Residential Property Finance – Your Complete Guide
Home and Property Loan Guidelines for Homeowners and Investors
Buying a home or investment property is often one of the largest investment decisions and financial commitments you will make in your life.
There are many things you need to be aware of when purchasing a property and borrowing money, from stamp duty to interest rates, first homeowner grants, comprehensive credit reporting, saving a deposit and obtaining a pre-approval.
In this article, we cover the things you need to know in relation to property finance.
What Will It Cost?
There are a number of costs you will incur when purchasing a residential property. These quickly add up to a significant amount of money and need to be taken into consideration when determining how much you would like to spend.
Here is a break down of what to expect:
Stamp duty is effectively a state government tax which is based on the purchase price of a property. As this is set by state governments, the stamp duty payable varies from state to state, as does how it is calculated and the rebates and concessions available to certain types of purchases, such as first home buyers & pensioners.
The purpose the property is being purchased for can also affect the stamp duty payable, ie: as home to live in (a principal place of residence) or to rent out (an investment).
To obtain accurate information about the stamp duty payable in your state, please visit the following websites:
- ACT – https://www.revenue.act.gov.au
- NSW – https://www.revenue.nsw.gov.au
- NT – https://treasury.nt.gov.au
- QLD – https://www.qld.gov.au
- SA – http://www.revenuesa.sa.gov.au
- TAS – https://www.sro.tas.gov.au
- VIC – https://www.sro.vic.gov.au
- WA – http://www.finance.wa.gov.au
Registration of Transfer Fee
This is a fee that is set by and payable to the state government, for transferring the ownership of a property from the seller (vendor) to the person buying it (purchaser). Transfer fees vary from state to state, ranging from as little as $207 in Tasmania, right up to $782 in Queensland for an owner-occupied property with a purchase price of $350,000.
Registration of Mortgage Fee
This is another fee that is set by and payable to the state government for registering a mortgage against a property. Mortgage registration fees also vary from state, ranging from $115 in Victoria, up to $181 in Queensland.
Realestate.com.au has a handy calculator that can be used for the purpose of obtaining an indicative estimate of the applicable government charges associated with purchasing a property in your state.
Your local Vie Financial finance broker will also be happy to provide you with a personalised funding summary detailing all the applicable taxes, fees and charges for exactly what you would like to do.
Legal & Conveyancing Costs
One of the primary roles of a solicitor/conveyancer is to prepare all of the legal documents required to facilitate the purchase of the property and to protect your interests. They will provide you with advice regarding the terms and conditions of the contract of sale and point out any specific items you should be aware of.
If there are planning restrictions, easements or caveats on the property, or something is out of the ordinary, your conveyancer or solicitor will also highlight this to you. It is always a good idea to have your solicitor or conveyancer read over the contract of sale before you sign it, for presentation to the vendor.
Although they will not be involved directly in arranging the finance for your property, your solicitor/conveyancer will act on your behalf to arrange settlement with your chosen lender, the vendor’s solicitor, and their bank.
They will also make sure you only pay costs from the date of settlement, which is the day the property legally becomes yours. This will ensure you do not pay for things like council and water rates that were incurred by the seller prior to settlement – more on this in a minute.
Effectively, your solicitor/conveyancer is your legal representative who brings all the parties involved in the sale transaction together to facilitate your purchase: your finance provider, the seller, the seller’s finance provider, the seller’s solicitor/conveyancer and the land titles office.
Rates & Strata Re-Imbursement
Many buyers do not realise that the amount they are going to contribute towards their property purchase will be “adjusted” by their conveyancer to allow for expenses that have been paid by the vendor (seller) in advance, at the date of settlement.
Say the vendor pays the council rates for a six (6) month period but sells and vacates the property after just one (1) month. As the buyer, you will be required to reimburse the vendor for the additional five (5) months of council rates they have paid. These costs will often be referred to by your solicitor or conveyancer as “adjustment costs”. The most common “adjustment” items that you should expect to pay at settlement are water rates, strata/body corporate levies and council rates.
To work out exactly how much you may need to adjust your contribution by, each item is given a “daily rate” and calculated accordingly.
