the first home buyers survival guide - blackburne · 2017. 3. 16. · the first home buyers...

THE FIRST HOME BUYERS SURVIVAL GUIDE

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ContentsGetting started ......................................................................................... 3 Equity ................................................................................................... 3 How much deposit do you need? ................................................. 3 Genuine savings ........................................................................... 5 Family guarantees ........................................................................ 6 First Home Owner Grant .............................................................. 7 Serviceability ...................................................................................... 8 Can you afford a loan? .................................................................. 8 What affects my ability to borrow?............................................... 9 Steps to take to increase borrowing capacity .............................. 9Types of home loans ............................................................................. 10 Variable loans ................................................................................... 10 Pros ............................................................................................ 10 Cons ........................................................................................... 10 Fixed rate loans ................................................................................ 11 Pros ............................................................................................ 11 Cons ........................................................................................... 11 Line of credit loans ........................................................................... 12 Pros ............................................................................................ 12 Cons ........................................................................................... 12 Basic loans vs packages .................................................................. 13 Basic loan ................................................................................... 13 Loan package.............................................................................. 13 Offset accounts ................................................................................. 14How does the loan application process work? .................................. 15 Meeting and fact find – what you will need to bring .................... 15 Loan is submitted – what happens next? ...................................... 16 Conditional approval – valuation, what does that mean? ........... 16 Loan is formally approved – FHOG applied for............................. 17 Loan documents are issued signed and returned ........................ 17 Settlement! ....................................................................................... 17 My loan’s settled – what next? ........................................................ 18Why use a broker? ................................................................................ 19 Why use Blackburne Mortgage Broking? ...................................... 20Glossary of terms .................................................................................. 21


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Getting startedThere are two interdependent factors that go into being able to purchase a property. Firstly, the equity you have to offer by way of your deposit and secondly, your serviceability, which is your capacity to repay a loan and what lenders will ultimately lend you.

Equity

How much deposit do you need?Ideally you would aim to have the biggest deposit possible, but let’s face it, not everybody will be in a position to make a sizable down payment. At the very minimum you need at least a 5% deposit, plus funds for the applicable purchase costs.

If you can contribute more than 20% of the purchase price, you will avoid paying Lender’s Mortgage Insurance (LMI). This is a one-off charge that protects the lender against your default, given there is a higher risk.


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There are a few variables that go into calculating a LMI premium but at a minimum you can expect to pay several thousands. Although this charge can be added to the loan amount (so it is not an “out of pocket” expense), a greater deposit may qualify you for a more competitive interest rate so it’s always in your best interest to contribute as much as you can.


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Genuine savingsUsually the deposit for your property will be coming from savings. In most cases, lenders not only want to see proof of the funds being held in your name, but they need to qualify for what they call “genuine savings”.

This can be in the form of any of the below:

• A savings pattern established over a period of three months

• A term deposit held for three months

• Shares held for three months

• A non-refundable gift held for three months

• Cash held in an account for three months

• Inheritance proceeds held in an account for three months.

There are also a few lenders that will accept past rental payments as a form of genuine savings, substituting the 5% deposit requirement for evidence of rental history.

Usually they will want to see a continuous rent history in the same property for a certain period of time and the property must be managed by a licensed real estate company. You will still need to come up with a 5% deposit, but the funds do not need to have been held for three months, so proceeds from the First Home Owner Grant (FHOG), a gift, sale of an asset or the like may be used as your contribution.


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Family guaranteesIf you do not have a deposit available to put towards a property purchase, a suitable alternative is often a family guarantee.

This entails a family member (usually a parent) offering security in their own home in lieu of a purchaser having little or no cash deposit.

Usually the lender will limit the guarantee to only the amount needed to keep the lending at an 80% loan to value ratio.

There are factors that need to be considered before choosing this path, including:

• If there is already a guarantee in place for another child, adequate equity must exist in the guarantor’s property

• If the guarantor has a home loan of their own there must be adequate equity available and the existing lender must have a family guarantee policy

• Legal advice is often a requirement by some lenders for guarantors to seek prior to settlement

• The guarantee will remain in place until the bank deems there is enough equity in the child’s property either through paying the home loan or by favourable valuation.


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First Home Owner GrantCurrently in Western Australia, first home buyers may qualify for a grant as well as stamp duty exemptions. While established home purchases are exempt from a grant, purchasers buying a new home or who choose to construct may receive $15,000. These funds are payable at settlement on a new home and at the first progress draw for construction.

