One of the most common financial goals that my clients have is to be able to buy a home. So many of us have aspirations for property ownership but often don’t know where to start. Whether you’re looking for a place to call home, or an investment to generate passive income, I’ve created this comprehensive step-by-step guide to give you everything you need to know to buy a property
Before we get into the nitty-gritty of how to become a property owner, it’s important to understand why you want to buy a home. Knowing your wants and needs over the long term (and knowing the difference!) is important. You are, after all, diving headfirst into the biggest financial commitment you’ll likely ever make. While we hear the old trope “rent money is dead money” that’s not necessarily true if buying doesn’t support the life you want. Here are a few questions to ask yourself before you decide buying is the right answer:
Three key questions
- How long do I plan to live it in? The transaction costs of buying a home (stamp duty, legal fees, taxes, sales commission, mortgage application fees, etc) make it an expensive exercise. Make sure that if buying you plan to live in or keep your property for at least 5 years – the longer you keep your home the more the costs are absorbed by the capital gains you (can) earn over time.
- Where do you want to live? If you can’t afford to buy a home where you want to live, there is nothing wrong with renting and using your surplus cashflow to invest (either in an investment property, the stock market or another form of investment). Choosing to move just so you can afford to buy a home may end up leading to disappointment about your lifestyle. Also, keep in mind that the location of your property can significantly impact the risk and return qualities of your purchase – so do your research.
- Does this support the life I want to have? While buying a property can be a great investment and a mortgage can be an effective form of forced savings, it’s important that you don’t commit yourself to a location, income or lifestyle you don’t want. If taking a high flying job in New York and travelling the world (eherm, post-COVID) is your thing, then there are other investment opportunities that provide great returns, don’t necessarily require debt and have significantly much less administration than a property
Ok, so now that you’ve done your self-reflection and you’ve decided that you really DO want to buy a home, let’s dive into the steps that are going to get you there!
Before you hit realestate.com.au, the first thing you’ll want to do is calculate your approximate buying power. This calculation, which is based on your surplus income and expenses, is best done via one of the hundreds of calculators available online. I quite like the NAB or the Money Smart versions, neither of which require you to give away your email for the results.
Keep in mind when you do this calculation that the banks will always give you the highest value that they will lend you based on your income. This doesn’t necessarily mean that it is the loan value you should borrow. It’s always a good idea to review your personal budget. Make sure you know how the repayments of a particular loan value will impact your expected cost of living once you’ve moved in and also what you expect your future income will be.
The next step is to research the type of home you want. Work out whether the value of the types of properties you want is within your budget. If not, you’ll have to think about what elements you consider to be non-negotiable and what you’re willing to compromise on. For example, are you willing to compromise on space to be in the location you want? Or is having the size, style and comfort of the house more important than location?
Once you’ve figured out the approximate value of the type of property you want, you can then work out how much you need to save for a deposit.
Save for a deposit
There is nothing complicated about saving money. We all know that in order to save we need to spend less than we earn. However, while it might be simple… it’s not easy. Managing your cash flow is one of the most important and foundational steps in creating long term wealth and financial security and so it’s worth the time and attention to master it.
Having a budget, a cash flow strategy and understanding your relationship with money [LINK] are all equally important parts of the puzzle. If you want personalised help with any (or all) of these key aspects, click HERE to book in for a free mini-session to see if I can help you out.
The exact amount that you need to save will be somewhere between 5 – 20% of the intended purchase price, plus a little bit more for transaction costs such as stamp duty, mortgage application fees, legal fees and pest and building inspection costs. Most of the good online calculators should include estimates for these costs based on what state the property is in.
If you have less than 20% deposit most banks will charge Mortgage Insurance. This gets added to your borrowing costs and is not something you pay up front. It’s worth noting that mortgage insurance does NOT cover you in any way. This is insurance for the bank in the case that you default. It protects them in case they lose money on selling the property after repossession.
Generally, the more you can save the better. But that doesn’t mean that because you have less than 20% deposit you should wait to buy a home. Sometimes getting into the market sooner is better than waiting to save for a larger deposit. Just make sure that you don’t overextend yourself on your repayments. Make the best financial decision for you and your circumstances, now and in the future.
Conduct home inspections
Woohoo, this is the fun part!
Once your savings has reached the target you set, you can start searching for properties you want to buy. Make sure that you consider your priorities before you decide on a property. It will come down to those key reasons you decided you wanted to buy a home in the first place. Consider the size, location, configuration and features. Imagine yourself living there and tap into how it makes you feel.
If you don’t want to spend the time and energy in conducting the search yourself, there is also the option of a buyer’s agent. They will do the hard work on your behalf by narrowing down the options and even negotiating on your behalf. This of course, comes at a cost. Either a percentage of the property value or a fixed fee. It can be worth it if you’re short on time or just plain sick of spending your Saturdays doing inspections.
