First Home Buyers
There’s so much to consider when you’re buying your first home and it can feel overwhelming. We’ve identified eight key stages of buying your first home which we’ve found makes the whole process feel more manageable. Each section below describes one of the eight stages in detail.
- Stage 1: Set Up Clear Goals and Timeline
- Stage 2: Work Out Your Borrowing Power
- Stage 3: Saving For Your Home Deposit
- Stage 4: Get a Loan Pre-Approval
- Stage 5: Choosing Your First Home
- Stage 6: Inspection, Offer and Acceptance
- Stage 7: Finalization and Settlement
- Stage 8: Post Settlement
Stage 1: Set up Clear Goals and Dateline
Studies have shown that you are more likely to be successful if you set clear goals. They get you to focus on what you want to achieve and help you make better decisions to bring that goal closer to fruition, so it makes sense to take the time to set up a goal.
You need to make sure that your goal is Specific, Measurable, Achievable, Realistic and Time specific, that is, SMART. The SMART approach brings structure that lets you effectively manage your goal to check if you’re on track.
Goals should always be as specific as possible. The more specific your goals, the bigger the chance you'll get exactly what you’re aiming for. If your goal statement is vague, for example “I want to buy a house”, it’s not so easy to work towards. It just feels too big and too far beyond what life is like now.
Vague goals like this tend to make people procrastinate because there’s nothing to hang on to.
A specific goal about buying your first home is:
“I will save for my deposit and buy my first home”.
How will you measure whether you’ve reached your goal? Your goal needs to include something that can be measured so you can track your progress. In this case the measurable item is money. Add the dollar amount that you would need to save for your deposit to your goal statement.
“I will save $60,000 for my deposit and buy my first home”
Make sure that your goal can be reached. Your goal should stretch you slightly so you feel challenged, but be realistic and defined well enough so that you can achieve it.
Let’s say you earn $5,500 a month and you are single. With day to day expenses it would be unlikely that you can save $3,000 per month. It would cause hardship and lead to anxiety. It would probably be demotivational rather than inspiring. Putting away $1,200 per month is probably more achievable and realistic and anything extra you manage to put away will be a bonus!
Your goal statement is now:
“I will save $1,200 per month in order to achieve my target of $60,000 deposit for me to buy my first home”
Your goal must not only be achievable but also be realistic. You must be wondering what the difference is. Let say that you earn a full time salary of $65,000 per year. Setting your sight on a $2 million dollar mansion would be wildly unrealistic, unless you win the lotto. A home priced around $300,000 is a more realistic goal.
So your goal statement is:
“I will save $1,200 per month in order to achieve my target of a $60,000 deposit for me to buy my first home that is valued at around $300,000”
Most people work more effectively when there’s a deadline involved, and your goal is no different.
Make sure you keep your timeline realistic and flexible. Being too stringent could make you miserable, while being too relaxed could lead to procrastination.
So here is what a time specific goal looks like:
“I will save $1,200 per month to achieve my target of a $60,000 deposit by 30 June 2023 (which is just over 4 years from now) for me to buy my first home that is valued around $300,000 by 31 December 2023 (which is just over 4 and a half years from now)”
One more thing, always put your SMART goal in writing. It makes it feel that much more real. Here is a link to a template that you can download and use.
Stage 2: Work Out Your Borrowing Power
When applying for a home loan, the amount that you can borrow may be different from the amount that you actually should borrow.
When a lender works out the maximum amount that you can borrow, it is based on a set of numbers: your income, your expenses, your assets and your debts. They can’t take into account your personality. Only you know the kind of lifestyle that you want, how disciplined you are with your finances and if there are any major life changes that might be on the horizon, like starting a family or quitting your job and starting a new business.
For first home buyers, lenders look at three things to decide if they will lend the money and how much they will offer:
- Genuine Savings
Broadly defined, serviceability is your ability as a borrower to meet loan repayments, based upon the loan amount, your income, your employment situation, expenses and other commitments such as credit card debt, personal loans and car loans.
The calculations for serviceability are a bit more complex than merely deducting expenses from income. Lenders in Australia tend to use one of the following methods for calculating serviceability:
Net surplus ratio (NSR) - This looks at the amount of money that you won’t be using to pay your debt and it expresses this as a percentage of your total after-tax income.
Debt servicing ratio (DSR) - This method calculates the percentage of income that will be used to pay your debt once the proposed home loan is factored in.
Uncommitted monthly Income (UMI) – This calculates the income you’ll have available each month after all expenses have been factored in, including proposed home loan repayments.
