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Getting ready to buy a property

Melinda Nash • August 14, 2019

Getting ready to buy a property

Entering the property market can be quite a daunting experience for all purchasers and especially first time purchasers. What to do and what not to do? So much jargon, what does it all mean? Who can you trust? Who do I need to help? What should I do to help put myself in the best position to get a loan?

There are two fundamental starting points: saving for a deposit and having enough income to service a loan. This is a simple starting point for us to start a conversation on a not so simple topic.

- Melinda Nash
Before we begin, it is important that I point out that much of this article is an opinion only and that as a licenced mortgage broker I can formally provide credit advice but not financial or other advice. Please seek advice from your financial planner and/or accountant or solicitor on any issues raised unrelated to lending. Please also note that lending policy varies significantly between lenders so there may be some variation to the norm that is portrayed here.

Saving and your deposit
When saving for a deposit, a regular savings plan is a good plan. Pay yourself first. Set up a regular automatic transfer from the bank account that your salary goes into, to a savings account. Set up that savings account so that access is limited. When establishing the amount of your "pay yourself first" figure, analyse your mandatory, basic and discretionary expenses. Limiting your discretionary living expenses ie. uber eats and retail shopping may be the key to saving for your home. During this period, another very important factor is to pay out any current debts as soon as possible including personal and/or car loans and ensure that no further loans, credit cards or leases are taken out as these will reduce your borrowing capacity. All debts, credit facilities and credit cards are treated as being completely at their limit by a lender regardless of their actual outstanding balance so the absence of these will increase your borrowing capacity.

The most common lending structure is for a bank to lend up to 80% of the value of the property that you are purchasing. In this scenario, your savings would need to equal the remaining 20% owed to the seller (otherwise known as the vendor) plus any stamp duty that is payable to the State Revenue Office in your state. In order to estimate the stamp duty, you can access the online calculator provided by each state.

In Victoria, it can be found here: https://www.sro.vic.gov.au/calculators/land-transfer-calculator Please note that a government transfer fee is additional to this. In this scenario, the lenders mortgage insurance is paid by the lender.

As a first home buyer, it is common for lenders to allow the borrowing of up to 95% of the property value (known as loan to value ratio (LVR)) inclusive of lenders mortgage insurance (LMI). All lenders have policy differences on this but currently there is one lender that will allow borrowings up to 98% loan to value ration (LVR) at the time of writing. If you have a direct family member that will allow the use their property as additional security for your loan, then it is possible for your loan to be up to 110% of the purchase price so can include stamp duty (if applicable) or renovation or other costs. Family pledge is another topic to refer to.

Lenders Mortgage Insurance is paid on all loans. If the LVR is 80% or less, the lender will pay the LMI on your loan. If your loans is greater than 80% LVR, then you are responsible for paying the LMI. It can be significant. The closer the LVR is to 80% the lesser it is and the opposite is also true.

Income
The lenders will assess your ability to service your loan (make your loan repayments) based on loan interest rates in excess of current interest rate that might apply to your loan so it is shown that you can weather several interest rate rises without putting your ability to meet your loan repayments without effecting your quality of living. While current interest rates applicable may be 3. something %, the servicing rate will be 5-6. something%. Income that can be used in this assessment can be as simple as one payslip but is usually two. Other factors that will be taken into account are; have you been with this employer for at least 6 months and are no longer on probation, have you been in the same industry for a minimum of 2 years, if you receive bonuses, commission payments, allowances etc. have these been received for at least 2 years, do you work in the emergency services, health or education sector and do you have any changes in employment in your future. So, changing employers just prior to the lodgement of a loan application is not a good idea.

If you are self-employed, most lenders (but not all) will require at least 2 years of self employed tax returns and financial reports (if applicable) and ATO Notices of Assessments. Lenders vary in their treatment of these but it is common for the most recent two years to be averaged, if the most recent year is lower then this will be used or if the most recent year is greater then the lesser year plus 120% to be used. Some expenses will also be allowed to be "added back" including some one off expenses and depreciation. Please consult your mortgage broker so they can help sort through these complex issues.

