
application is unique. Since 2001 my passion has been to help
borrowers properly structure their mortgage debt and, just as
importantly, understand the strategy behind the structure.
I hope this guide inspires you to begin mapping out a plan to buyyour first property. A good first step on that journey is to contact my
office and arrange an obligation-free appointment to discuss your
circumstances. Even if you think you may not buy for a year or more,
its worth having a general discussion now.
STEP 1 Contact me 5
STEP 2 Income 5
STEP 3 Ongoing expenses 5
STEP 4 Your deposit 7
STEP 5 What is Lenders MortgageInsurance (LMI)? 7
STEP 6 Should I use a guarantor? 8
STEP 7 Can I buy with someone
who is not my partner? 8
STEP 8 What is Stamp Duty? 9
STEP 9 What other costs do I pay? 9
STEP 10 Loan types 10
STEP 11 What are redraw and offset? 11
STEP 12 Repayment types 12
STEP 13 What if my home might one
day become an investment? 12
STEP 14 Loan submission 12
STEP 15 Credit report 13
STEP 16 Pre-approved! 13
STEP 17 Government benefits for
first home buyers 13
STEP 18 Property hunting 14
STEP 19 Using a buyers agent 14
STEP 20 Price negotiation 14
STEP 21 A conditional exchange
of contracts 15
STEP 22 Unconditional exchange
of contracts with a 66W 16
STEP 23 Buying at auction 16
STEP 24 Beware the auction/valuation
black spot. 17
STEP 25 Unconditional Approval 17
STEP 26 Paying your deposit 18
STEP 27 Loan offer 18
STEP 28 Insurances 18
STEP 29 Settlement 19
STEP 30 Post-settlement 19
STEP 31 Congratulations 19
CONTENTS
2016 Edition
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3 l 31-STEP GUIDE TO BUYING YOUR FIRST PROPERTY IN NSW
Ninety percent of allmillionaires become sothrough owning real estate.
Andrew Carnegie
Disclaimer
The information in this manual is accurate as at May 2016. Lenders and
governments however frequently change policies, and every mortgage
application is unique. The information provided here is a guide only and
decisions about your mortgage should be taken only after your personal
financial circumstances have been carefully discussed with a professional.
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4 l 31-STEP GUIDE TO BUYING YOUR FIRST PROPERTY IN NSW
Having worked closely with several hundred first property buyers, I know that following theseguidelines will put you in a stronger position when applying for your first mortgage.
Drive a modest car. Often the first thing people do when they start earning a full-time
income is borrow money to buy a car. Car loans usually come with high repayments,
which significantly reduce how much you can borrow for a property. A less expensive car
often means a better first property.
Holidays should be funded by savings, not credit cards. Travellers tend to be more
prudent if they are spending their hard-earned savings. A large credit card debt will
weigh down a savings plan for your first property, and reduce your borrowing capacity.
Open a dedicated savings account that is separate from your everyday bank account.
A good online savings account will offer a better rate of return than conventional bank
accounts, and usually with no fees. Its better not to have ATM access to your savings
account so you can resist impulse spending. Name the account something like Deposit
for My First Property to encourage a mindset of saving and frugality.
A debit card is preferable to a credit card because youre spending your own money,
rather than spending the banks and incurring high interest. If a credit cardisnecessary,
the key thing in a mortgage application is the limit, not the balance. A high credit card limit
reduces borrowing capacity, even if the card is barely used.
Theres no better savings plan than living at home until you buy a property. If thats an
option, save at least the rent you would otherwise be paying.
While its tempting to rent somewhere expensive, youll have less savings for a deposit.
The more modest your rental accommodation, the more options youll have for yourfirst property.
Old-fashioned tips
Every person who investsin well-selected real estatein a growing section of aprosperous community adoptsthe surest and safest method ofbecoming independent, for realestate is the basis of wealth.
Theodore Roosevelt
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531-STEP GUIDE TO BUYING YOUR FIRST PROPERTY IN NSW l
STEP 1 STEP 3
The first step on the journey of buying your first property
is to contact me. You are welcome to phone during
the day, the evening or the weekend. We can make an
appointment for you to come to my North Sydney office
or we can talk over the phone. Unless youve already
found a property and have a tight deadline, our first
meeting will be a general discussion so we can consider
your options and map out a plan.
My phone number is 02 9955 1176 or0412 129512
My email [email protected] office address is Level 6/122 Arthur Street,
North Sydney, 2060
A borrower may well have a high income. But if they
also have high ongoing expenses, their loan size will be
significantly reduced. Ongoing expenses include:
Car loans
Personal loans
HECS or HELP debt
Credit cards (remember, its the limit that counts)
Dependent children
General living expenses
Contact me
STEP 2
The most important factor in any mortgage application is
income. Youll need to demonstrate your ability to repay
both the debt and the interest it incurs. Your income will
have a significant impact on the size of your loan and
therefore the purchase price of your property.
A key part of the mortgage application will be providing
documentation that confirms your income. It varies from
lender to lender, but for employees this can be as simple
as two recent pay slips. The rules around including
bonuses, commissions, foreign incomes, contractual
incomes, probationary periods, etc. vary from lenderto lender.
Self-employed borrowers are usually required to provide
the last two years of personal tax returns plus company
tax returns and financials. One or two lenders will consider
a self-employed application based on only the most recent
tax returns.
If youre buying an investment property, lenders will factor
in a future rental income. They may also factor in the tax
deductibility of the interest you pay (theyll need to factor
in any rent or board youll continue to pay). As a result,
borrowers can generally borrow more if theyre buying aninvestment property, although the interest rate is typically
a little higher.
Income Ongoing expenses
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When you submit a mortgage application, the lender will
calculate your income and then deduct your expenses to
establish how much money you can put towards a mortgage
each month. Theyll assume a significantly higher interest rate
than todays interest rates so they can be confident youll still
be able to afford the repayments if interest rates rise. Here are
examples of three typical first home buyer calculations.