Apply for mortgage pre-approval
Getting pre-approval isn’t always necessary. But, if you know that you’re ready to buy in the next 3 – 6 months, it makes things easier. It also puts you in a better position to negotiate.
Pre-approval is basically an initial assessment of how much you are able to borrow. It is done by a lender in anticipation of you proceeding with a full loan application. You will need to provide your budget and supporting documentation as if it were a full application. So make sure you have done your homework on which lender you want to go with.
You can either do your own research or speak to a mortgage broker. They will not only be able to help you get the best deal, but will also be able to help with the application process and to guide you on anything you don’t understand.
One final note, make sure that you don’t apply for pre-approval until you are absolutely ready to buy. Each time you apply for pre-approval it is recorded on your credit file and a rejected application isn’t good for your credit score.
Deciding on what offer to make
Making an offer on a property can be nerve-wracking, especially if it’s a house you want to call home. Yikes! The best strategy is to take the emotion out of the negotiations. While this isn’t always easy, remember that while this property might seem like The One, there will always be another property.
Before you make the offer, you need to decide exactly how much you’re willing to pay and how much you want to offer. When deciding how much to offer you need to consider what the vendors asking price is, what you can afford to spend (capped at your mortgage pre-approval value) and what independent assessors value it at.
Going in low isn’t always the best option, especially if there is a lot of interest in the property or if it’s early on in the property’s marketing campaign. Be respectful but always stick to your price limit and what you feel is fair value.
Make the offer
Once you’ve decided on a fair value, make a call to the agent and tell them that you would like to make an offer.
Make an offer quickly rather than wait. Even if something has been listed as going to Auction doesn’t mean you have to wait until the auction to make your offer. Due to the cost of going to auction, most vendors will want to secure a sale (at a good price) before the auction day as there is a risk there won’t be a better offer.
There are a couple of other factors to be aware of that will impact a vendors decision to sell, that are not related to price. You may make your offer more attractive by having finance already approved, which takes away the uncertainty of the sale falling through. Agreeing on a settlement date that works for the vendor is also something that may affect their decision to sell. Needing a very long (or short) settlement may influence their decision, so if you have some flexibility with this, it can be worthwhile asking the agent about this.
If your offer is not accepted and you have room to negotiate, then do so. If your offer is accepted, it’s time to engage a lawyer. Note that even though the offer was verbally accepted, nothing is yet legally binding and there is a possibility of being gazumped. Gazumping is unfortunate but legal. You can read more about it and how to avoid it here.
Engage a lawyer
Many years ago, my husband and I made an offer on a property that we thought was perfect for what we needed. It was only after engaging our lawyer that we discovered that the ownership structure outlined in the contract would have put us at financial risk.
I can’t stress enough how worthwhile it is to engage a good conveyancing lawyer. Not only will they review the sales contract but they can also help to arrange pest and property inspections, do all the title searches, review strata documents and sinking fund records (if an apartment) and liaise with your lender to have the final settlement transferred.
There may be circumstances, like my own, where the lawyer advises you not to purchase a property. This could be because of potentially negative contract clauses, poor inspection reports or something else. It can be disappointing, especially when you’re so keen and excited to buy a home, but it’s important to listen to their advice. That is, after all, what you engaged them for.
Conduct relevant property checks
If you have a good conveyancing lawyer, they will arrange to get pest and building inspections done. If your lawyer does not do this, you will need to arrange it yourself. The inspection reports usually won’t make a recommendation either way as to whether you should buy a property, but if there are major structural issues or pest infestations you will need to decide whether it is worth the (potentially large) financial burden to fix the problem. Once again, remember that this is the reason you engaged someone to inspect the property – to reduce your exposure to financial risk
Exchange of Contracts
If your lawyer is happy with the contracts, the pest and building inspections and you’re ready to proceed, now is the time to sign the documentation. At this stage both you and the vendor will sign two copies of the contract and it’s at this stage that you put down a deposit, usually of 10% of the value of the property.
Settlement is very last step in buying or selling a home and it is the process of transferring legal ownership of the property from one party to another. It usually happens around six weeks after the exchange of contracts, but as mentioned above, this can be negotiated between the buyer and vendor.
On the morning of settlement, you will need to do a final inspection, just to make sure that everything is as it is meant to be. Vendors have been known to remove light fixtures, dishwashers or other features which were agreed upon within the contract – so beware!
Once you have done your final inspection, the balance of the purchase price will be transferred from your lawyer to the vendor and the title of the property will be transferred to your name.
Hooray! Now it’s time to get your keys and to pop the champagne. You’re a homeowner!!