All lenders differ in how they assess serviceability and the way they work out your maximum borrowing power. However, regardless what the lenders say about your borrowing capacity, you need to be comfortable with your mortgage repayment and avoid “mortgage stress” which is when 30% or more of your income goes on your home loan repayment.
If you’d like to get a ball park figure on what you should borrow, you can use the “How much SHOULD I borrow calculator” that I have developed. You can access it from here.
Remember that the results are an indication only. They are neither a quote nor a pre-qualification for a loan.
A home loan deposit is your initial cash contribution to the purchase price of a property. It means that you own a small portion of the home.
Lenders use a Loan to Value Ratio (LVR) to assess how risky you are as a borrower. It looks at the amount you wish to borrow in relation to the value of the house you want to buy. The higher the ratio, the more risky you are as a lender.
Generally, I would suggest that you have a Loan to Value Ratio of 80%. This means you need a deposit of at least 20% of the value of the property. On top of that you’ll also need to have enough to pay stamp duty and legal costs. This will vary depending on which state you live in but a safe figure is 5% of the property value.
It’s a lot to save. So, why don’t people borrow more?
The reason for borrowing up to 80% of the value of the property and not more is to avoid Lenders Mortgage Insurance (LMI).
LMI is a fee charged by lenders to provide themselves with an extra level of protection in case you can’t pay your loan. It’s not cheap and the more you borrow, the more it costs.
LMI on a $300,000 loan, would cost between $10,000 and $15,000.
If you are willing to pay for LMI, you can usually borrow up to 95% of the property value. However, keep in mind that higher borrowing usually attracts a higher interest rate.
On the other hand, the good news is, if you have a bigger deposit and you borrow less than 80% of the value, you may even be able to negotiate a discounted interest rate from the lender.
Genuine savings is a term used by lenders to define whether the funds that you’re going to use as your deposit have been saved by you over a period of time. While different lenders have their own definitions of genuine savings, they all require evidence that you have held onto the money for a minimum of 3 months.
Your Genuine Savings can take various forms. They can be (this may vary between lenders):
- Savings such as Term Deposits or High-interest Savings Accounts accumulated or held over a period of 3 to 6 months
- Shares or managed funds which have been held over a period of 3 to 6 months
- A Monetary Gift. You’ll need to have a statutory declaration from whoever gave you the monetary gift saying that you don’t need to repay it. You’ll also need to have had control of that money for at least 3 months.
- Inheritance – If the money has been held for at least 3 months to 6 months
- Rental payment – If you are renting before you find your first home some lenders may accept this as genuine savings as you have shown a commitment to paying a regular fee. Once you have bought a home, the money you would have spent per week on rent can now be directed into paying your home loan. To do this you would need to show a perfect rental history.
Genuine Savings represent your deposit.
If you plan to borrow 95% of the property value lenders will typically ask for a minimum of 5% of the property price as genuine savings.
Stage 3 - Saving for your home deposit
No time like the present to start saving for a deposit!
Having 20% of the property value (not cost as the cost can be higher than what the bank value the house) is ideal. That way you’ll avoid a hefty charge for Lenders Mortgage Insurance. And no complaints if you can save up more! The higher your deposit payment, the less mortgage you have to pay off.
The basis for your savings is a solid budget. Having a budget doesn’t mean that you have to give up enjoying life. A budget clearly shows how much you are spending and the areas where you can spend more wisely. It helps you understand your money and makes saving easier.
Here is a 7 step process that I’ve developed to assist you with developing your own personal budget:
Step 1 – Download the Sheridans Home Budget Template
You can download the Sheridans
Home Budget Template here
Step 2 – Calculate your income
What do you earn? This is all the money you have coming in on a regular basis from your wages, any government benefits you receive and dividends from shares. If you’re not on a fixed income use your average income (after tax) for the past 12 months. Enter your earnings amount into the budget.
Step 3 – Work out your spending
To begin with, it’s important that you get an idea of your current spending habits and financial commitments. To do this, get copies of your bank and credit card statements for the last 3 months.
Review all your key expenses and take note of the amounts and their frequency and enter them into the Sheridans Budget Template.
Expenses come in three categories.
Fixed expenses: These are regular bills and payments that can’t be avoided. Fixed expenses are things like phone and internet bills, insurance payments, rent, car registration, electricity, gas, car loan payments.
Variable expenses: These are also unavoidable expenses but the amount varies from month to month and you generally have some control over the amount you spend. Variable expenses are things like groceries, petrol, toiletries, clothes and hairdressing.
Discretionary expenses: These are optional expenses. They include dining out, take away food, pay TV and entertainment.
Step 4 – Add Up Your Savings and Investment
Enter all your savings and investments into the budget template. This will include savings accounts, managed funds and shares. Do not include your compulsory superannuation contribution.
