So you’re going to buy a property? Congratulations! You must have sold an organ or won the lottery.
Maybe you saved your arse off, or got some help from the parentals. Either way, you have squirreled away enough money for a deposit.
Otherwise, you’re reading this because it’s useful information to have in approximately 72 years when you have saved up enough. I get it – it’s like watching Jamie Oliver. You aren’t really going to make that 30-minute Peruvian rotisserie chicken, but it feels good intending to.
And like most finance stuff, there’s a whole world of bullshit jargon and rules you’ve never heard of. It’s like your mum trying to navigate Instagram – ‘what does ‘AF’ stand for?’.
I am going to break down the process, but it really is a lot of learning so I’ll keep it topline for now. If you get really excited, you can Google more info.
Find out how much you can borrow.
There are plenty of nifty ‘borrowing power’ calculators that give you a general idea. They’re pretty generous though – they suggest that you can buy a chateau on the banks of the river Seine … as long as you eat baked beans and shop at K-Mart for the rest of your adult life.
So you need to sit down with an actual mortgage broker and go through it.
Make friends with a mortgage broker
Should you use a broker? Fuck yes. Seriously, you’ll feel like a bloke who’s wandered into Sephora if you try and work this shit out yourself. A mortgage broker does all the work for you and you don’t even need to pay them – the winning lender does that!
Keep an eye out to make sure they aren’t just suggesting the loans aligned with their brand. For example, Aussie Home Loans can act as a broker as well as sell you an Aussie loan – but only if it’s the best deal. They have a professional obligation to do what’s in your best interest..
Occasionally you can get a deal that’s not available through a broker – e.g. I refinanced to a UBank home loan that my broker couldn’t match, even though he is a top bloke. But that was when I was already somewhat versed in this stuff. If you’re a virgin, you don’t really want to mess around with clueless Year 8 boys now, do you?
How do you find a broker? Ask around. People who have a good one will happily recommend them – maybe it’s because they play a positive role in such a big event, but people seem to get attached.
Things that might affect your borrowing power:
- Credit cards. The limit you have is seen as a liability, even if the balance is zero. So if you have a $10,000 limit, the bank assumes you have that much debt and that counts it as a competing priority for your hard-earned cash. So either cancel unnecessary cards or reduce your limits.
- Personal or car loans – again, if you owe $20K on a car loan, the bank will take this into account. Sensible Aunty Belinda says what business do you have buying a house when you are still paying off a car – HOWEVER, this is the real world, so if you are, be aware that it crimps your spending power.
- Your credit score. Like an inner wild child, everyone has one of these – even if they don’t know it. If you buggered up a mobile phone plan as a 19 year old, your credit score will know. If you didn’t return that Mean Girls DVDs to the store in 2005, they will know. OK, maybe not the latter one – but you will have a score, it might be compromised by a bad decision or oversight, and you need to know about it. Google ‘credit score’ and get a free one.
- Your savings history. Even if you have been gifted a hefty sum from the ‘bank of mum and dad’, you need to show the bank you can be a grown up and pay off a mortgage. So they will want to see your bank statements to reassure themselves of that fact.
Building in a buffer
Now just because you CAN borrow a certain amount, doesn’t mean you NEED to. Banks are pretty clueless about how much they think you actually spend. They will say ‘your repayments are this, and your spending is that, so you can borrow this BIG AMOUNT.’
But they don’t know about your penchant for annual ski trips, your addiction to spray tans or your deep-seated desire to pay 30 bucks a pop for an F45 workout. So unless you intend to live like your Nanna, don’t take the max amount.
Also, remember that we are at crazy low interest rates right now, and they won’t last forever. You need a decent buffer in case rates go up, so get your broker to run the numbers as though rates had gone up 3% or more. If you almost pass out when you see those repayments, it means you can’t afford it.
The next step is to get pre-approval on the loan you want. That means you can go to auctions and sales and feel like you have the money in your hot little hand. You actually don’t, because the bank still needs to approve the property you buy, and a bunch of other boring details. But it’s the closest you’ll get until you do the deed for real.
The paperwork gauntlet
Applying for a home loan is seriously one of the biggest paperwork fuck-arounds you will ever experience. They want payslips, bank records, identification and whether you’re oily, dry or combination skin. Well, it feels like it anyway.
A good mortgage broker will hold your hand through it, but be ready to spend time and frustration on it.
Crunching the numbers
How much does a property cost? More than you think. The purchase price is just the start. Other costs are:
- Legal/conveyancing fees. Depends on who you use and what you need but factor in at least a couple of grand.
- Building inspections – A few hundred bucks every time you get serious about a property and want to make sure it’s structurally sound and not full of termites.
- Stamp duty – This is the big one. If you’re a first home buyer, some states have exemptions or discounts, so check out your state government website. Working out the amount is pretty complicated and different in each state, so check out the calculators you find online or ask your broker. But it can add tens of thousands of dollars to your purchase price.
- Lenders’ Mortgage Insurance – Another annoying trap for the rookie. If you have less than 20% of the deposit, the bank thinks you’re risky. So they make you take out insurance on the amount that’s short. E.g. If you’re at 18%, you may need insurance on the missing 2%. If you get one of those ‘95% of purchase price’ loans, they will hit you hard with this. You don’t have to find this money upfront – they whack it onto the mortgage. But if you throw an extra, say, $10k onto your mortgage, you are then paying interest on it. It’s a rort in my opinion, so do everything you can to scrape up the 20% deposit.On a side note, when I bought my place, the bank valued it at $40K higher than what we paid. We had been just shy of 20%, but at the bank’s valuation, we hit the 20% mark, so my awesome broker made them waive the couple of grand extra we would have spent on LMI. Suffer, bank!
Choosing a loan
Fixed, variable, offset, redraw – WTF? Relax, it’s not that complicated.
The first thing to decide is whether to have a fixed rate, meaning the interest rate doesn’t change. A variable loan goes up and down at the whim of the Reserve Bank or even just when your bank feels like it.
A fixed rate means you have more certainty for the term of it (often 3 years) but you are also stuck if rates go down, and may face a fee if you pay the loan out early (a break fee).
There are pros and cons of each, and basically, it’s like placing your money on red or black on a pokie machine – it could go either way. Choose the option that you can sleep at night with.
Then there is ‘offset account’. This is where any money in your bank account counts towards (offsets) the loan. Say you have a cool $10K of your everyday money kicking around in your bank account (well done, I wish I could manage that).
The bank acts as though you paid that money to them, and reduces the amount you pay interest on. So for example instead of paying interest on $400K, you pay it on $390K. All adds up, my friend!
A redraw is similar but I prefer it because it’s an extra level of discipline. Any money that you pay on top of the minimum repayment goes to the loan, but you can redraw it out again. Say you made $10K extra in payments last year – you can claw that back if you need an emergency boob job or something.
In my experience, once that money is in there, it’s a huge guilt trip to pull it out again – and you usually have to wait a day.
In terms of rates, your broker should find the best one for you. But here’s a hot tip – it’s probably not going to be with one of the big 4 banks. It might be with some credit union, or an online bank (like my UBank loan). So don’t be sucked in by their branding. Also, bear in mind the ‘comparison rate’ – this means if they say the rate is 4%, but by the time you add fees and charges, it comes out more like 4.2%, they have to say so. Try and find one with minimal fees, obvs.
Now I am not going to give you any advice about actually choosing a property because that’s a whole other topic and one I’m not really an expert in. But suffice to say do your research – lots of it.
So that’s it Fierce Girls. Save this in your files for your happy house-hunting in the year 2067!