Note: These case studies are approximate guides,
accurate at the time of publication. They do not
consider the requirements for a deposit.
Please do not rely on these calculations.
CASE STUDIES
Owning a home is akeystone of wealth...
both financial affluenceand emotional security.
Suze Orman
Daisy wants to buy her first home.
She is buying the property by
herself.
She is employed full-time and earns
$80,000 p.a.
Her only debt is a credit card with
a $10,000 limit.
She will live in the property and
make principal and interest
repayments.
Daisy may be considered for a
30-year loan in the vicinity of
$440,000.
Case studyone
Donald wants to buy his firstproperty as an investment.
He has been self-employed for
five years and owns 100% of his
company.
His personable taxable income is
$100,000 p.a., and his company has
a taxable income of $50,000 p.a.
He will continue to live with his
parents rent-free, and wants to buy
an investment property by himself.
He has a car loan that costs $500
per month, and a $20,000 credit
card limit.
For the first five years of the loan
he wants to make interest-only
repayments.
While the rental return on the
property will be quite important,
Donald may be considered for
a 30-year loan in the vicinity of
$1,100,000.
Case studytwo
Jack and Jill want to buy theirlong-term family home.
Jack is employed full-time and
earns $125,000.
Jill is employed part-time and earns
$80,000.
They have a personal loan with
monthly repayments of $450, but
no credit cards.
They have two dependent children.
They want to buy a home and
make principal and interest
repayments.
Jack and Jill may be considered
for a 30-year loan in the vicinity of
$1,250,000.
Case studythree
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731-STEP GUIDE TO BUYING YOUR FIRST PROPERTY IN NSW l
STEP 4 STEP 5
You may have a good income and low expenses. But if you dont
have a sufficient deposit, you cant be pre-approved for a loan tobuy your first property. The only exception is if you have a guarantor
(see Step 6.)
Here are the key facts regarding your deposit:
A deposit is usually cash in a bank account in your name.Lenders will also consider other liquid assets as a deposit, such
as publicly listed shares.
The deposit can be anything other than the result of borrowing
money from outside your family, such as savings accumulatedover time, the sale of an asset, or a windfall gain.
A family member can agree to give you money as a gift. While
they may not need to put the money into your account to get
the loan approved, they will need to put it in writing that theyveagreed to give you a certain amount of money to help with the
purchase.
If the family member insists on the contribution being classified
as a loan, the family member will need to confirm that no
repayments are necessary, and that the loan will only need to berepaid when the property is sold.
Almost every lender will insist on a first property buyer havinggenuine savings if they have less than a 15% deposit. If thefirst property is an owner-occupier, the genuine savings will
need to be 5% of the purchase price of the property. And foran investment property it can be higher. To verify these genuine
savings, the lender will want to see the last three months of
statements from your bank account where you have yourdeposit. Theyll want to see a demonstrated ability to save
money, or at the very least that the balance has not reduced.
As a general rule, if you have less than a 20% deposit you will
need to pay Lenders Mortgage Insurance.
Your deposit What is Lenders Mortgage Insurance (LMI)?Lenders Mortgage Insurance (LMI) is a one-off feepayable on the settlement of the loan. LMI is paid
by the borrower to insure the lender against losing
money on the loan.
If you have a 20% deposit (or a guarantor seeStep 6) you dont need to pay LMI, which is good.
Not only do you avoid the fee, but your variable
interest rate is also likely to be lower. Lenders willoccasionally have a promotion where borrowers
with a 15% deposit can be considered for a LMI
waiver, but this offer is rare. Some lenders in 2016may give certain professionalslawyers, doctors,
accountants, etc.an exemption from paying LMIwith just a 10% deposit.
LMI is expensive. But its usually added to the loan
amount so you dont need to save up to pay it. Still,its always better to use any savings you have to
make the deposit larger rather than pay for the LMI
yourself because the larger the deposit, the lowerthe cost of the LMI.
The cost of LMI can vary from lender to lender.
Some charge a little more for investment loans
than the figures to the right which are based onan owner-occupied loan in NSW.
PURCHASE LOAN AMOUNT COST
PRICE OF LMI
$600,000 $516,000 (i.e. 14% deposit) $7,500
$600,000 $552,000 (i.e. 8% deposit) $22,000
$900,000 $774,000 (i.e. 14% deposit) $11,000
$900,000 $828,000 (i.e. 8% deposit) $33,500
$1,200,000 $1,032,000 (i.e. 14% deposit) $17,000.
$1,200,000 $1,104,000 (i.e. 8% deposit) $53,000
As you can see, the two most significant factors are:
The dollar amount of the loan the larger the loan, the
larger the LMI cost.
The size of your deposit when compared to the value of
your property the larger the deposit, the lower the LMI.
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STEP 6 STEP 7
Some mortgage applications involve a family guarantee, and are
often associated with a first property purchase. A guarantor servestwo helpful purposes:
They negate the need to pay LMI.
They can overcome the requirement for genuine savings.
In the past, guarantors could use their income to help a borrowerget a larger loan. This option is no longer available unless the
guarantor and borrower are married, or have been in a de facto
relationship for more than two years.
A guarantor is a family member who typically has significant equityin a property, which means they either have no mortgage or thebalance is low compared to the value of the property.
The family member is agreeing to secure your mortgage (at leastpartly) by a property they own. Its a significant commitment from the
family member, especially if the property securing your mortgage isthe family home. If you get into financial difficulty and fall behind in
your mortgage repayments, a guarantor can be forced to sell their
property to repay your debt. The guarantor needs to know that whilethe chances of something going wrong (i.e. a forced sale of their
property) is low, the consequences are high. Several lenders only askthe guarantor to guarantee a small portion of the overall debt, so if
something does go wrong they are only liable for that portion.