Step 5 – Review your Expenses and Savings
This is the most important part of your home budget because it shows how you can increase your savings and get your home deposit that much sooner.
You want there to be enough money from your income to cover the bills without anxiety and to keep your expenses at a level that won’t make you suffer stress. We suggest the following amounts to avoid financial hardship and stress:
- Fixed expenses should be less than 40% of your total income
- Variable expenses less than 30% of your total income
- Discretionary spending less than 20% of your total income
If you find that you’re over these levels, you’ll need to rethink your spending and perhaps change your lifestyle.
Step 6 – Use the information you’ve gathered to plan for the future and set up bank accounts
Remember when grandmother had a set of envelopes for all the bills to pay? When she got paid she’d divide out the cash - $10 towards the gas bill went into the envelope marked “gas”, $12 for groceries into the “groceries” envelope, $7 for petrol and so on. Anything left over would go into the precious “holiday savings” envelope which she would then hide away in a hard to reach place so she wouldn’t be tempted to spend it on any daily expenses.
This system is like a modernised version of Grandma’s envelopes.
Set up a bank account for 90% of your pay to go into. Set up three sub accounts linked to this account for your different types of expenses: Fixed, Variable and Discretionary.
Now that you know what you earn and what you spend you can be prepared. Once your pay goes into your bank account, divide it out into the Fixed, Variable and Discretionary accounts.
The Sheridans Home Budget Planner can help you calculate how much should go into each account.
Where possible set up automatic payments from your Fixed expense account and Variable expense account to pay your bills. Some companies offer a discount for direct debit payments and a bonus for on time payment. Automatic payments will let you take advantage of this and remove the risk of forgetting to pay a bill and all the embarrassment, hassle and extra fees that go with it.
The Discretionary account holds your “fun money”. Enjoy spending it or add it to your savings as a bonus.
Step 7 – Review Your Savings and Investments
Now you have a clear picture of all of your expenses you can also see how much money you can save regularly. Ideally, your minimum savings amount will be similar to what you expect your home loan repayments to be. If this is not possible because you are currently paying rent, your savings and investment should be at least 10% of your income.
Set up another bank account that’s not easy to access, perhaps at another financial institution. This will be your savings account, and like Grandma, you need to make it a little hard to reach so it doesn’t disappear on daily expenses. If possible, get 10% of your pay automatically transferred to this account.
If you have debt (personal loan, credit card, car loan etc.) your focus should always be paying this off first as debt will reduce your borrowing power.
You can now work out how long it will take you to reach your savings goal. To do that divide the amount you will need for your home deposit by your monthly savings.
If you’re not happy about the time it could take you, you might want to consider a more affordable property or adopt more stringent saving measures.
If your expenses plus your savings are pretty much equal to your income you’re right on track. Keep up the good work. Your home deposit is
Stage 4: Get a Loan Pre-Approval
Before you start looking seriously for a home, get a fully assessed loan pre-approval. This is a statement from your lender saying how much they are prepared to lend you. It is free and valid for 3 months to 6 months, depending on your lender.
It’s a serious process and it has many advantages. In addition, all the work you do towards choosing the lender and filling in paperwork for your loan pre-approval won’t need to be repeated when you apply for your actual loan.
Having a loan pre-approval gives you very clear guidance on how much money you can borrow, so you’ll know how much money you can spend on a house. This will save you time and energy, since you won’t be looking at homes you can’t afford.
Sellers often prefer buyers with a pre-approved loan. If a seller has several offers to buy their house they prefer someone who has a pre-approval since it’s less risky. Sellers may also be more willing to negotiate with someone who they see as a serious buyer. In addition, real estate agents may work harder on your behalf if they consider you to be an actual property buyer.
Having pre-approval can give you confidence when you’re bidding at an auction or negotiating a purchase price. Not only that, it quickens the settlement process as the loan is already part of the way being formally approved.
Please note that online applications and over the phone loan pre-approvals are not formal fully assessed pre-approvals and come with many conditions. This is not something that I would consider suitable for first home buyers.
Even with pre-approval, there is still an element of doubt until you have the final approval from the lender, usually known as “Unconditional” approval. This is the final guarantee that you will receive finance for the purchase.
Here are some factors that can impact pre-approval:
The conditions in your pre-approval will be “subject to a satisfactory valuation of the property”. Depending on your lender, certain types of property may be unacceptable. For example, they may reject a property in poor condition or certain locations may not be acceptable to them.
Change in Personal or Financial Circumstances
Changes in your financial circumstances after your pre-approval may impact on your pre-approval as they can affect your ability to repay your loan. So, if you change jobs or change from full time to casual work, or take on a new loan or credit card, the lender may need to reassess your application as these can affect your loan repayment ability.