Your Vie Financial mortgage broker will make an allowance for “adjustment costs” when calculating the funds required to purchase the property you wish to buy. This will ensure you are not caught out and do not have to try and find additional funds to cover the applicable adjustment costs at settlement.
Lenders Mortgage Insurance
Lender’s mortgage insurance (LMI) is an insurance policy that protects your lender from financial loss in the event you do not make your home loan repayments, and they are forced to sell your property for less than what you owe them.
Lenders mortgage insurance is applied directly to your home loan. While LMI is not an upfront fee that you must cover at settlement it is added to your home loan, so you still have to pay for it, plus interest!
Lenders mortgage insurance is payable when you borrow over 80% of what the property you are purchasing is valued at. As a general rule, you will need to contribute 24% of the properties purchase price using unborrowed funds if you want to avoid paying lenders mortgage insurance: 20% as a deposit, and roughly 4% to cover all of the costs we covered earlier.
The cost of LMI varies depending on a number of variables, however, the main influencer is the percentage of the properties value you wish to borrow, which is known as the loan value ratio (LVR).
The higher your loan value ratio, the more expensive your lender’s mortgage insurance will be. For a rough guide on what your lender’s mortgage insurance may cost, have a look at Genworths LMI estimator.
The cost of lenders mortgage insurance varies between lenders and scenarios. Your Vie Financial mortgage broker will be able to provide you with an accurate LMI quote for your individual circumstance.
What is the Minimum Deposit Required?
While this is a common question it is a difficult one to answer accurately, as each lender has a different maximum borrowing amount that may or may not include lenders mortgage insurance. As a general rule, the minimum amount required is approximately 9% of the property’s purchase price, 5% as a deposit and 4% to cover all of the costs we talked about earlier in this article.
Your mortgage broker will be more than happy to provide you with an accurate, no cost, & no-obligation funding summary that will detail the minimum amount required to purchase a property for the price you are looking at.
Are There Any Other Options if I Don’t Have the Minimum Deposit Required?
A family guarantee could assist you to purchase a home using a smaller deposit and result in you not having to pay for lenders mortgage insurance (LMI).
A family guarantee is where a family member with enough equity in their home makes it available for you to us as security for your new loan. They do not have to give you or the lender any money, however, they do need to be willing to accept the obligations associated with providing a security guarantee, and you need to make the loan repayments when they are due.
The security your family member (the guarantor) provides does not need to cover the total amount you borrow, it just needs to cover a portion of it, which is usually the amount required reduce your loan value ratio (LVR) to 80%. Utilising a family guarantee to lower your LVR to 80% not only reduces your deposit amount, but it also removes the requirement for to you to pay for lenders mortgage insurance, literally saving you thousands of dollars.
It is critical that you as the borrower can afford the loan, as the guarantee does not reduce or assist with your home loan repayments. It is also important for the guarantor to understand that a portion of their property is being used as security for the loan you are taking out.
A family guarantee is a serious commitment. If you find yourself in a situation where you can’t meet your loan repayments, the lender has the right to sell your property to recover the money you owe them.
If what the lender sells your property for is not sufficient to repay the total amount outstanding, they will call on your guarantor to cover the shortfall – up to the maximum amount of the family guarantee that has been provided. In the event your guarantor is unable to cover the shortfall, the lender may also sell their property.
It is extremely important that you as the borrower and any family member who is considering providing a guarantee, obtain independent legal advice before applying for a loan. If you would like more information on how a family guarantee works and the options available, get in touch with your local Vie Financial mortgage broker.
Genuine savings are funds that you have accumulated in a bank account gradually, over a period of time.
As a general rule, most lenders require you to demonstrate genuine savings of at least 5% of the property’s purchase price over a minimum period of three (3) months, when your loan value ratio (LVR) is 90% or above.
What constitutes genuine savings?
- Cash held in a bank account in your name for over three (3) months.
- Managed funds or shares held in your name for over three (3) months.
- Money held in a term deposit in your name for over three (3) months.
- Equity held in an existing property.
- Some lenders will count rent paid over a twelve (12) month period as genuine savings, however, conditions do apply.
First Home Owners Grant
The First Home Owners Grant (FHOG) was introduced in Australia to assist buyers to purchase their first home. The grant differs in each state, and in most instances only applies to new homes and properties.