But the risk for the lender is significantly less if the loan is secured
by two properties and so theres no need to pay LMI, which can
save the borrower thousands. And the mortgage over the familymembers property can be removed as soon as the mortgage
balance is less than 80% of the value of your property.
At the time of publication, only one major lender will consider a
guarantee from someone outside the family, such as a friend or
godparent.
Yes, you can buy a property and borrow money with a friend
or family member. However, there are two potential difficultieswith this structure.
Lets say Mickey and Pluto buy an investment propertytogether for $800,000 and borrow $600,000 which they
divide into two loans of $300,000. Mickey and Pluto may
have a handshake agreement that Mickey is only responsiblefor one of the $300,000 loans and that Pluto will take
responsibility for the other $300,000 but in the lendersopinion, they each individually owe $600,000.
This means that if Mickey applies for another mortgage in thefuture (for example, to buy a home with his wife Minnie), the
lender will need to assume Mickey is fully responsible for the
entire $600,000 debt he shares with Pluto. Thats becauseMickey and Pluto are (in the eyes of both the lender and the
law) both responsible for the entire debt. If Pluto ran away
to Mongolia and was never heard from again, Mickey wouldhave to repay both $300,000 loans by himself.
The other difficulty in buying with a non-spouse is decidingif, when and how to sell. When Mickey gets married, Minnie
may insist on him selling his share in the property he ownswith Pluto so they have a deposit for their own home.
But Pluto may not want to sell, believing the house will
jump in value over the next two years. Theres no room forcompromise, so someone wins and the other one loses.
Of course, Pluto could buy Mickeys share in the property.But that could lead to a dispute when determining fair
market value, since one party knows the other has to sell.
Generally speaking, family members are better at resolving
these tensions than friends.
Note: One lender has recently introduced a new policy
Property Share that is designed for friends to buy either
homes or investment properties together. In this example,the lender would treat Mickey as the borrower of one loan
and guarantor of the other loan (which would be in the nameof Pluto) and vice-versa. This means they can keep their
finances separate Pluto may want to pay interest-only on a
fixed rate whereas Mickey might want to make frequent lumpsum deposits and so would want a variable loan. Its strongly
recommended to ask a legal person to draft an owners
agreement that clearly spells out issues such as:
How to pay for renovations.
What happens if one party can no longer afford their
repayments?
When and how to sell.
This Property Share option means each borrower is only
responsible for their own debt. If they want to borrow moremoney in the future, the lender doesnt need to assume they
are also responsible for the other debt. It also makes it easier
for one party to sell their share of the property to a third party.
Sometimes a parent (or parents) will sell their home, pool
their resources with their adult child (and usually their
partner) and buy a bigger property where they live together.This can be convenient for retired parents who would own
a percentage of the property title but not be a borroweron the loan. The parent isnt expected to contribute to any
mortgage repayments, but would be acting as a guarantorof the loan, which means they are consenting to the property
they partly own being sold if the borrower seriously defaults
on the mortgage.
Should I use a guarantor? Can I buy with someone who is not my partner?
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STEP 8 STEP 9
Stamp duty is a one-off state government tax that must be paid
before or at settlement if youre borrowing money for the purchase.If youre paying cash and dont need a mortgage, you can delay
the stamp duty for a short period after settlement.
Unlike some states, the cost of the stamp duty in NSW is the same
whether the property is owner-occupied or an investment. Beforeyou submit your loan, you will need to demonstrate you have
money available to pay for the stamp duty, although a guarantor
can negate that requirement. Stamp duty becomes more expensiveas the property becomes more expensive, and the percentages
used in calculations also increase.
The following stamp duty is payable for these purchase prices:
$300,000 $8,990 (i.e. 2.99% of the value of the property)
$500,000 $17,990 (i.e. 3.59% of the value of the property)
$1,000,000 $40,490 (i.e. 4.04% of the value of the property)
$2,000,000 $95,490 (i.e. 4.77% of the value of the property).
As well as your deposit and stamp duty, you should also factor in
around $1,800 for your legal work and around $400 for either a stratareport or, for a house, a building/pest inspection.
While some lenders will charge an application fee of around $600,most charge a settlement fee of around $300. The state government
will charge around $450 in registration fees, and you should factorin up to $1,000 (or more depending on price) in adjustments
reimbursements for any local council rates or strata fees the seller has
already paid in advance. As a general rule, you should assume costsof around $4,000.
What is Stamp Duty? What other costs do I pay?
Real estate investing, even on avery small scale, remains a tried
and true means of building anindividuals cash flow and wealth.
Robert Kiyosaki
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STEP 10
Loan typesThere are countless mortgage products in Australia. But nearly all
of them will fall under one of these categories:
STANDARD VARIABLE:This is easily the most popular loan
type in NSW. The interest rate is variable, and so generally movesup and down when the Reserve Bank adjusts its official interest
rate. However, a lender will occasionally change its variable ratefor other reasons. A standard variable rate loan has an offset
account attached to it (see Step 11). Often it is best to pay
an annual fee of around $400 with a standard variable. Thatfee brings the loan under a package that includes discounted
interest rates, a free credit card, free offset, discounts on
insurances, etc.
BASIC VARIABLE:This is the same as a standard variable rate
loan except it doesnt have an offset account. However, it doeshave redraw (see Step 11). Basic variable loans usually have no
ongoing fees, and are generally more popular if the loan amountis under $300,000 or so.
Warning: Many lenders have a track record of heavily promotinga new basic variable with a very low rate, and then increase the
rate above the market average.
