So you’ve heard it time and time again, but just for good measure – it’s true! The further you plan ahead saving money to buy and get your deposit together, the better off you’ll be in the end. We know there are so many questions and a lot of fear that comes with buying your first home.
Guide to Buying A Home: From 12 months to One Month Out
So we’ve compiled a guide to buying a home from 12 months to one month out. It includes everything you need to know before you commit to the purchase because if you don’t educate yourself, you won’t be prepared.
- What’s your ‘why’?
- Affordability side of it
- How are you going to get the money?
- What the banks look at
1. What’s your ‘why’?
Buying a property is a big thing, and just to get to the purchasing stage takes a long time. A recent survey by one of the big banks found that on average you spend about $600 in researching just to buy a property. So are you ready to spend that much per property if you’re actually not quite ready?
It took Nathan a long time to find a property. For a lot of first homeowners, it can be very daunting especially if you haven’t even rented before. Preparing mentally is important especially if you’re looking a bit further down the track.
If you buy – ask yourself:
- Can you commit to staying in that same suburb and house for a while?
- Are you ready to take on the extra expenses?
- Are you ready to settle down for a bit?
- Are you financially ready?
2. How much you can afford to borrow and can you pay for the loan repayment?
If you’re renting, calculate the cost of your rent as opposed to when you’ll buy. In a lot of cases when you’re renting you’ll cover the electricity and water but you won’t cover body corporate fees. So getting yourself financially ready with this information is important. From a high-level overview, this will help you alleviate those nerves.
If you don’t, you won’t be able to afford surprise repairs like if your toilet gets busted. Or your own health when you’re off work for a while. There are so many online calculators out there to help you understand what the monthly, fortnightly commit is. A typical loan term is 30 years with 5% repayments.
3. Will a lender think you’re ready?
When it comes to getting a home loan, think like a lender. They’re the ones who will decide if long term you’re in this. Lenders look at what sort of deposit you have, what is your income and what are your liabilities as well as ongoing commitments.
When we look at a deposit – you’ll need from 5 – 8% of purchase price.
Most people say aim for 10%. Costs like stamp duty vary from state to state and most have waivers up to a certain amount. Lenders mortgage insurance is something to be aware of too if you don’t have a 20% deposit. We also look at guarantor loans if you’ve got family to assist.
There are also first home owners grants in different states and these are on new properties. In Queensland, $15,000 is offered on new homes and this can go towards part of your deposit.
4. Income – What do the banks look for?
The banks look at each category of income differently. These are categorised and differentiated by full time, part time, casual and self-employed. Ideally, the banks want you in full time or part time work for at least 3 months but this varies between banks. This will then be looked at in your assessment and the net figure of your income will be used for loan repayments.
For casual workers, they’ll want to see 3 – 6 months of income but you have to be careful because banks look at Year to Date and that’s annualised and used as income. So if you’ve taken long periods of time off, the banks look at how much money you’ve made in the financial year.
5. Other debts and liabilities – Credit cards and personal loans.
Even if you have a $10,000 limit on a credit card, that limit will reduce your borrowing capacity. If you’re doing a balance transfer every few months on your credit card that will also impact your ability to get a loan. So be careful with the number of enquiries on your credit card. The lenders look at how many times you’ve gone to apply for credit and they’re assessing you as an applicant to get a loan.
Look at consolidating and closing any credit cards you no longer need.
6. AfterPay and Zip Pay – Beware!
Although these are short-term and full repayments, the banks treat them like a credit card. Because they don’t have a limit, the bank might look at these as a $10k liability or credit card. This can impact or affect you to get your first home. The banks are now utilising comprehensive credit reporting. This is where the data for your credit file is being reported as positive or negative. Even if you’re 14 days late for a credit card repayment they can see this, it is transparent throughout all lenders. Any debits or direct debits you’ve got they can get a log on. Even if you close an account, you keep that history for two years.
They look at this and it’s called your propensity to pay – what your ability to meet your loan commitments based on your spending and saving to date is.
If they’re giving you a loan for $2.5k per month, they want to make sure you know how to allocate that amount of money per month to your mortgage. So rent is good for yourself to show this because it’s like a mortgage on training wheels.
7. How flexible is your timeframe?
Like everyone, we want everything yesterday but if you need to reassess this timeframe and have some flexibility around when you move out to improve your credit score and savings. You’ve still got to search for the right property as well.
3 to 6 months out
It’s time to look at your transition and see where your finances are and if they have changed.
First, you want to consolidate your deposit funds, the money you’re putting down to buy your first home. If you’re a few months out, you can move all your funds into one account. This will be the account your purchase is going to be in. If it’s you and your partner, move it into a joint account. So at least you know exactly what the deposit is going to be as of now, leading up to the purchase.
The banks just want to see proof, your genuine savings and this is having that. The money needs to be in your account for at least three months. So when you come around to buying, the banks won’t ask as many questions.
1. Get a better sense on how much you can afford
The banks might lend 4 to 6 times your income if you have no credit card repayments. Now’s the time to speak to a mortgage broker and get a pre-approval. This can be done over the phone as estimated rates.
2. Pre-approval process
Is now the right time?
Generally, the pre-approval process lasts for about three months and some banks longer. If you’re looking to purchase within the next three months now’s the time to do this. It will give you confidence in the ability to look for what you’re after.