Grants and stamp duty concessions also change frequently. To see if you are eligible or to obtain more information about the First Home Owner Grant in your state please visit: http://www.firsthome.gov.au/ or contact you local Vie Financial mortgage broker.
What is Serviceability?
Serviceability is your ability to meet/service your home loan repayments. Banks calculate your serviceability to ensure you can afford to take on a loan and to determine how much they are willing to lend you. Lenders use different methods to calculate serviceability, and different criteria when it comes to the minimum serviceability standards they will accept.
The assessment of a borrower’s loan serviceability is a legal obligation for financial institutions under responsible lending rules in Australia. Financial institutions calculate serviceability by taking all sources of monthly income such as wages, bonuses, commissions, rent received for investment properties, government pensions, child support etc, and then subtract all of the borrower’s household monthly living expenses.
The amount remaining is known as the net income surplus (NIS). If there is not a surplus after all the borrower’s expenses, including any existing and proposed new debts, have been taken into account the loan application will not be approved. All lenders apply an additional amount to a borrower’s monthly commitments to help ensure you will be able to live comfortably and continue making your loan repayments in the event interest rates rise after you take out a loan.
Lenders also treat varying forms of income differently. For example, a lot of lenders will not accept child support payments or government pensions as income, which means they will not include this in their serviceability calculation.
Other lenders will discount or cap rent received for investment properties, which reduces the amount of income that can be included in their serviceability calculation, and reduces the amount of money they will be willing to lend you.
Home loan serviceability is monitored by the Australian Prudential Regulation Authority (APRA). APRA is an independent statutory authority that supervises institutions across the banking, insurance and superannuation industries, to promote financial stability in Australia.
If you would like to determine how much you can comfortably afford to borrow, contact you local Vie Financial finance broker.
Over the past few years, there have been many changes to the way banks calculate and verify living expenses when assessing home loan applications. Lenders are responsible for determining that what you spend now, and what you will spend in the future, is not going to jeopardise your ability to repay your home loan.
The recent Banking Royal Commission uncovered some undesirable practices lenders used to assess borrowers living expenses, which has resulted in more rigorous verification processes.
Living expenses include; rent, power, water and gas bills, property rates, groceries, childcare, healthcare, insurance, medical expenses, gym memberships, phone & internet services, pay-TV and Netflix subscriptions, school fees, child support payments, clothing and transport expenses.
Discretionary or non – essential items, like alcohol, tobacco, entertainment, travel and excessive shopping are now also being carefully reviewed by banks and lending institutions.
Some lenders will accept your living expenses as declared, provided they are in line with people earning similar incomes, in similar circumstances to you. However, most financial institutions will compare what you declare to the Household Expenditure Measure (HEM).
The HEM benchmark was developed by the Melbourne Institute, an economic research group based in Victoria. HEM is used as a tool by lenders to assist assess a borrower’s annual living expenses using data that takes into account the state & city where they reside, the type of household they occupy: single, couple, family etc, their annual income and the number of dependent children they have.
Now more than ever, it is extremely important to ensure that your declared living expenses are as accurate as possible. Some lenders are requesting bank account and credit card statements for the sole purpose of verifying borrowers living expenses and discretionary spending.
The truth is your account statements provide a huge amount of information about you and can ultimately determine whether or not your loan will be approved. Many lenders require three (3) to six (6) months statements for your bank account, credit card and loan facilities as part of their application process, which enables them to thoroughly review the conduct of your existing accounts.
Reviewing the statements not only enables them to verify your income and expenditure but also see what you are like at managing your money and paying your bills. Are there late payment, the account is overdrawn, or dishonour fees being charged to your account? Is your credit card over its limit? Has it been paid on time over the past six (6) months? These are the account conduct issues lenders look for and take into consideration when assessing home loan applications.
Lenders look at your credit score (which appears in your credit report), to assist them to determine if they are going to approve your loan. Your credit score is a number that is based on an analysis of your credit file, at a particular point in time, that helps a lender determine your creditworthiness.
Credit reporting agencies collect your financial and personal information and document it on your credit report. This information is then used to calculate your credit score and includes:
- Your personal details (such as age and where you live).
- The type of credit providers you have used (such as a bank or utility company).