FIXED RATE:A fixed rate means the interest will not change for
a number of years. Most loans are for a 30-year term, but you
can arrange to fix your interest rate for one to five years. Somelenders will even let you fix for up to 10 years. While its not
always the case, the longer you fix, the higher the rate. A fixed-rate loan generally doesnt have an offset account or redraw, and
is very limited in its ability to accept lump sum deposits without
penalty. They usually have a steep break cost if you decide topay out the loan before the end of the fixed period. If the variable
rate rises above your fixed rate you have probably saved money.
But if the variable rate drops below your fixed rate youll be losingmoney. Some people (often new parents or people approaching
retirement) want to fix their interest rate because they are
attracted to the certainty.
SPLIT LOAN:A common structure where you have some of
your debt at a variable rate and some of your debt at a fixed rate.
LINES OF CREDIT:A line of credit is effectively a big credit card
secured by your property. Theres a set limit that doesnt reduce,and you only have to pay the interest due each month. You are
welcome to pay lump sums, and you can pay even pay the debtin full and keep the facility. The interest rate is always variable,
and usually about 0.20% higher than a standard variable rate.
You can have your salary or any other income paid into the Lineof Credit, and you can treat it as a bank account where you
can withdraw and deposit money via BPAY or ATM. A Line of
Credit combines your debt, savings and everyday banking inthe one account. Lines of Credit can be used to buy a home or
an investment property, but I rarely recommend one to buy aproperty. The interest rate is higher, and as the debt is paid the
borrower has instant access to the paid off balance to spend
however they want (e.g. a trip to Hawaii). And for tax reasons,an offset is far more preferable for investors. Lines of Credit
are suitable for people who have paid off (or largely paid off) amortgage and therefore have a lot of equity, and want instantaccess to their funds to invest.
CONSTRUCTION LOANS:These are variable loans used to
finance the construction of a property. The borrower is approved
for a certain amount of money, and the builder is paid from thosefunds as various stages in the construction are completed. The
borrower only pays interest on the debt paid to the builder, and
the repayments are interest-only. With most lenders, the loan willautomatically become a standard variable loan with principal and
interest repayments when the property is complete. At that pointit is worth considering a restructure.
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Interest rates in Australia
from 1996 to April 2016
Courtesy of the Reserve Bank of Australia
STEP 11
Most people with a home loan today will have either an offset accountor a redraw facility, and in many cases both.
An offset account is like a normal everyday bank account except in onepositive respect.
Lets imagine you have a mortgage with ABC Bank of $1,000,000, and$50,000 sitting in your offset account. In that case, you would only be
charged interest on $950,000 on this particular day because the bankpretends the money in the offset is sitting in the mortgage when they
calculate the daily interest charge.
A good savings account these days returns around 3%, and you have
to pay tax on the interest you earn. Money in an offset account doesnt
earn any interest, but does prevent interest of over 4% being chargedto your mortgage. And theres no tax to pay for that saving.
Redraw is similar to offset in that it reduces the interest payable.Redraw is simply depositing surplus cash directly into the mortgage
account itself. Most lenders will let you deposit spare money into themortgage and redraw it at no cost. While the money is sitting in the
mortgage, it is reducing the debt you owe and therefore the interest
youre charged. In most cases, redraw is not suitable for an investmentloan or for an owner-occupied loan that may one day become an
investment loan (see Step 13).
What is redraw and offset?
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STEP 13 STEP 14
This tip is critical for those with home loans, and even more
so for people looking to buy their first home. It is the mostoverlooked factor with owner-occupied loans, and costs
countless people (usually those with an excellent debt
reduction record) a lot of money.
If theres a possibility your owner-occupied mortgage will
become an investment property one day, you should considerpaying interest-only repayments from the moment you buy
your home. It does seem counter-intuitivepeople whoare good with managing their money want to see their debt
reducebut you can effectively pay the debt off via an
offset account.
When the property becomes an investment property:
You will have much more cash available to use as a
deposit on your next owner-occupied property and so
that future home loan will be lower.
The investment loan you now have will give you greatertax benefits.
All debt is bad. But owner-occupied debt isnt tax deductible,which makes it worse than investment debt.
If youre in this position, but have a track record of not being agreat saver and not clearing your credit card debt each month,
you should probably avoid this strategy. It will result in a lot ofcash in your offset, which may be too tempting to spend.
If youre considering paying interest-only repayments onyour owner-occupied property because it might become an
investment property, you should first talk to your accountant.
Once you have sufficient income and deposit, and havechosen a mortgage structure and lender, we can prepare
and submit your loan application.
Its usually a good idea to be pre-approved for a little
bit more money than you think youll need. It can befrustrating to find the ideal property and having to waste a
few days asking your lender to increase the loan amount
so you can make an offer. As a general rule, its not a goodidea to borrow the very most your lender is prepared to
lend you. But if youre young and confident your income
will increase with time, borrowing towards your upper limitcan be a reasonable strategy.
Once youve provided the necessary documentation, Iwill prepare your application. You will need to check it
carefully and make any necessary changes, as its criticalto get every detail accurate. When youre happy with
the application form and youve signed it, Ill submit the
application to the lender. I always include a Loan Summarywith your application. It spells out the details of our
application, and will be one of the first things read by thedecision-maker within the lender. The Loan Summary will
highlight your strengths, and address any weaknesses.
After submitting the loan we usually hear back in three to
four days. But it can be anywhere from a day to a month,
depending on the volume of applications being receivedby the lender. Sometimes the lender with the most
attractive offer at the time and take the longest to assess
your application, which can be frustrating (but well worththe wait).
STEP 12
Most lenders will let you make repayments weekly,fortnightly, or monthly. I find its usually best to match
your repayments to your pay cycle, and arrange for themortgage repayment to be direct debited a couple of days
after your pay arrives in your account.
At some lenders you will end up paying about a month
extra in repayments over the course of a year if you make
weekly or fortnightly repayments. This increases the cost ofthe repayments, but youll reduce your debt more rapidly.