Your personal circumstances may also change in a way that affects your ability to meet loan repayments. You may have an addition to your family or you may have had to spend your savings on an emergency expense.
Interest Rate Change
There is always a possibility that interest rates could change between receiving your loan pre-approval and buying your home. If the
interest rate increases, the maximum amount that you are able to borrow may decrease. The opposite is also true, so if the interest rate
falls, you may be able to borrow more.
Stage 5: Choosing Your First Home
What sort of property do you want? Would you like an apartment or a unit or a house? Is this going to be your “forever home” or your “starter home”?
A forever home is the place you plan to stay, well, forever. It will be comfortable and suit your lifestyle, and your family’s (or your future family’s) lifestyle for many years to come.
A starter home will start you off in the real estate market.
Once you’ve paid off some of the principal of the home loan you’ll own a part of the property. This is known as equity. With a certain percentage of equity you may be able to borrow more money to buy another property.
Many people choose to buy a home unit or apartment with a plan to sell it in the near future. In Australia, for many years, property prices have been rising and it could be a matter of waiting for interest rates to fall or property prices to go up to make a profit from selling a starter home. There is, however, no guarantee whatsoever that this will happen!
Others may buy a place in poor condition, do it up and sell it for a profit.
This isn’t the case for everyone.
We’ve put together a house hunting checklist. You can download the checklist here.
Look through it and check what you must have and what’s not important to you. If you’re buying with your partner, this is a good exercise to do together. Remember, some things can be added later, like a security system or ducted air-conditioning, and other things just won’t change no matter what you do, like land size and property location.
Perhaps you won’t find the things that you like in an established home and you may consider building your own home.
Stage 6: Buy a house – Inspection, Offer and Acceptance
Before you buy, have the property inspected for faults to make sure that it isn't a dud. It is vital that you find out about any hidden issues like damp, shifting foundations, faulty wiring and plumbing and it’s good to know upfront what sort of maintenance and repairs you may be up for in the near future. Here’s some of what qualified building inspectors look for:
- Look for cracks in the wall, they may be hidden by wallpaper
- Check walls and floors for dampness
- Confirm ceilings are clear of mould or leak stains
- Check windows/blinds are in working order
- Check plumbing systems – look for leaks, check drainage is working including outside drains
- Test the electrical systems including all power points, air conditioning, heating, ceiling and extraction fans
- Find any rusting framework
- Check doors are functional
- Check the level of traffic noise
- Check phone lines and TV aerial points
- Check mobile phone reception
- Check the garden for poisonous plants
- Check for large trees close to the house as their roots could cause structural damage
- Look for any rotting timber on the outside
- Inspect external structures like pergolas and granny flats and confirm extensions are legal and council approved
- Keep an eye out for fire hazards such as external cables or power points
- Ensure external walls are straight
- Test water pressure of external taps
- Check the roofs condition including frames and tiles and gutters
- Check condition of gates and fences to ensure bases are sound
- Look for signs of pests. You may need a separate pest inspection if this is identified as an issue.
Once a report has been complied on the condition of the property, you can then make a knowledgeable decision based on the findings. Then you can factor in the cost of repairs to the purchase price, decide to drop the deal altogether or use the information to negotiate on the price.
Make an offer and negotiate
When you find a property that you like, make an offer to the seller of how much you’re willing to pay for it.
Determining the amount to offer is a tricky business. To start with, work out the maximum amount you are willing to offer and remember that sometimes it is better to walk away rather than go above the budget you have set, as other opportunities will present themselves.
Once you have decided on the maximum amount you are willing to offer, you need to consider what your initial offer on the property will be. Offer too low and you risk alienating the seller or being outbid. Offer too high and you could end up paying too much for the property.
To determine your initial offer amount, it’s helpful to obtain as much information as you can about the house itself, the sellers and the prices other places in the area have sold for. As a starting point, compare the property with other properties in the same neighbourhood with the same characteristics - including number of bedrooms, age, and land size. A Google search of the property may turn up recent sales around the area. Your mortgage broker may also be able to help you get data. This gives you a good indication of a fair price for the property.
There are other factors that may affect the value of a property. You may like to ask the real estate agent:
- How long has the property been on the market?
- Why are the owners selling?
- Have the owners bought another property yet?
- When are the owners planning to move?
- What is and isn't included in the property?
- Have any offers been made? If so, why were they withdrawn or not accepted? If no offers have been made, why not?
Once you’ve gathered this information, you should have an idea of how much you would be comfortable to pay for the property.
It may be worth offering the asking price if you need to move quickly, the property meets all your needs and you're confident that it's fairly priced.
