John Ruddicks First Home Buyer Guide - 2016

7/26/2019 John Ruddicks First Home Buyer Guide - 2016

1/22

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


2/22


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


3/22

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.


4/22


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


5/22


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


6/22


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


7/22


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.


8/228 l 31-STEP GUIDE TO BUYING YOUR FIRST PROPERTY IN NSW

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?


9/22931-STEP GUIDE TO BUYING YOUR FIRST PROPERTY IN NSW l

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


10/22


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.


11/22


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?


12/22


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


13/22


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


14/22


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


15/22


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


16/22


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


17/22


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).


18/22


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.


19/22


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.


20/22

$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


21/22

$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


22/22

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.

Date post:	01-Mar-2018
Category:	Documents
Upload:	kelly6dai
View:	214 times
Download:	0 times

John Ruddicks First Home Buyer Guide - 2016

Documents