Most people with a mortgage over their home will elect
to pay principal and interest repayments, which meansevery time you make a repayment youre not only paying
the interest but also reducing the debt. Some people(often investors and people considering converting their
owner-occupied property into an investment property) electto only make interest-only repayments from the outset.
Assuming a 30-year term and an interest rate of 4.20%,
principal and interest repayments are about 40% higherthan interest only repayments.
Repayment Types What if my home mightone day become aninvestment?
Loan Submission
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STEP 15
The first thing a lender will do when they receive yourapplication is conduct a credit report. This will tell them
such things as:
Your previous employers
Your previous addresses
If you are a director of any companies, and whether
any of those companies have been reported for beinglate with either debt repayments or bills
Whether you have been reported in the past five to
seven years for being in default on a finance contract ora bill (e.g. from a phone company)
Whether you have been bankrupt in recent years
Whether you have applied for a mortgage or otherfinance in the past five to seven years.
Most borrowers have a clear credit report. But if youreconcerned there may be a negative entry, its important
to get the report before submitting your loan. If you needa copy of your report please let me know. If there is a
negative entry, its best to address that up front in the
submission to the lender. It may be necessary to delaythe application and try to rectify the blemish.
Credit Report
STEP 16
The credit team within a lender makes the decision asto whether to pre-approve a loan. Sometimes the credit
officer assigned to your application will request additionaldocuments. Once they are satisfied with your application,
they will issue a pre-approval, also known as a conditional
approval. Each lenders process is a little different, but adocument is usually emailed to me, which I then forward
to you.
Most pre-approvals are valid for three months, although
some lenders issue six-month pre-approvals. The
standard pre-approval will say the borrower is approvedfor a certain amount of money subject to the lender
conducting a valuation of the property and inspectingthe contract for sale.
Unfortunately, some lenders issue flimsy, computer-generated pre-approvals that are worthless. Its important
to get what I call a fully verified pre-approval, where the
lender has carefully reviewed the documents associatedwith the submission.
Even though a lender has officially said you are pre-approved, if you change jobs or take on other debt the
lender has the right to revoke the pre-approval or reducethe loan amount.
If your application is unsuccessful, it probably means yourproperty purchase has only been delayed. At that point,
we will map out a strategy to overcome any impediment.
Pre-approved!
STEP 17
These benefits are only available to people buying their first
owner-occupied property in NSW. Even then the benefits arerestricted to first home buyers buying a property thats being
constructed typically an off-the-plan purchase or a house and
land package.
To be eligible, you or your partner must be either apermanent resident or an Australian or New Zealand citizen.
If the purchase price is less than $750,000 the government
will give you a $10,000 tax-free grant at settlement.
If the purchase price is less than $550,000 you wont pay
stamp duty, saving you $20,240.
If the purchase price is more than $650,000 you will paynormal stamp duty.
If the purchase price is between $550,000 and $650,000
the stamp duty you pay will be reduced. A stamp duty
discount or exemption is also available on vacant landpurchases at reduced amounts.
To be eligible for these benefits you need to live in the
property for at least six months within the first 12 months,
and agree to refund the benefits if you dont fulfil thoseterms.
If you own an investment property (or have owned an
investment property) purchased after 30 June 2000you may still be eligible for the first home owners grant.
However, you will not receive the stamp duty exemption/
discount.
Government benefitsfor first home buyers
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14 l 31-STEP GUIDE TO BUYING YOUR FIRST PROPERTY IN NSW
STEP 19 STEP 20
When you engage with a real estate agent whos selling aproperty, that agent is working for the seller of the property.
A buyers agent is a real estate professional you pay to acton your behalf in the buying process. You explain what
you want in a property, and the buyers agent scours the
market for a property that fits your description. Often abuyers agent will know of properties about to come on
to the market that the public hasnt been informed about.
They also conduct the negotiations on your behalf to buythe property.
Relatively few purchasers are prepared to pay the buyersagent, but they are increasing in popularity. I cant recall a
purchaser engaging a buyers agent who didnt report theydid a good job. The chances of buying a lemon through a
reputable buyers agent is low.
When youve found a property you want to buy, youneed to negotiate a price via the real estate agent.
Because the real estate agent is being paid to get the
highest possible price for the property, some buyersdont bother building a positive rapport with them.
This is an error. The real estate agent is in a position ofpower, and having a cordial relationship with them can
only help.
Every sale has its own dynamics, and most buyers will
negotiate by phone or in person. I find it can help to put
your offer in writing via email. Unlike other contracts tobuy or sell, emails regarding the purchase of real estate
in NSW are not binding.
Clients phone me around the time of making an offer.
Sometimes I can think of something that can help gettheir offer accepted, but mostly Im just a sounding
board to talk things through at this critical juncture.
STEP 18
Armed with a pre-approval, you can now inspectproperties knowing you can make an offer. Of course, it
can only help if youve already been looking at properties.The more properties you see, the sharper your eye
becomes at spotting good value and knowing whats
suitable for you. A common error people who have justgained pre-approval make is to buy the first property they
see. It may well be the perfect property for you, but please
force yourself to look at a few others just to be sure.
Excellent resources are the real estate websites
www.realestate.com.au and www.domain.com.au.Saturday is the busy day of the week for real estate, so
mapping out a timetable of inspections on Friday eveningcan help you make the most of the day. Inspections are
also available during the week.
If you find the ideal property before gaining pre-approval
you may still be able to buy it. But it does mean well be in
a rush, and rival buyers will probably have a head starton you.
Property Hunting Using a Buyers Agent Price Negotiation
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1531-STEP GUIDE TO BUYING YOUR FIRST PROPERTY IN NSW l
STEP 21
Under NSW law, a property is sold with a five-day cooling-offperiod unless its waived under what is known in the industry
as a 66W (see Step 22).