This is also true when you are making an offer in a competitive market. In this market, properties are snapped up quickly and buyers are regularly outbid. If a lot of other buyers are interested in the property, it can be worth offering the asking price or even slightly higher to avoid missing out. However, make sure you're not paying way above the market price. Do your market comparison and stick to the range you've identified.
When making an offer, it is also important to consider the advantages you offer as a buyer. Having a loan pre-approval gives a lot of certainty to the seller and gives you the ability to proceed with settlement as soon as your offer on the property is accepted. In addition, as a first home owner, you don’t have any property to sell, and so presumably you're able to move quickly. This will be looked upon favourably by any seller who has already purchased another property and is ready to move.
Put your offer in writing and send it to the real estate agent. The real estate agent will talk to the seller and decide whether it is satisfactory. They are likely to come back with a counter offer, that is a higher price, which the owner would accept. You can agree to this or make another offer of your own at a price that you think is reasonable. Sometimes the estate agent may give you an indication of the price the owner will accept. Remember the estate agent is working to try to get the highest price for the seller.
When you enter into a negotiation, keep in mind:
- Be coy about your finances. Revealing how much you’re willing to spend may prompt the agent to push the price to the top end of your price range.
- Play it cool, even if you fall in love with a property. Showing too much enthusiasm may make the agent think you’d be willing to pay any amount.
- Show you’re serious by having your loan pre-approval in place so the seller knows you’d be able to follow through on your offer.
- Don’t be overly influenced by ‘sweeteners’. Sometimes owners offer to throw in white goods, or other perks, to push up your offer. But usually these goods aren't worth the extra you'd pay on your mortgage.
- Think about what else you have to offer. Are you buying in cash or with a large deposit? Are you happy with a long – or short – settlement time? These sorts of things can be appealing to sellers and are worth emphasising in your offer.
- Take your time to consider your options. While the agent may push you to finalise the deal, think it over carefully before you make a higher bid.
While negotiating with the real estate agent the seller is free to take expressions of interest from other potential buyers, and even exchange contracts with them. If there is another serious buyer, the real estate agent will probably ask you to increase your offer, especially if the other buyer has made a higher offer.
Exchange and Sign Contracts
Once you’ve agreed on the purchase price, you’ll exchange and sign the contract of sale. It's important that you check the contract carefully to ensure that everything about the property is understood and that there will be no legal surprises after you have purchased it. Here are some tips that you may find useful during the exchange of contract stage:
This is the date on which all legal documentation is transferred from the seller's name into yours. The adjustment of rates and taxes are calculated, and the balance of the price of the property is paid to the seller. This is a complex legal process and it is strongly recommended that you engage a conveyancer or solicitor to represent you. After this date, you will be given the keys to your new property and you can take possession.
You can negotiate a settlement date with the seller. A 60 day settlement is most common. A shorter period may be possible if you already have loan pre-approval. However, you may want to consider a longer period – for example 90 days if you have not started the loan application process.
For a first home buyer, it is also important that you include conditions of sale in your contract. They help protect you in the event that the property does not meet your expectations or you are unable to obtain enough funds to complete the purchase. It’s important that you use a solicitor or licensed conveyancer who understands offer conditions when buying a home. Don’t rely on the agent to write the offer conditions for you. They’re acting in the seller’s best interests, not yours.
The three common conditions in sales contract are:
- Finance approval – that is, you are able to get the money to buy the property
- Valuation – the institution lending you the money to buy the property does an independent valuation of the property (at your expense) and agrees that the price you are paying is suitable
- Satisfactory building and pest inspections – after a thorough building and pest inspection you are satisfied with the condition of the property and willing to purchase it.
You may also include any other conditions for the sale in the contract although, if your conditions are too complicated, the seller could reject your offer.
Once you and the vendor have signed the contracts of sale, you are legally bound to proceed with the purchase of the property, unless one of the conditions listed in the terms and conditions of the contract is breached. You also need to pay a deposit – typically 5-10% of the purchase price – at the end of the cooling-off period, which in South Australia is two working days after the contracts are signed. If you are buying a property at auction you will be expected to pay the deposit as soon as the auction finishes.
Conveyancer or solicitor:
For first home buyer, I strongly encourage you to consider engaging the services of a conveyancer or solicitor to help you with this process. The key role of your conveyancer or solicitor is to prepare and certify the legal documents that will shift the title of the property from the vendor over to you. The earlier you speak to a conveyancer, the better they can help you look over the contracts and give you advice.
A conveyancer will communicate the terms and conditions of the purchase to you in plain English to help you understand exactly what's involved and what documentation you are signing. This includes:
- References to the zoning of the property
Any special conditions for the purchase. They can also help you add to the contract conditions if you need to.
