Purchasing a property can be overwhelming and the mortgage process can be confusing. Being prepared and understanding the basic process can really help. Before you start looking for a home or investment property, there are several items to consider such as:
- Your serviceability (or borrowing capacity)
- How much deposit do I require?
- Understanding the costs involved
- What are the available government grants that you can get?
- Get a pre-approval before you start looking
In this article, Trusted Finance will present each of these items in detail, along with specific data and examples so that you can easily visualize.
- Know your serviceability: Before purchasing a property, it is always important to know how much you can borrow, and consider the factors that affect your borrowing capacity. Read more about how banks normally access your service ability and how to improve your borrowing capacity
An important factor to consider is how comfortable you are financially to repay the proposed loan. It is important not to overstress yourself, but instead, come talk to one of our friendly members at Trusted Finance and let us help you work out a budget to pay your loan manageably. You can use our tool to estimate your monthly payments here.
- Deposit: Most banks will require you to have a genuine savings of at least 5% of the purchase property value. (i.e. if you want to buy a $600K house, you need at least $30K). Genuine saving is money obtaining from your working salaries, income from property leasing, etc. It needs to be placed in your bank account for at least 3 months. If you have more than 20% to deposit (i.e. You have $120K and plan to purchase a property valued at $600K), then you probably won’t have to pay extra for Lender Mortgage Insurance. LMI is applied when you borrow more than 80% the value of the property.
For example: You are buying your first house to reside, which values at $600K in Victoria:
The amount you can borrow = 95% the value of the house + LMI
In this case is ($570K + $18K) = $588K (more than > 97% of house value)
The amount of debt repayment required = Housing value + LMI – amount borrowed
In this case is ($600K + $18K) – $ 588K = $ 30K (equivalent to 5% of house value)
As you may realize, the amount of money you need to prepare to pay off debt is up to 5% of the value of the house, which is because you have to pay a significant cost of LMI, which was the result of borrowing 95% of the value of the house.
*** Note: the above payment does not include other costs, the above figures are examples only and may vary depending on each bank and specific case.
- Other costs: Besides deposit money, some of the other costs would include:
- Stamp Duty: This is a government cost that is usually the biggest expense outside the purchase price of the property. Stamp duty is different between states and territories. It can be exempted if you are first-home buyer, and the value is less than a certain value (various between states and territories); i.e. In Victoria, if the first house you purchase is less than $600K, you do not have to pay for Stamp duty fee. Besides, if you are Australian citizen or PR holder, you only pay 5-6% the value of the property for stamp duty, however, if you are oversea investor, you will pay around 12-13% total value of the property.
- Conveyancing Costs: Conveyancing is the process of which a property’s ownership is transferred from the current owner (the vendor) to the buyer. A conveyancer is a legal representative that specialises in this field. Either a conveyancer or solicitor will review your Contract of Sale and ensure appropriate checks are conducted on the property with local government agencies.
- Loan Set Up Costs: This includes establishment fees and will vary depending on the Lender and the loan product chosen. It is important to note that you may also require Lender’s Mortgage Insurance (LMI) depending on your deposit size. You have to pay insurance lenders when borrowing more than 80% of the home’s value (LVR> 80%). When the deposit amount is less than 20% – meaning you need to borrow more than 80% of the value of the house, you need to pay the LMI. This number will vary and depending on your LVR level; The total amount you borrow and the policy per bank will range from 0.5-4.6% of the total amount you borrow. You can estimate the amount of LMI to pay here.
- Foreign investment license fee (FIRB): If you do not have citizenship nor PR, you need to apply for an Investment License before buying a home in Australia. This license is required for each purchase – one license per home and costs from $ 5,000 depending on the value of the home you are buying. Conveyancer / Solicitor can help you get this license. If your spouse is Australian citizen or PR holder, you do not need to buy this license. For those with temporary visas over 12 months, you do need to apply for it, and make sure that you sell before your visa expires. If you do not hold a citizenship, PR or temporary visa, you can still buy a house for investing purpose, but only new houses are accepted. And please note that, this purchase does not guarantee that you will be granted any visas to enter Australia. (Check here for more information)
- Inspection Costs: It is always recommended that prior to purchasing a property, you hire professionals to inspect the property for structural defects, concerns, pest infestations, anything that could potentially cause damage to your property. However, this cost is optional.
- Government grants: before your first purchase, you need to find out if any government grants you are eligible for. These are some of the current example of the grants:
- First home buyer support (FHOG) – for Australian citizen/ PR holder: If you are purchasing your first home and the property is new (brand new house or house under construction), you can receive $ 10,000 support from the Government. Some banks may accept this amount as deposit money.
- HomeBuilder grant – for Australian citizen: If you sign a building/construction contract from now until December 31, 2020 and the construction will commence within 3 months from the signing date, you might be eligible to receive $ 25,000 as HomeBuilder grant. Currently, banks have not allowed to use this amount as deposit money.
- First Home loan deposit scheme (FHLDS) – for Australian citizen: If you have 5% deposit, you can be “guaranteed” to avoid paying LMI for the loan (as mentioned above). However, only 10,000 applications will be approved every financial year. For more details, please read here.
- Other grants: Each state will have different grants at different times depending on the policy at that time. For example, WA is granting a $20,000 Building Bonus support for building contractors from June 4, 2020 to December 31, 2020. This support is for everyone, from Australia citizen, PR holder to foreign investors, regardless of the residing location of buyer and the purpose of house purchasing (to reside or to lease). Find out more here.
- Get a pre-approval before you start looking for a property: Conditional pre-approval is an indication from a lender that you’re eligible to apply for a home loan up to a certain limit. It can show sellers you’re serious about buying and you can be confident that you can afford the property. Find out more here.
If you find the first home purchase process too complicated and many problems arise, do not hesitate to book an appointment with the Trusted Finance team, for a free loan consultation and further steps. Follow in the process of buying a house!
Disclaimer: This is general information only and is subject to change at any time. Your complete financial situation will need to be assessed before acceptance of any proposal or product.
📲 Phone: 1300 24 68 68 (Vanessa)
📨Email: [email protected]
📌Credit Representative Number 506391
“𝐓𝐫𝐮𝐬𝐭𝐞𝐝 𝐅𝐢𝐧𝐚𝐧𝐜𝐢𝐚𝐥 𝐏𝐚𝐫𝐭𝐧𝐞𝐫𝐬 – 𝐅𝐨𝐫 𝐲𝐨𝐮𝐫 𝐩𝐞𝐚𝐜𝐞 𝐨𝐟 𝐦𝐢𝐧𝐝”
🏢 Head office: Suite 18, Level 11 Aquavista Office, 401 Docklands Dr, Docklands, VIC 3008