If youve had an offer accepted, the first option (which
grants you a five day cooling-off period) is to pay a 0.25%deposit (e.g. $2,500 on a $1,000,000 purchase) and sign
the contract for sale which is given to the vendor or their
legal representative. At the same time the vendor signs thecontract with your name and the agreed price, and you or your
legal advisor takes possession of that signed version of the
contract.Once the signed contracts have been exchanged, the vendor
cannot sell the property to anyone else for the next five dayseven if theyre offered a higher price. You have the right to pay
the remainder of the deposit within the next five days, at whichpoint you have bought the property unconditionally.
But before you pay the remainder of the deposit you needto conduct some checks. And if any of the results are
unfavourable (or you simply change your mind) you can call off
your purchase and forfeit only your 0.25% deposit, which iskept by the vendor.
While under a cooling off period there are four things to do.
1. FINALISE LOAN STRUCTURE
You may have been pre-approved for up to $750,000, butyou only need $625,000. The pre-approval may have been
for a variable loan, but now you want to fix half of it. Whenyou know the exact purchase price we can discuss and
finalise these key points and then inform the lender.
2. VALUATION
A valuation is a report prepared by a certified valuer acting
on instructions from your lender. Most lenders will pay thecost of the valuation. Often the valuer will need to walk
through the property for five minutes before preparinga report of around eight pages. Valuers are informedwhether a price has been agreed, and commonly report
that the value is the same as the purchase price.
The valuation will also report on other factor, such asflood or bushfire risk. Sometimes a lender will reject a
property for something unrelated to the price, particularly
if you have less than a 20% deposit. If the valuer says theproperty is worth less than the agreed purchase price, it
usually delays or even derails the loan approval. But whileit can be frustrating, the valuer may be doing you a favour.
3. CONTRACT REVIEW
When a vendor decides to sell a property, their legal
advisor needs to prepare a Contract for Sale, which
is usually around 80 pages long. When your offer isaccepted, you need to ask the real estate agent to
forward that contract to you so you can forward it toyour legal advisor.
Your legal advisor can either be a solicitor or a
conveyancer. A conveyancer is someone who is qualifiedin one specific part of the law property sale. Your legal
advisor will read through the contract and let you know ofany concerns. For example, the sale price of a property
may seem like a bargain until they inform you the local
council has plans to build a sewerage plant next doorwithin five years. Most of the time your legal advisor will
read the contract and report no significant concerns. But
if there are issues, its important to consider them carefully.While it may look like a great property, you dont want
to buy a property with a cloud over it (legal or otherwise)unless you can see a solution and buy the property at an
appropriately discounted price.
4: INSPECTIONS
Before fully committing to buying a property, you should
pay for an inspection. For a house you should get abuilding and pest inspection, which will identify any
structural issues or pest damage. For a unit you shouldget a strata report, which is an independently assessed
review of the strata building including its finances and
structural issues. Its important to pay for these reportsyourself, because if youre simply given these reports and
theres a problem down the track that wasnt identified,
you wont have any legal standing to sue whoeverprepared the report.
A Conditional Exchange of Contracts
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16 l 31-STEP GUIDE TO BUYING YOUR FIRST PROPERTY IN NSW
STEP 22 STEP 23
Unconditional Exchangeof Contracts with a 66W Buying at Auction
If the real estate agent advises you that the vendor doesnt
want to exchange with a cooling-off period, youll need to signa 66W certificate acknowledging that youre waiving your right
to a cooling-off period. Some vendors prefer this it simplifies
the process, and makes buyers act as quickly as possible. Ifyoure going to buy a property with an unconditional exchange,
you need to complete the valuation, contract review, inspections
and confirm the final loan structure is approvedbeforeyouexchange.
Auctions are increasingly popular in NSW. If youwin an auction, youve unconditionally exchanged
contracts on the purchase of a property and waived
your right to a cooling-off period. As a result, youllneed to have your loan pre-approved (subject only to
valuation), the contract reviewed, and the inspectionscompleted before the auction (see Step 21).
Home purchases thatare very highly leveragedor unaffordable subjectthe borrower and lenderto a great deal of risk.
Moreover, even in astrong economy,unforeseen life eventsand risks in local realestate markets make
highly leveragedborrowers vulnerable.
Ben Bernanke
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1731-STEP GUIDE TO BUYING YOUR FIRST PROPERTY IN NSW l
STEP 24
Beware the Auction/Valuation black spot.The property buying process has checks and double-checks at every step to ensure people avoid making a
catastrophic slip-up. If someone legally commits to buyinga property but cant get a loan to pay the vendor, it can
easily result in bankruptcy.
However, theres a black spot in property buying and
mortgage lending in NSW. It relates to buying at auction
(or with a 66W) and the post-sale valuation.
Imagine Daffy is pre-approved for a loan of $950,000,
which assumes a purchase price of $1,000,000. That
means Daffy is borrowing 95% of the value of the property.And lets say Daffys pre-approval is subject only to the
valuation of the property. If Daffy finds a property he wantsto buy for $1,000,000 going to auction he could instruct
the lender to conduct a pre-auction valuation. But likemost people, he probably wont because valuers are
usually a fraction conservative when assessing the value
of a property without an agreed sale price. If the lenderspre-auction valuation says the property is worth $970,000
but Daffy buys it at auction for $1,000,000, the lender willonly lend 95% of either the purchase price or the valuation
(whichever is lower).
In this case, Daffy can only borrow 95% of $970,000. If he
cant come up with an extra $30,000 or so hell default on
the settlement and likely lose:
10% of the agreed price
the vendors legal costs
the difference between $1,000,000 and a subsequentlower sale price.
Daffys lender might re-evaluate the property after theauction and revise the valuation to the purchase price. But
theres no guarantee they will, and valuers can be reluctantto amend a recent valuation. Another option at this point
would be to ask a second lender to value the property.