The First Home Owner Rate (FHOR) of Duty thresholds and eligibility can be determined by the below:

Home - as at 3 July 2014

• To be eligible for the FHOR of Duty, the unencumbered value of the home must not exceed $530,000

• Where the dutiable value of the home does not exceed $430,000, no duty is payable

• Where the dutiable value of the home exceeds $430,000 but does not exceed $530,000, duty is payable at a rate of $19.19 for every $100, or part of $100, by which the dutiable value exceeds $430,000.

Vacant Land

• To be eligible for the FHOR of Duty, the unencumbered value of the vacant land must not exceed $400,000

• Where the dutiable value of the land does not exceed $300,000, no duty is payable

• Where the dutiable value of the land exceeds $300,000 but does not exceed $400,000, duty is payable at a rate of $13.01 for every $100, or part of $100, by which the dutiable value exceeds $300,000.


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Serviceability

Can you afford a loan?Even if you have a sizable deposit to put down for a purchase, you are still limited by what loan amount lenders will allow you to borrow.

While all banks have their set of metrics as to how they work out borrowing capacity, as a simple rule of thumb, it’s your income versus your expenditure.

All liabilities you may have are factored into the equation including:

• Credit cards – a bank assesses the limit of a credit card, not the balance, so even if you owe nothing on it, it will still be factored in

• Personal loans – this includes any kind of unsecured debt, most commonly car loans

• Dependants – if you have children, your general living expenses are assessed at a higher threshold by the lender

• HELP debt – the bank will want to know the outstanding debt and what your repayments are given that it does impact your net income

• Tax debt – if you have any outstanding Australian Taxation Office (ATO) debt this needs to be declared and the repayment terms verified

• Business debt – if you are self-employed then your business debts may also be factored in to your personal situation.


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What affects my ability to borrow?It’s pretty simple really, the size of your income against your expenses is the baseline for determining the amount you can possibly get a loan for, but there are other factors that you also should take into consideration, including:

• Bank’s own serviceability calculators – each lender has their own unique lending formula, so what you can borrow at one bank may differ markedly from what you can at the next

• Bank policy with certain incomes – if a percentage of your income is derived from bonus or commission income then this will be assessed differently at different banks. For example some banks will use the whole lot, some only a portion

• Self-employed income – depending on the bank, you may need to show up to two years full financials, which in most cases will be averaged

• Defaults or over limit accounts – if your credit history is less than perfect, there may be limitations as to what certain banks will lend to you. If anything is over limit it must be corrected and often an explanation given to the bank as to why the conduct was not exemplary.

Steps to take to increase borrowing capacityThere are some key points to consider when you want to maximise your borrowing capacity which include:

• Pay off as much debt as possible to increase your net income

• Reduce limits on credit cards or close them completely if you don’t need them

• Keep your tax up to date. If you are self-employed or receive bonuses or commissions, income tax returns and ATO Notice of Assessments are crucial for income verification

• Maintain all your current commitments in a sound manner and ensure any accounts are immediately put in order if you fall behind in payments.


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Types of home loansThe three main categories of loan types are variable, fixed and line of credit loans. There is also the ability with most lenders to have a combination of different loan products, depending on your needs.

Variable loansStandard variable loans are the most popular home loan in Australia. Interest rates go up or down over the life of the loan depending on the official rate set by the Reserve Bank of Australia and funding costs. Your regular repayments pay off both the interest and some of the principal.

You can also choose a basic variable loan which offers a discounted interest rate but has fewer loan features, such as a redraw facility and repayment flexibility.

Pros• If interest rates fall, the size of your minimum repayments will too

• Standard variable loans allow you to make extra repayments. Even small extra payments can cut the length and cost of your mortgage

• Basic variable loans often don’t come with a redraw facility, removing the temptation to spend money you’ve used to pay off your loan.

Cons• If interest rates rise, the size of your repayments will too

• Increased loan repayments due to rate rises could impact your household budget, so make sure you take potential interest rate hikes into account when working out how much money to borrow

• You need to be disciplined around the redraw facility on a standard variable loan. If you dip into it too often, it will cost more and take much longer to pay off your loan.


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Fixed rate loansWith a fixed rate loan, the interest rate is fixed for a certain period, usually the first one to five years of the loan.

This means your regular repayments stay the same regardless of changes in interest rates.

At the end of the fixed period you can decide whether to fix the rate again at whatever rate lenders are offering or move to a variable loan.