- The amount of credit you have.
- The number of credit applications and enquiries you have made.
- Any unpaid or overdue amounts.
- Any debt or personal insolvency agreements relating to bankruptcy.
What Does My Credit Score Mean?
Your credit score will be a number between zero and 1,200. The number is rated on a five-point scale (excellent, very good, good, average and below average). The position of your credit score on this scale helps lenders work out how risky it is for them to lend to you:
- Excellent – you are highly unlikely to have any adverse events harming your credit score in the next 12 months.
- Very good – you are unlikely to have an adverse event in the next 12 months.
- Good – you are less likely to experience an adverse event on your credit report in the next year.
- Average – you are likely to experience an adverse event in the next year.
- Below average – you are more likely to have an adverse event being listed on your credit report in the next year.
Your credit score will increase or decrease depending on the information being added to your credit report. Your score can change even if your financial habits haven’t. This could be due to a number of factors including:
- Applying for a new loan or credit card.
- A listing on your credit report expiring.
- A change to your credit limit on an existing loan or credit account.
- New information provided by a creditor.
- Closing a loan or credit card account.
- Late repayments.
How to Improve your Credit Score
Improving your credit rating starts by looking at your current financial situation and identifying ways to improve it. As your financial circumstances improve your credit score will improve. Getting into a good credit position before you apply for a loan can help increase the likelihood of being approved.
You can improve your credit score by:
- Lowering your credit card limits.
- Consolidating multiple personal loans and/or credit cards.
- Limiting your applications for credit.
- Making your repayments on time.
- Paying your rent and bills on time.
- Paying your mortgage and other loans on time.
- Paying your credit card off in full each month.
Fixed or Variable Rate
Generally, when you take out a home loan you have two (2) choices when it comes to interest rates: fixed or variable.
Fixed Rate Loan
A fixed-rate loan is where your interest rate is locked in for a certain (fixed) period, usually between one (1) and five (5) years. During the fixed period, your interest rate and your loan repayment will not change.
Having a fixed-rate loan can make budgeting easier as you know exactly what your repayments will be for the fixed-rate period, enabling you to plan ahead and set financial goals with the certainty of knowing your repayments are not going to change. Any rate rises will not affect you, and if interest rates rise above your fixed-rate, you will be happy knowing you are paying less.
Some of the potential disadvantages associated with fixed-rate loans are; rate reductions will not be applied to your loan throughout the fixed period, meaning you may be stuck paying significantly more than what you would be if you were on a variable rate loan in the event interest rates go down.
Additional loan repayments and re-draw are also severely limited, or not allowed at all during the fixed-rate period. Fixed-rate loans usually have expensive break fees that are incurred if you need to change or want to refinance/pay off your loan within the fixed period.
A fixed-rate loan is not going to be suitable if you are thinking about selling your home or you want the freedom to switch loans/lenders.
Variable Rate Loan
Variable-rate loans will fluctuate any time the lender increases or decreases their interest rate. They may do this as a result of the Reserve Bank of Australia adjusting the official cash rate, or due to other economic factors that affect them. With variable-rate loans, your minimum repayment amount will increase if interest rates go up and decrease if interest rates go down.
Variable-rate home loans typically offer much more flexibility than fixed-rate loans and generally come with a range of features such as; unlimited additional repayments, enabling you to pay off your loan faster and unlimited redraw, enabling you to access the funds if you need them in the future.
Many variable rate home loans come with an offset account, which can help reduce the amount of interest you pay and do not have hefty fees if you decide to pay your loan out early due to selling your property or wanting to refinance.
It can be more difficult to budget with a variable rate loan as repayments can increase when interest rates change.
Your Vie Financial mortgage broker will assist you to determine whether a fixed or variable rate loan is suitable for your individual situation.
Obtaining a Pre-Approval
A pre-approval means that a lender has agreed, in principle, to lend you the money to fund the purchase of a property up to a certain amount. It allows you to ascertain your purchase price, so you can narrow your search, negotiate with certainty, and bid with confidence if you’re going to buy at auction.
You’re under no obligation to take out the loan, and the lender has no obligation to lend you the amount you are pre-approved for, however, it shows sellers you’re serious about buying and you’re confident you can afford the property.