Since this would now be after the auction its likely (but nota certainty) the valuer would agree with the auction price.
However, the second lender may not approve your loan
for 95% of the purchase price because their policy is toonly lend up to 90% of the value.
If Daffy didnt have the property valued before auction, thelender will probably need to conduct a valuation post-
auction. Au auction is effectively a valuation of a property,and so post-auction the valuer will almost always agree
with the purchase price. But I have known two occasions
when the valuer didntone where the borrowersappealed the valuation and it was successfully increased,
and the other where another lender valued the property atthe purchase price and the borrowers switched lenders.
The bottom line is that if youre pre-approved to borrowaround 90% or more of the value of a property, the risks of
buying at auction (or without a five-day cooling-off period)
need to be carefully discussed in advance. It may be that
you simply cant buy a property at auction.
STEP 25
Unconditional ApprovalOnce a lender has approved your final loan structure, yourproperty and its purchase price (and if necessary obtained LMI
approval), the lender will issue the Unconditional Approval. Thismeans the lender has agreed to lend you the money required
and has no further checks to make. Once we get to this
point, the pressure is off. The lender will email me a documentconfirming the loan is 100% approved, which I will then
forward to you (and often your legal representative) via email.
You will then instruct your legal representative to complete theexchange by paying the full deposit (less any amount youve
already paid).
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18 l 31-STEP GUIDE TO BUYING YOUR FIRST PROPERTY IN NSW
STEP 26 STEP 27 STEP 28
Paying your deposit Loan Offer InsurancesUnder NSW property law, the exchange of contractsrequires a 10% deposit. However, the vendor can agree to
a lower amount, with 5% being quite common. Sometimesthe vendor will ask for the deposit funds to be released to
them before settlement. You should ask your legal advisor
whether this is advisable.
If you dont have a cash deposit available (maybe you have
a guarantor, or a gift of money is yet to arrive), I can helpyou get a deposit bond from one of several providers. A
deposit bond comes with a fee, but its easy to obtain once
you have an unconditional loan approval. A deposit bond isa promise from a major insurance company to the vendor
that if you cannot settle on the purchase then the insurerwill pay the 10% deposit in cash. The insurer will then seek
to recoup that payment from you.
Once your loan is unconditionally approved your lenderwill post a formal loan offer to you. This consists of several
important legal documents that you should read carefully,
sign and return. If you are unclear about anything in thesedocuments, you should discuss it with your legal advisor.
I often go through the loan offer with borrowers in personas well.
Once the loan offer documents are signed, they are postedback to the lender who will take a few days to process
them. Once thats complete, your lenders legal department
will contact your legal advisor to co-ordinate the settlementwhich is typically six weeks after the exchange.
Once youve exchanged contracts, you have a legalinterest in the property. But what if the property is
destroyed by a natural disaster between the exchange
and the settlement? And what if the vendor doesnthave building insurance? This opens up a myriad of legal
questions, so its worth contacting an insurance companyand getting the property insured. This isnt necessary for a
strata unit strata insurance covers the entire building, and
is paid by the strata levies. Some lenders will make havingan insurance policy in place a condition of settlement.
Taking on a mortgage is a significant responsibility, andits well worth considering personal insurances such as
income protection, life insurance and total and permanent
disability insurance. If you already have these policies inplace, now is a good time to review them in light of your
increased debt. This is especially important if you havedependent children. People understand the need to insure
their car, home, contents and property, but find it harder
to appreciate the need to insure their greatest asset theirability to earn future income.
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1931-STEP GUIDE TO BUYING YOUR FIRST PROPERTY IN NSW l
STEP 29 STEP 30
Settlement Post-settlementSettlement is the big day when you get the keys to yournew property. A few days before, your legal representative
will have advised if there is any outstanding payment fromyou to make for the deposit or fees and how to forward
those funds so they are available at the settlement.
On the day of settlement you have the legal right to
conduct a final inspection. This is a final check to make
sure the property hasnt been altered or physicallydamaged. For example, the vendor may have stripped it of
inbuilt appliances that the contract for sale said would be
sold with the property.The settlement is a physical meeting thats usuallyover in less than a minute. You do not attend. Instead,
representatives of your legal advisor, your lender, the
vendor and potentially others will get together to exchangedocuments and cheques. At the end of that process you
are the legal owner of the property, and entitled to the keys
and occupation. Its also the day your mortgage starts.
If you set up internet banking, you can see your accountnumbers and account transactions.
A day or two after settlement its worthwhile speaking withyour lender to:
Ensure your direct debt is in place to make your
repayments.
Check when your first and subsequent repayments aredue.
Record if necessary, your new residential and postal
address with your lender. Double-check that your offset account is plugged into
your loan (if you have an offset).
If you have a new bank account, remember to inform
your employers payroll department. If you have directdebts coming out of an old account (such as for a gym
membership), its important to put aside some time to
phone regular recipients and advise them of your newbank account details.
STEP 31
Congratulations!Buying your first property does change your life in a fewways. You now have quite a responsibility in ensuring the
repayments are made but this can result in the borrowerbeing more focused on their career. Having your own home
from which a landlord cannot evict you at short notice also
brings greater peace of mind and hopefully with time willalso become a worthwile financial investment.
Copyright 2016 by John Ruddick Home Loans. All rights reserved. This book or any portion thereof may not be reproduced or used in any manner whatsoever without the express written permission of the publisher.