- Purchase price and settlement date
- Deposit and payment date
- Matters relating to title (references to covenants, restrictions, easements and the like)
- Owners’ corporation matter
Cooling Off Period
A cooling-off period is the period of time in which a property buyer can change their mind and can walk away from a legal agreement to purchase a residential property. Details of a cooling-off period will be included in the sales contract. The rules vary between states and territories. In South Australia, the cooling off period is 2 working days. If you do change your mind and decide not to buy after all, you will pay a termination fee, but apart from that the rest of your deposit is usually refunded.
The person selling the property, however, is not entitled to a cooling-off period. Once they sign the sales contract, they are obliged to go through with the sale, subject to the conditions of the contract.
As a buyer you can waive your rights to cooling off period but before you do this make sure you seek professional advice from your
conveyancer or solicitor.
Stage 7: Finalisation and Settlement
Catch Up with Your Conveyancer or Solicitor
After your offer has been accepted, you need to get in touch with your conveyancer or solicitor. Your conveyancer or solicitor will review your contract of sale and also undertake:
Title Search and Certificates Check
Although the vendor conducts these checks as part of preparation for the Vendor’s Statement, your conveyancer or solicitor may need to ensure that all of the information included is correct. The search and certificates provide information such as the latest owners corporation fees, a Water Information Statement, disclosures about any unregistered easements, indications from the relevant road authority showing whether the property has been acquired for road widening, building information regarding works undertaken during the previous 10 years, as well as reference to final inspections, outstanding orders and flood levels.
Draw Up a Transfer of Land
The purchaser or the purchaser’s conveyancer or solicitor is responsible for the preparation of the transfer document to ensure all pertinent information is included in the Certificate of Title of your new property. These details could include the manner of holding of a property, such as what percentage each party will be holding if more than one purchaser is involved. You can review them before signing the documents, which are sent to the vendor at least 10 days before settlement date.
Supplying Copies of Signed Documents to the Financier
This includes the contract of sale, transfer of land and title search, which allow the mortgage to be arranged.
Your conveyancer will calculate the difference between the sum provided by your lender and the total cost of purchase and will organise for you to provide the difference by a bank cheque or a bank transfer into the conveyancer’s trust bank account.
Preparing a statement of adjustment
Your conveyancer or solicitor will also prepare a settlement statement. This is a document that includes details of any adjustments that are made for the purchase. For example, the seller may have already paid the council rates for three months and during the second month you will become the new owner. So, the seller will need to be reimbursed for those two months. Typical adjustments are water rates, council rates, body corporate fees, and so on. These statements will be prepared by your solicitor or conveyancer and submitted to the vendor for verification.
Arranging settlement with all parties
Your conveyancer represents you at the settlement with your lender and the vendor.
Notice of Acquisition
It is a legal requirement that you lodge a notice of acquisition with relevant authorities when you acquire land. Your conveyancer will do this on your behalf.
There are no set fees for engaging a conveyancer or solicitor as not all property transactions are the same. It is a good idea to obtain a number of quotes or a service recommendation. As part of the process, a solicitor or conveyancer will provide you with a Costs Disclosure Statement. This is confirmation of the fee for standard conveyancing procedures, and fees for any variations. It may also include references to other expenses which you will need to pay for, such as title searches, obtaining certificates and meter readings.
Organise Property Insurance
Technically, you are the owner of the property from the date the contract is exchanged, so it’s important you put in place some sort of home insurance cover to protect it. This is also a requirement of the home loan approval process, so your lender will require proof of building insurance. If you’re buying a strata unit, you need to arrange a Certificate of Currency from the Body Corporate’s insurer.
Once you’ve made an offer and it’s been accepted, contact your mortgage broker or your bank so that they can finalise your home loan application. You will need to provide them with a range of documentation such as:
- Contract of Sale
- Insurance certificate of currency
- Updated pay slips
- Updated bank statements.
As part of this process, your lender may organise an independent valuation of the property to make sure that the contract price is
The day before, or the morning of, the settlement you’ll have the opportunity to do a final inspection of the property. Contact the agent to arrange this.
The seller must hand over the property in the same condition as when it was sold. When you view the property for the final time you should check:
- Appliances, the hot water system, heating and cooling are in working order
- Structure, walls, light fittings, window and floor coverings are in the same condition as when you first saw the property.
- Locks, keys and automatic garage door controls are supplied and working.
- Items listed as included in the sale are in place e.g. curtains, blinds, light fittings
If you’re buying a new home, make sure all the work is finished and that the appliances are installed and working. You can organise a defects inspection by a building inspector, if you don’t feel confident checking these things yourself.