Living Expenses
All lenders will ask for information regarding your cost of living. They will be required to be broken down into expense types and then broadly into discretionary and non-discretionary. Some lenders will also ask for 3 months of your transaction statements such as your cheque account and credit card statements to demonstrate that your expenses are what you say they are. In the lead up to your loan application, it is wise to contain spending to necessary expenses and hold back on excess discretionary expenses such as uber eats which may increase your monthly living expenses and reduce your borrowing capacity if the lender views this as an ongoing expense. When presenting your living expenses, it is worthwhile to analyse, break them down and highlight any that are once off (ie. new air conditioner) or only occur irregularly (ie annual house insurance) and therefore should be re-calculated as to what the actual monthly expense would be. There will be no consideration of reduced entertainment living expenses when you have a new home and are more likely to prepare meals at home, for example.

Conditional Approvals
A conditional approval from a bank or lender will provide a borrower with some comfort, without it being a concrete guarantee, giving some confidence when the borrower is committing to a contract of sale. A conditional approval involves presenting your set of circumstances to a lender, them assessing them and agreeing that, given the circumstances presented, they believe that they may lend to you. Conditional Approvals last for between one and six months. They can be extended by showing that circumstances haven't changed by providing updated payslips, for example. It is strongly recommended that a conditional approval is achieved before making a commitment to a purchase.

Legal
A Contract of Sale will need to be signed to purchase a property. This purchase will likely be one of the most significant purchases you will make. It is imperative that all purchasers have appropriate and skilled property and conveyancing legal advice. Your solicitor should check the Contract of Sale before you sign it. They may make recommendations regarding new special conditions and bring to your attention factors about the property that may not be evident during an open for inspection such as easements or planning issues that affect your potential property. They may also recommend clauses such as "subject to finance" or a reduced deposit payable if the successful purchaser.

Your mortgage broker works for you. They can recommend connections for you to ensure that your interests are well served and independent to the property transaction. Your broker will be able to make an assessment as to your approximate borrowing capacity. These vary lender to lender as they all have differing policy and assessment criteria and servicing buffers. Only a lender application can confirm this. Your broker will package your loan application relevant to your needs, choosing the best lender based on the policy that best suits your circumstances and at the lowest cost to you. The ultimate choice of lender though is yours. Once selected, they will then present your story to the lender adding value as to why you are a valuable future client for the lender as part of the application and supply of supporting documents process.

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Melbourne City, and Regional Cities such as Geelong and Ballarat are recovering. Clearance rates at auction have improved significantly, and this has occurred without any external interference. The reasons are summarised below – Return of the incumbent Government has created stability and much needed confidence Lending restrictions have eased Unprecedented population growth Low interest rates Bipartisan approach to implement the greatest transport infrastructure program in Victoria’s history The removal of stamp duty savings buying off the plan for investment, the “prohibition” approach of foreign investment in Australia by Chinese nationals, and higher interest rates for investment have cruelled the building industry. This has led to a dramatic fall in new building approvals and experts are now predicting a shortage of new apartment accommodation in the future. Here is my snapshot – Based on all of the above, my expectation is there will be robust capital growth across most housing categories, and higher yields. This a growth area for negative gearing but stay away from buying apartments off the plan. Without government support, 1st home buyers will continue to struggle, and will need to become more proactive approach to saving at a much earlier age or rely on parental support. This is a social challenge for the Government for which there are no short term answers. Unless the Government is willing to continue subsidising home ownership, like many other of the best cities in the world, home ownership will continue to become more difficult. Regional areas of Melbourne will benefit most from the Governments transport infrastructure program. The end of the line cities such as Ballarat, Bendigo, Geelong and even suburbs such as Frankston will have the most to gain compared to the areas in between. This is an ideal entry level opportunity for 1st home buyers which is being supported by a government funded regional home buyers grant. This massive infrastructure spend will have little impact on Melbourne’s Inner City property values which are scarce by definition and not transport dependent. As a consequence, inner city real estate will continue to escalate in value. In summary, Melbourne continues to be a robust place for investment, lifestyle and opportunity. It will remain one of the best cities in the world for many years to come, and I see no reason why real estate should not continue to be a key driver of wealth creation for home owners and investment. Other Articles: https://www.robmillar.com.au/robs-blog/ Author: Rob Millar

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