Pros• Your regular repayments are unaffected by increases in

interest rates

• You can manage your household budget better during the fixed period, knowing exactly how much is needed to repay your home loan.

Cons• If interest rates go down, you don’t benefit from the decrease.

Your regular repayments stay the same

• You can end up paying more than someone else with a variable loan if rates remain higher under your agreed fixed rate for a prolonged period

• There is very limited opportunity for additional repayments during the fixed rate period

• You may be penalised financially if you exit the loan before the end of the fixed rate period.


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Line of credit loansWith line of credit loans, you can pay into and withdraw from your home loan every month, so long as you keep up the regular required repayments.

Many people choose to have their salary paid into their line of credit account.

This type of loan is good for people who want to maximise their income to pay off their mortgage quickly and / or want maximum flexibility in their access to funds.

Pros• You can use your income to help reduce interest charges and pay

off your mortgage quicker

• You have greater flexibility to access available funds

• You can consolidate spending and debt management in a single account.

Cons• Without proper monitoring and discipline, you won’t pay off the

principal and will continue to carry or increase your level of debt

• Line of credit loans usually carry slightly higher interest rates.


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Basic loans versus packagesThere are two options for structuring your loan, either choosing a basic “no frills” home loan or opting for a package. One of the main mitigating factors in choosing between the two is the desire to have an offset account.

Basic loanA basic loan is quite simply that, basic. It’s usually just a home loan by itself with no bells or whistles, but it generally comes with a low interest rate.

While there are often no ongoing fees with a basic loan product, you may be charged for additional account keeping transactions for accessing redraw for example.

Basic loans usually do not come with an offset account facility. The product usually suits a first home buyer who just needs a cost effective simple home loan and this is usually the biggest customer of the basic loan product.

If you have multiple properties, several loans and a suite of different banking products, then a basic loan is most likely not the preferred option.

Loan packageA loan package option is often referred to as a “Professional Package” or “Pro Pack”. Along with your home loan product or products, it includes a transactional account and usually a credit card.

The package will also come with access to additional interest rate discounts, and while in most cases there are no ongoing fees, an annual package fee is payable.

As a rule of thumb you can expect to pay around $400 per year on average to have a package in place, but this fee is usually negated by the money saved by having products bundled together.


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Offset accountsAn offset account is a transactional account linked to a home loan.

The amount you have in the account offsets the interest that you pay.

For example, if your home loan is $200,000 and you have $10,000 in your offset account, interest is applied to $190,000 only.

Your repayments will remain the same, however the end result will be that you will pay more principal, therefore paying off the debt quicker.


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How does the loan application process work?Meeting and fact find – what you will need to bringWhen you initially meet with your broker, it’s a good idea to come fully armed with the documentation they will need in order to assess your situation. This will enable them to give you an idea of what you are able to borrow and what kind of price range you are able to purchase.

Whenever possible bring the following:• Identification, drivers licence and also passport if you will be

applying for the First Home Owner Grant (FHOG)

• Income documentation, including two recent payslips, and if you earn bonus or commission income, your last group certificate and ATO Notice of Assessment. For self-employed applicants, two full years tax returns are ideal

• Documentation relating to any other income such as Centrelink benefits or pensions

• Current bank statements showing savings history and where funds to complete the purchase are held

• Statements of any debts such as credit cards and personal loans to verify limits and repayments

• Contract of sale for the property purchased if held.

At the first meeting the broker will advise you what you can borrow and the relevant costs. They will run through different lending options and structures and help you choose what lender and product is suitable based on your current set of circumstances.

If you already have a contract of sale in place then the application may be started.


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The broker will capture all the relevant information required for the application and you will sign the relevant documentation needed to submit the loan, if you are happy to do so.

In some instances purchasers may wish to have a day or two to think about what lender or product they wish to select, but usually most clients make their selection fairly easily if given sound information and guidance.

Loan is submitted – what happens next?Your loan is submitted shortly after you have signed the application and all relevant documentation has been received.

You can expect to have some kind of feedback within about 3 to 4 business days, but this will depend on your lender’s current service levels. Your broker will advise you if your lender is experiencing delays in processing your loan.

Conditional approval – valuation, what does that mean?Your first communication from the bank via the broker will be your conditional approval.

This is issued after the bank have done their assessment. Your broker will advise you if there is anything else required by the bank, but ideally the only condition would be a valuation of the purchase property.

A valuation is usually done as a matter of course as the bank needs to verify that the property is indeed worth what it’s being paid for. They normally take around 2 to 3 days to be returned once a bank has ordered one.