If you find damage or deterioration, it doesn’t necessarily give you the right to withhold on settlement. You need to prove that the damage breaches the conditions stated in the contract of sale. Deterioration could be the result of fair wear and tear or may have existed before you signed the contract and just failed to see it.
However, if there is substantial new damage the vendor may be in breach of the contract and you may request that it be repaired before settlement.
Occasionally, disputes do arise as a result of a final inspection. If this happens, try and work out an agreeable compromise with your buyer - it works in both your interests if you can resolve things amicably. If an agreement can’t be met, you may want to seek legal advice.
On Settlement day a number of exchanges occur between your conveyancer and the vendor’s conveyancer and your lender, (you don’t need to be present), which culminate in you receiving the keys to your new home.
Here is a rough outline of what happens:
- The vendor collects the deposit money from the estate agent where it has been held in trust.
- Your lender pays the balance of the purchase price to the vendor.
- You pay adjustments for expenses such as taxes, council rates and water rates to the vendor
- You receive title of the property. The mortgage will be noted on the title until the term of the home loan is completed. When you’ve paid off your mortgage you get to keep the title, until then it belongs to your lender.
- Your conveyancer or bank will arrange to register the transfer and the home loan.
- Your conveyancer and the vendor’s conveyancer advise in writing to the agent that settlement has occurred, and that the agent can release the keys to you. It can take a couple of hours after settlement has occurred before the correct notices have been received so it is always best to ring and check if the keys are ready for you to pick up.
Be warned, that it is not unusual for settlements to be delayed by a few hours, or even a day or so due to a variety of factors like a missed signature, a cheque being delayed or incorrect paperwork.
Although it is an extremely frustrating, everybody will be working to effect settlement as soon as possible for you. Just to be safe, set your moving in date to be a few days after Settlement Day, so if things don’t go according to plan you still have somewhere to stay.
Stage 8: Where to From Here
Update Your Home Budget & Continue Saving
You’ve done a great job with your budget! You’ve successfully saved a deposit and bought a property. Now that you’re a home owner, your budget will still be important, just a little different.
With your own home comes new expenses. You are now responsible for your council rates, water bills and if you are in a unit, you will have body corporate fees too, so include these in your updated budget.
Repairs and home maintenance are another area to include in your budget. You may want to consider setting aside 1% of the purchase price for repairs and maintenance. If your home cost $350,000, plan to put away $3,500. You may not need to use that money from one year to the next, but it is good to have it there just in case you need it.
Keep saving! It’s so important to have savings there in case of some kind of emergency. You can keep your savings in a redraw account or an offset account so your savings are working on your mortgage.
Update friends & family with your new contact information
Let your friends and family know you’ve moved. Send around a text message or email notifying people of your new address and phone number.
Make list of organisations to contact
I’ve made a check list of important organisations, business and services you need to notify of your change of address:
|Leisure and Family Activity
|Work and Education
Redirect your mail
You can use the Post Office’s change-of-address service, which redirects all mail to your new address. It takes up to 10 days to come into effect. Keep this service for six to 12 months after moving into your new home to avoid post going astray.
Make extra repayments
Making extra repayments on your loan is hugely worthwhile:
If you have a loan 30 year loan of $350,000 with an interest rate of 4%, an additional repayment of $200 per month will save you around $ 52,243 in interest repayments and reduce your loan term by about 5.5 years.
Extra repayments reduce the principal amount of your loan and so that decreases the amount of interest you need to pay. Not only that, because you’re paying more, the time period of your loan will also decrease and you’ll fully own your home sooner.
Most lenders allow extra repayments on home loans and they also let you access those funds if you ever need them. This can be using a redraw facility or an offset account.
It also gives you a buffer in case you may accidentally make a late repayment.
If your earning situation doesn’t change after you buy your first home, you will probably be able to make some extra repayments. This is because when the lender was calculating how much to lend you they included a buffer of about 3% just to be certain that you could meet your repayments if interest rates were to go up.
Be strong when facing the temptation to use your credit cards to buy new furniture! Enjoy shopping around.
Avoid New Debt
Avoid taking on new debt, if you can help it. Think very carefully before you take on any new debt like a new credit card or a personal loan. Make sure you can afford it and that it is for something really worthwhile.
Not long after someone buys their first home, they often come in to see us about getting a loan for a new car.
We do my best to talk them out of it!
It makes sense to borrow money to buy a home. It’s an investment. Property prices usually ago up and you’ll always need somewhere to live.