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$300,000 $500,000 $700,000 $900,000 $1,200,000 $1,600,000 $1,800,000 $2,000,000
3.30% $1,314 $2,190 $3,066 $3,942 $5,255 $7,007 $7,883 $8,759
3.40% $1,330 $2,217 $3,104 $3,991 $5,322 $7,096 $7,983 $8,870
3.50% $1,347 $2,245 $3,143 $4,041 $5,389 $7,185 $8,083 $8,981
3.60% $1,364 $2,273 $3,183 $4,092 $5,456 $7,274 $8,184 $9,093
3.70% $1,381 $2,301 $3,222 $4,143 $5,523 $7,365 $8,285 $9,206
3.80% $1,398 $2,330 $3,262 $4,194 $5,591 $7,455 $8,387 $9,319
3.90% $1,415 $2,358 $3,302 $4,245 $5,660 $7,547 $8,490 $9,433
4.00% $1,432 $2,387 $3,342 $4,297 $5,729 $7,639 $8,593 $9,548
4.10% $1,450 $2,416 $3,382 $4,349 $5,798 $7,731 $8,698 $9,664
4.20% $1,467 $2,445 $3,423 $4,401 $5,868 $7,824 $8,802 $9,780
4.30% $1,485 $2,474 $3,464 $4,454 $5,938 $7,918 $8,908 $9,897
4.40% $1,502 $2,504 $3,505 $4,507 $6,009 $8,012 $9,014 $10,015
4.50% $1,520 $2,533 $3,547 $4,560 $6,080 $8,107 $9,120 $10,134
4.60% $1,538 $2,563 $3,589 $4,614 $6,152 $8,202 $9,228 $10,253
4.70% $1,556 $2,593 $3,630 $4,668 $6,224 $8,298 $9,335 $10,373
4.80% $1,574 $2,623 $3,673 $4,722 $6,296 $8,395 $9,444 $10,493
4.90% $1,592 $2,654 $3,715 $4,777 $6,369 $8,492 $9,553 $10,615
5.00% $1,610 $2,684 $3,758 $4,831 $6,442 $8,589 $9,663 $10,736
5.10% $1,629 $2,715 $3,801 $4,887 $6,515 $8,687 $9,773 $10,859
5.20% $1,647 $2,746 $3,844 $4,942 $6,589 $8,786 $9,884 $10,983
5.30% $1,666 $2,777 $3,887 $4,998 $6,664 $8,885 $9,995 $11,106
5.40% $1,685 $2,808 $3,931 $5,054 $6,738 $8,984 $10,108 $11,231
5.50% $1,703 $2,839 $3,975 $5,110 $6,813 $9,085 $10,220 $11,356
5.60% $1,722 $2,870 $4,019 $5,167 $6,889 $9,185 $10,333 $11,482
5.70% $1,741 $2,902 $4,063 $5,224 $6,965 $9,286 $10,447 $11,608
5.80% $1,760 $2,934 $4,107 $5,281 $7,041 $9,388 $10,562 $11,735
PRINCIPAL AND INTEREST MONTHLY REPAYMENTS BASED ON A 30-YEAR TERM
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$300,000 $500,000 $700,000 $900,000 $1,200,000 $1,600,000 $1,800,000 $2,000,000
3.30% $825 $1,375 $1,925 $2,475 $3,300 $4,400 $4,950 $5,500
3.40% $850 $1,417 $1,983 $2,550 $3,400 $4,533 $5,100 $5,667
3.50% $875 $1,458 $2,041 $2,625 $3,500 $4,667 $5,250 $5,833
3.60% $900 $1,500 $2,100 $2,700 $3,600 $4,800 $5,400 $6,000
3.70% $925 $1,541 $2,158 $2,775 $3,700 $4,933 $5,550 $6,167
3.80% $950 $1,583 $2,217 $2,850 $3,800 $5,067 $5,700 $6,333
3.90% $975 $1,625 $2,275 $2,925 $3,900 $5,200 $5,850 $6,500
4.00% $1,000 $1,667 $2,333 $3,000 $4,000 $5,333 $6,000 $6,667
4.10% $1,025 $1,708 $2,392 $3,075 $4,100 $5,467 $6,150 $6,833
4.20% $1,050 $1,750 $2,450 $3,150 $4,200 $5,600 $6,300 $7,000
4.30% $1,075 $1,792 $2,508 $3,225 $4,300 $5,722 $6,450 $7,167
4.40% $1,100 $1,833 $2,567 $3,300 $4,400 $5,333 $6,600 $7,333
4.50% $1,125 $1,875 $2,625 $3,375 $4,500 $6,000 $6,750 $7,500
4.60% $1,150 $1,917 $2,683 $3,450 $4,600 $6,133 $6,900 $7,667
4.70% $1,175 $1,958 $2,742 $3,525 $4,700 $6,267 $7,050 $7,833
4.80% $1,200 $2,000 $2,800 $3,600 $4,800 $6,400 $7,200 $8,000
4.90% $1,225 $2,042 $2,858 $3,675 $4,900 $6,533 $7,350 $8,167
5.00% $1,250 $2,083 $2,917 $3,750 $5,000 $6,667 $7,500 $8,333
5.10% $1,275 $2,125 $2,975 $3,825 $5,100 $6,800 $7,650 $8,500
5.20% $1,300 $2,167 $3,033 $3,900 $5,200 $6,933 $7,800 $8,667
5.30% $1,325 $2,208 $3,092 $3,975 $5,300 $7,067 $7,950 $8,833
5.40% $1,350 $2,250 $3,150 $4,050 $5,400 $7,200 $8,100 $9,000
5.50% $1,375 $2,292 $3,208 $4,125 $5,500 $7,333 $8,250 $9,167
5.60% $1,400 $2,333 $3,267 $4,200 $5,600 $7,467 $8,400 $9,333
5.70% $1,425 $2,375 $3,325 $4,275 $5,700 $7,600 $8,550 $9,500
5.80% $1,450 $2,417 $3,383 $4,350 $5,800 $7,733 $8,700 $9,667
INTEREST-ONLY MONTHLY REPAYMENTS
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Level 6/122 Arthur Street, North Sydney, 2060 l P02 9955 1176 l M0412 129512 l [email protected]
These are some of the lenders we can work with on your behalf.