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Depending on the banks requirements, they may order a full valuation where they inspect the property, a kerbside valuation where they just drive by or a desktop valuation which is a computer generated valuation. It’s usually your loan to value ratio that determines what kind of valuation is sought by the bank.

Loan is formally approved – FHOG applied forOnce you have secured a formal approval, your broker will advise both your real estate and settlement agents to confirm and your FHOG may be applied for.

Your broker will submit the FHOG through your lender and an approval from the Office of State Revenue usually takes around 3 days. The funds from the FHOG will be collected by the lender at settlement so you won’t physically receive the money.

Loan documents are issued, signed and returnedWithin days after the formal approval is issued, loan documents are issued by the bank or by their solicitor. Once you receive them you can complete and sign them yourself, or sign up with your broker, the latter being the most preferred option with first time buyers.

Once completed, the loan documents are returned to the lender who will certify them and make your file ready to settle in line with the settlement date as per the contract of sale. Your settlement agent will liaise with you and the lender during this time, making the settlement booking and collecting your contribution if need be.

Settlement!Congratulations, you are now a home owner!


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My loan is settled – what next?After you have been advised of settlement, picked up your keys and moved in to your new place the first thing to do is pop a bottle of champagne!

After the dust has settled, its crucial to check that your accounts are set up as required, your new cards are properly activated and your internet banking is up and running. Initially there will be not much more to do apart from move in to your new home until repayment time comes around.

If you have chosen a different financial institution for your home loan lender from your existing bank you will most likely need to modify your current arrangements.

Most borrowers choose to have their salary credited into the account from where the repayments will come from, which is a sound choice particularly if you are using an offset account.

Whether you have chosen weekly, fortnightly or monthly repayments, it is imperative that adequate funds are available to make that repayment as soon as it is due.

If you do choose to change the account to where your salary is paid, make sure all your direct debits that you may have in place are adjusted to ensure all your commitments are met.

Your broker will touch base with you several weeks after settlement to ensure that your accounts are set up as required and to confirm that the first repayment has been made on schedule and answer any questions you may have.

From here the loan will take care of itself, but your broker will check in with you regularly to ensure that all is continuing to travel well and will review your circumstances if needed.


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Why use a broker?The question should be “why WOULDN’T you use a broker?”

Here are the main reasons why most people engage the services of a mortgage broker, rather than going directly to a bank:

• Brokers have access to a suite of different lenders and products and can tailor a lending solution specific to your own requirements. A bank is limited to their own service offering and products

• Banks often have unadvertised deals available through the broker channel only that you would not have access to if you went to them direct

• A broker will do all the work for you, easing the pressure during an often stressful and emotionally charged transaction. Having an expert assisting you in navigating through the often complex paperwork relieves a huge burden, particularly for a first time buyer

• As banks operate during limited trading hours, it can be difficult to attend appointments. A broker will be more flexible with the times they are able to see you and will often be available to come to you at your home or place of business if it is more convenient

• The service comes at no cost to the borrower, as a broker is paid by the lender by way of referral commission.

Another important consideration upon settlement is reviewing your full financial position with a financial planner. Purchasing a home, and in most cases taking on a relatively large amount of debt, warrants a review of your insurance position in particular, as its imperative to consider what your strategy would be if you were no longer in a position to make your loan commitments. A reputable planner should be engaged at this point to provide some sound advice with this in mind.


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Why use Blackburne Mortgage Broking?At Blackburne Mortgage Broking we can deliver all of the above, but our service offering comprises of so much more, including:

• Our brokers have a “Premium Status” with most banks, which translates into the ability to access greater interest rate discounts than standard brokers, meaning greater savings for the client

• Another advantage of being a Premium Status broker is that our applications are usually actioned much quicker as lenders dedicate staff specifically to process Premium Status broker files

• Blackburne Mortgage Broking has cemented its place as Perth’s off-the-plan lending specialists, having assisted hundreds of buyers in securing finance for their off-the-plan property purchase. This is an invaluable asset should you be looking to purchase off-the-plan, however our brokers are highly trained and experienced in lending for all property types

• Our brokers have their own dedicated support team member, which essentially means you have two people actively working on your loan submission and two lines of communication for updates and support

• To ensure our clients’ full financial needs are met, we have partnered with financial planners Wealth Protect Financial Services, who offer our clients a complimentary financial review upon settlement.


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Glossary of termsApplication fees: The fees charged by a lender to set up a loan and cover the lender’s internal costs.