A car, on the other hand is a depreciating asset. It’s losing value every single day you have it. To be honest with you, if you can’t afford the car you want, a car loan is a bad financial decision. You’ll be paying interest on the loan and the car will be losing value. You’re losing money in two directions.
You may want to consider buying a second hand car that will do the job in the interim while you save to buy the car you really want with cash. You’ve successfully saved a deposit for your first home, so what can stop you?
There’s no telling what the future holds and it pays to be prepared.
How would you pay your household bills and your mortgage if you could no longer work? Do you have the right protection in place?
There is no set amount of cover that you should have. You need to make a sound estimate of your current financial situation and imagine what you and your family will need if you can no longer provide regular income.
Given the complexity of the matter, you should speak to a financial adviser to make sure you’ve covered everything important and have the right cover for you and your family.
Here’s a snapshot of what you should consider:
Life insurance is a lump sum paid to your family (or your estate) when you die.Consider a life insurance policy that, at a minimum, accounts for the value of the home loan. That way if tragedy strikes, you know that whoever is left behind doesn’t have the additional worry of how they are going to pay off the home.If you a have a superannuation fund, it will have a life insurance component or a death benefit. The amount will be adequate in some situations, but it is well below the needs of families with dependent children. You may be able to increase the amount by paying extra into your super fund, or you may think about taking out a separate life insurance policy.Take into account your partner’s working capacity. If you have insufficient life insurance, chances are they will have to work to help make ends meet.Stay-at-home partners also should have some level of cover. If the stay-at-home parent were to pass away, the current income earner may need to spend more time at home with children and have less capacity to earn.
Total and Permanent Disability (TPD) Insurance
Total and permanent disability (TPD) insurance covers the costs of rehabilitation, debt repayments and the future cost of living if you are totally and permanently disabled. It is usually bundled together with life insurance. Check if your super fund offers TPD cover and whether this amount would realistically cover your family’s needs if you were unable to work again. Often you can opt to increase the TPD and life insurance benefit in your super fund by paying extra.
Income Protection Insurance
Income protection insurance covers up to 75% of your usual income if you can’t work for an extended period due to injury or illness. It is more comprehensive than workers compensation which only covers injuries that are work related.Premiums vary, depending how much cover you need and are generally tax deductible (please confirm with your accountant). As with most insurance products, premiums increase with age because you are more likely to make a claim. Some products, however, offer level premiums where you always pay the same amount.Many policy holders reduce their premiums when their children get older and need less support. You can also save on premiums by taking out a policy with a six-month waiting period before you can claim.
Also known as critical illness cover, this provides a lump sum payment if you are diagnosed with a specific serious illness, such as cancer or stroke. There are about 45 diseases that fall into this category for insurance purposes depending on the insurance company. If you have a family history of a serious illness, it would be worthwhile getting trauma cover.
Prepare your estate plan
Like insurance, estate planning is about preparing for the worst while hoping for the best.
It’s a responsibility you have to your family. If you become incapacitated or die, you need to have plans in place.
Making a Will is one of the key tasks of estate planning. It is about deciding what will happen to your assets, like your home, when you die. Your will provides instructions on how your estate is to be distributed amongst your nominated beneficiaries.
With regards to your home, if you own your property as tenants in common, you are able to pass on your share in the property in your will.
If you own the property as joint tenants, on your death, the surviving co-owner will automatically become the sole owner of the property. However, if both you and your co-owner die at the same time the property can be passed on according to your will.
A thorough estate plan includes a will and:
Power of attorney
Where you appoint someone else to conduct your affairs if you are unable to do so.
Power of guardianship
Where you give someone else the power to make personal and lifestyle decisions for you if you lose your mental capacity.
Advance health care directive
Which are Instructions on your wishes regarding medical treatment if you’re unable to communicate.
The key when making your estate plan is to be as specific as possible about your intentions. It may be uncomfortable contemplating your own passing, but it ensures legal battles are not part of your legacy.
Speak with a lawyer so that your estate plan is tailored specifically to your needs, your goals, and your family situation. General strategies, such as do it yourself will kits can be very helpful as springboards to a tailored plan, but they may not cover everything in your situation.
WE’RE HERE TO HELP YOU
Dealing with banks can be a stressful experience but rest assured that our mortgage broker based in Glenelg (but our mortgage broker services the entire Adelaide Metropolitan area) can help you make the right decision about your mortgage. We will guide you at every stage of your loan process.
Contact us on 08 8376 0455 or drop into our office at 593 Anzac Highway, Glenelg SA 5045
Any advice contained in this article is of a general nature only and does not take into account the objectives, financial situation or needs of any particular person. Therefore, before making any decision, you should consider the appropriateness of the advice with regard to those matters. Information in this article is correct as of the date of publication and is subject to change.