3. Is every property okay for banks? Is every property looked at the same?
You’ve got to be careful with the properties you’re looking at, an experienced broker can help you with this so keep the communication lines opened.
4. Fixed or Variable Rate? Offsets? What should we be thinking about?
Speaking ‘high level’ at this stage, if you’re thinking of fixing your rate it will be from 1 – 5 years.
Fixed rates give great stability and you know what you’re in for. But unfortunately, there’s no flexibility so if you’re wanting to make extra repayments it’s not as easy to do this.
Whether on a variable rate you can set up offset accounts etc. For now, understand a high-level overview of what each one is and start to figure out which one is right for you.
5. Practising your mortgage repayments
Sticking with the example of the $2.5k month repayments. It’s best practice to sit down and look at the repayment and start to practice saving this as an ongoing commitment.
There are lots of online calculators so you can figure out what your monthly repayments would be online easily.
6. Time to start researching neighbourhoods
When I was buying my first home, I was very broad in what I wanted, but I don’t recommend this. It’s important for you to understand which neighbourhood you want to be in and stay specific towards what you want.
Understand the type of property – is it a unit, house and how many bedrooms?
The more specific you can get the more defined and easier your researching ability will be.
This is the number one mistake so many home buyer makes. So many people have champagne taste and a beer budget, so you need to know your costs but also stick with it.
Remember, this isn’t necessarily your forever home, so look at neighbouring suburbs if you can’t afford where you want to live.
7. Avoid credit enquiries, job changes and holidays over this time
The more credit enquiries you do, the more impact it will have on your credit file. Every time you apply for a credit card you’re lodging an application on your file. Try to avoid this if you can.
Job changes should be done prior to this time frame and if you’re going from full time/part-time to casual this will impact it as well.
Organising holidays can also be a problem but this is hard to navigate around. Be aware if you do have a holiday coming up, try to purchase on either side of when you’re away. The good thing is, as long as you have your contract signed and finances approved you don’t need to be there for settlement.
One month out
We’re assuming you’ve got your pre-approval ready, you know your loan limit and the area you want to buy in, along with bedrooms and features of the home you’re looking for. Now you can start to look at what you want to achieve.
Once you’ve found the right home Hunter Galloway can provide you with a free RP Data report to help you, because it’s time to negotiate and land your dream home.
1. How to deal with real estate agents
Understand the market. Depending on where the property is in the cycle – i.e. if it’s peak market where there’s lots of competition or a declining market where there’s not much interest from buyers and you can give a better offer.
Find this out by going to the open house early and stay as long as it’s open for. In that half hour look at how many people go through it.
If there are 30-40 people going through it you need to be firm with your offer. If there are one or two people you might be able to be a bit cheekier with your offer. Understand the competition around with the property and don’t take the real estate agents word.
2. If there is a lot of competition, move fast.
Now you can start to formulate your negotiation strategy. Reports like RP Data which we can send you will give you data about properties selling in the area similar to yours. For example, a three bed, two bath double garage in Red Hill and you’d look at properties with the same specifications. If it’s selling for $600k and your property has ‘Offers over $600k’ then you can get an idea of where your offer should be.
It’s also a good time to ask the real estate agent why they’re selling it, what was the original asking price and are the sellers ready to negotiate on price. Along with what’s the lowest price they’re willing to accept.
Don’t always negotiate on price. In Brisbane when we put down an offer we put clauses like ‘Subject to finance and building and pest’. These can be anywhere from 14 – 21 days. Really, 21 days is common in finance.
Our tip is moving from 14 days down to 7 days can give you an ability to negotiate on price, so check with your broker about what they can do for you.
For example, when Jayden was buying his home, there was another buyer who put down $5,000 extra than him. Yet he had finance in 5 days and the other buyer was 21 days so he got the house because the seller wanted to move quickly.
Auctions are a great way to negotiate on the day in front of everyone else’s offer and get a bargain. A lot of first homeowners don’t go to auction so immediately you don’t have as many people within that field. Speak to us about this.
The contract of sale is the legal document you need to sign to buy a property. Who do you need to speak to, to arrange this? Well, each state is different.
You will be able to sign the contract with clauses that are ‘subject to’. Subject to finance and building and pest are common clauses and give you the ability to protect you if these things don’t go through nicely. You’ll need a solicitor and this is so important because they can be the difference between a simple and easy process or one you want to forget. This costs anywhere from $1k to $1,200 and this includes settlement assistance. The other people you’ll need assistance from are building and pest inspectors which are between $400 – $500. At Hunter Galloway, we have a team of experts we work with that we can recommend you to.
6. The formal approval process
The best thing is that now you have your preapproval. We’ll get the contract of sale and get your order of valuation. The bank will go and value it and 99% of the time the property will value in at the purchase price. It’s rare it comes in over or under. Sometimes off the plan apartment purchases come in lower but usually established properties come in at the same price. Once we get that back, the bank formalises the approval. Here you’ll let your solicitor know and then we’ll get you to sign final documents. If there are any hiccups along the way we come in and help, to ensure that it’s smooth and easy.
We help a lot of clients with the negotiation strategy especially first home buyers as this can be a stressful process. Remember that the real estate agent is working for the vendor, so that’s where we come in to help you.
Call us at Hunter Galloway for further advice about buying your first home so that it is a smooth and easy transition.