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John Ruddicks First Home Buyer Guide - 2016
John Ruddicks First Home Buyer Guide - 2016
HOME BUYER
MANUAL
Your 31 step guide to buying
your first property in NSW
2016 Edition
CONTENTS
STEP 1
Contact me
STEP 2
Income 5
STEP 3
Ongoing expenses
13
14
14
14
STEP 7
of contracts
15
STEP 8
STEP 9
10
11
12
16
16
black spot.
17
17
18
18
12
STEP 28 Insurances 18
12
STEP 29 Settlement 19
13
STEP 30 Post-settlement 19
STEP 16 Pre-approved! 13
STEP 31 Congratulations 19
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.
Having worked closely with several hundred first property buyers, I know that following these
guidelines will put you in a stronger position when applying for your first mortgage.
n 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.
n Holidays
n 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.
n 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 card is necessary,
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.
n 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.
n 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 your
first property.
Old-fashioned tips
STEP 1
STEP 2
STEP 3
Contact me
Income
Ongoing expenses
Car loans
Personal loans
Dependent children
CASE STUDIES
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.
Owning a home is a
keystone of wealth...
both financial affluence
and emotional security.
Suze Orman
Case study
two
Case study
three
n He
n Jack
n She
n She
n Her
n She
Case study
one
n His
n He
n He
n For
n Jill
n They
n They
n They
STEP 4
STEP 5
Your deposit
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 to
buy your first property. The only exception is if you have a guarantor
(see Step 6.)
PURCHASE
LOAN AMOUNT
PRICE
COST
OF LMI
$600,000
$7,500
$600,000
$22,000
$900,000
$11,000
$900,000
$33,500
$1,200,000
$17,000.
$1,200,000
$53,000
n
A deposit
n
The
n
A family
n
If the
n
Almost
n
The
n
As
a general rule, if you have less than a 20% deposit you will
need to pay Lenders Mortgage Insurance.
31-STEP GUIDE TO BUYING YOUR FIRST PROPERTY IN NSW l
STEP 6
STEP 7
Yes, you can buy a property and borrow money with a friend
or family member. However, there are two potential difficulties
with this structure.
n
What
STEP 8
STEP 9
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 strata
report or, for a house, a building/pest inspection.
n $500,000
n $1,000,000
n $2,000,000
Unlike some states, the cost of the stamp duty in NSW is the same
whether the property is owner-occupied or an investment. Before
you 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 expensive
as the property becomes more expensive, and the percentages
used in calculations also increase.
STEP 10
Loan types
There 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 moves
up and down when the Reserve Bank adjusts its official interest
rate. However, a lender will occasionally change its variable rate
for 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. That
fee 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 does
have redraw (see Step 11). Basic variable loans usually have no
ongoing fees, and are generally more popular if the loan amount
is under $300,000 or so.
Warning: Many lenders have a track record of heavily promoting
a 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. Some
lenders 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 fixedrate 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 to
pay out the loan before the end of the fixed period. If the variable
10
rate rises above your fixed rate you have probably saved money.
But if the variable rate drops below your fixed rate youll be losing
money. 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 debt
in 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 Line
of 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 in
the one account. Lines of Credit can be used to buy a home or
an investment property, but I rarely recommend one to buy a
property. 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) a
mortgage and therefore have a lot of equity, and want instant
access to their funds to invest.
STEP 11
What is redraw and offset?
Most people with a home loan today will have either an offset account
or a redraw facility, and in many cases both.
An offset account is like a normal everyday bank account except in one
positive 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 bank
pretends 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 charged
to 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 the
mortgage 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 investment
loan or for an owner-occupied loan that may one day become an
investment loan (see Step 13).
11
STEP 12
STEP 13
STEP 14
Repayment Types
Loan Submission
This tip is critical for those with home loans, and even more
so for people looking to buy their first home. It is the most
overlooked 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 consider
paying interest-only repayments from the moment you buy
your home. It does seem counter-intuitivepeople who
are 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:
n You
n
The
STEP 15
STEP 16
STEP 17
Credit Report
Pre-approved!
Government benefits
for first home buyers
n
Your
previous employers
n
Your
previous addresses
n
If you
n
Whether
n
Whether
n
Whether
n
If the
n
If the
n
If the
n
If the
n
To
n
If you
13
STEP 18
STEP 19
STEP 20
Property Hunting
Price Negotiation
14
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 to
buy 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 get
their offer accepted, but mostly Im just a sounding
board to talk things through at this critical juncture.
STEP 21
A Conditional Exchange of Contracts
Under NSW law, a property is sold with a five-day cooling-off
period 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 the
contract 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 days
even if theyre offered a higher price. You have the right to pay
the remainder of the deposit within the next five days, at which
point you have bought the property unconditionally.
But before you pay the remainder of the deposit you need
to 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 is
kept by the vendor.
While under a cooling off period there are four things to do.
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 is
accepted, you need to ask the real estate agent to
forward that contract to you so you can forward it to
your legal advisor.
15
16
Ben Bernanke
STEP 22
STEP 23
Unconditional Exchange
of 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 sign
a 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. If
youre 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 approved before you
exchange.
STEP 24
STEP 25
Unconditional Approval
The property buying process has checks and doublechecks at every step to ensure people avoid making a
catastrophic slip-up. If someone legally commits to buying
a property but cant get a loan to pay the vendor, it can
easily result in bankruptcy.
n
the
17
STEP 26
STEP 27
STEP 28
Loan Offer
Insurances
18
Once the loan offer documents are signed, they are posted
back 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 settlement
which is typically six weeks after the exchange.
STEP 29
STEP 30
STEP 31
Settlement
Post-settlement
Congratulations!
Settlement is the big day when you get the keys to your
new property. A few days before, your legal representative
will have advised if there is any outstanding payment from
you to make for the deposit or fees and how to forward
those funds so they are available at the settlement.
n
Check
due.
n
Record
n
Double-check
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.
19
$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
$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
These are some of the lenders we can work with on your behalf.
Level 6/122 Arthur Street, North Sydney, 2060 l P 02 9955 1176 l M 0412 129512
l E john@jrhl.com