Arrears: An overdue or outstanding amount.

Break costs: Penalties charged for ‘breaking’ or ending a fixed term loan before the agreed date.

Deposit: An amount paid by the buyer at the time of entering in a contract of sale, acting as a commitment to buy. A minimum of 5% to 20% of the total purchase price is usually required.

Direct debit: Regular electronic debiting of funds from a nominated cheque or savings account.

Disbursements: Miscellaneous fees and charges incurred during the transaction process, including search fees and government charges.

Discharge fees: Administration fees to cover costs incurred by terminating a loan account.

Discharge of Mortgage: A document signed by the lender and issued to the borrower when a mortgage loan is repaid in full.

Equity: The amount of a property “owned” by the owner. It’s the current value of a property less the amount still owed on its mortgage. Equity usually increases as the principal of the mortgage is paid off. Market values and improvements may also affect equity.

Fixed rate: An interest rate that applies to a loan for a nominated term. Both the interest rate and loan repayments are fixed for the set term, regardless of any interest rate adjustments in the home loan market. The agreed term is normally anywhere between 1 and 7 years.

Guarantee: A contract to pay someone else’s debt if they don’t pay it.

Guarantor: A person or organisation that agrees to take on the responsibility for the payment of a loan – if the actual borrower is unable to pay.

Interest: The amount charged for money borrowed from a lender.

Interest only loan: A loan where only the interest is paid for a nominated term, usually 1 to 5 years. The principal is then repaid over the remaining term of the loan by the conversion of repayments to principal and interest.

Interest rate: The percentage of the loan amount, used to calculate the interest to be paid for a loan.


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Introductory loan: A loan product offered to new borrowers at a low rate for an introductory period – usually up to 12 months. It can also be called a discounted or honeymoon rate.

Lender's Mortgage Insurance (LMI): Insurance which covers the lender if a borrower defaults on a loan and proceeds from the sale of the property do not cover the loan. It’s usually required for the loans the lender considers more risky, such as when the amount borrowed is over 80% of the property value. This covers the lender only – not the borrower.

Line of credit loan: A flexible loan arrangement with a specified limit to be used at a customer’s discretion.

Loan to Value Ratio (LVR): The percentage of the loan amount against the value of that property. So if a house is worth $160,000 and the mortgage is $100,000, then the LVR is 62.50%. Most lenders require a borrower to take out Lender's Mortgage Insurance if the LVR is 80% or more.

Mortgage: The funds borrowed to purchase a property. The property acts as security for repayment of the loan. The lender holds the title or deed to the property. It’s also known as a home loan.

Mortgage offset account: A savings account linked to a home loan. The interest earned by the money in the savings account offsets, or reduces, the interest due on the home loan. A 100% offset is where the interest rates earned and paid are the same. A partial offset account is where the interest earned on the offset account is only a portion of the rate paid on the home loan.

Principal: The amount owing on a loan, on which interest must be paid.

Principal & interest loan: A loan in which both the principal and interest are repaid, during the agreed term of the loan.

Redraw facility: A component of a variable rate loan which enables a borrower to make extra repayments on the loan but later redraw this money if needed.

Refinance: To switch mortgage providers and arrange a new loan for the same property.

Security: An asset that a borrower gives a lender the rights to — so the lender can be confident of getting the money back, one way or another if the debt is not re-payed as per the loan agreement.

Term: The duration of a loan or a specific period within that loan. This is usually written in months for example, 360 months equals 30 years.

Valuation: A professional opinion of a property’s value.

Variable rate: A rate that goes up or down depending on money market interest rates.

Are you ready to purchase your first property?Contact us and we can discuss your options with you.

Call (08) 9429 5794 or email [email protected]

1050 Hay Street, West Perth WA 6005PO Box 422, West Perth WA 6872T +61 8 9429 5794 F +61 8 9429 5766 E [email protected] W blackburne.com.au

Disclaimer. This eBook is intended to provide general information and to be used as a guide only. Readers are advised to contact their financial adviser, broker or accountant before making any investment decisions and should not rely on this eBook as a substitute for professional advice. While every care has been taken to ensure the accuracy of the information it contains, neither the publishers, authors nor their employees, can be held liable for any inaccuracies, errors or omission. Copyright is reserved throughout. No part of this publication can be reproduced or reprinted without the express permission of the publisher. All information is current as at publication release and the publishers take no responsibility for any factors that may change thereafter.

the first home buyers survival guide - blackburne · 2017. 3. 16. · the first home buyers...

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