First Home Buyers Guide by Andrew Pine

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Andrew Pine – How to buy your first home

Part 1 – Get a deposit

 

For most of us, a house will be the most valuable thing we own during our lifetime. The right house is also your first rung on the property ladder, should you want to climb your way to financial freedom. The wrong house could leave you financially and emotionally stressed, wishing you had never embarked on this adventure in the first place.

But we haven’t even started yet! A lot of jargon is thrown around by those in the property industry. For a first home buyer, hearing Agents and Banks using phrases like “leaky buildings”, “stamp duty”, “Lender’s Mortgage Insurance”, “Loan to Value Ratios” and “First Home Owners Grant” is enough to make you sit back and wonder whether you will ever know enough about this industry to dip your toe in without accidentally choosing that ‘wrong’ house.

So how are people in Queensland buying their first home and what do you actually need to know? Over the next few weeks we will outline a road map which covers the basics. Today, let’s focus on what your goal is and the first step – getting that deposit!

  1. Determine your Objective

This is the most important (and most boring) part of the exercise. But without knowing what your destination is (the objective), how can you know how to get there?

An objective must be a defined thing. You must be able to determine whether you have arrived at your destination. “Being really rich” is not sufficiently defined, while having five positively geared rental properties is. So is owning that dream family home with no mortgage.

For now, let’s assume your objective is to purchase your first home at an affordable price which does not ruin your existing lifestyle.

The remainder of this series therefore maps out how you can get to your destination. But first lets work out how to get started: how to get that deposit!

  1. Deposit

Unless your parents are extremely rich or you made some very, very smart saving decisions when you were a child, you are most probably going to have to borrow money to buy your first house. Let’s assume you need to borrow from a bank.

Regardless of whether your objective is to own a hundred rental properties, or one mansion for yourself to live in, you must contribute to part of the total cost of buying that first property.

Historically banks required you to save 20% of the price. But given the median house price is Auckland is now close to a million, it might take you a while to save over $200,000.00.

Banks have therefore relaxed their 20% requirement. It is now possible for your deposit to be as little as 5% of the price. Some banks will even not require you to have saved the entire 5% yourself, provided you meet certain criteria. However, once you have less than a 20% deposit, banks decide that you are risky to lend money to. Banks therefore charge you Lender’s Mortgage Insurance (LMI), which is a fee quite often charged when you first borrow the loan. All of a sudden that $50,000.00 deposit you saved up over a year or two is down a few thousand dollars.

So how can you avoid LMI? Well three ways, or, hopefully a combination of all. Firstly, when calculating your deposit, banks will take into account the First Home Owners’ Grant . Are you eligible? To find out, here is a link to the relevant website.

Secondly, a relative can also guarantee part of your loan without even giving you any money! Emphasis on “part”. A guarantee is where a relative (often a parent) promises the bank that if you cannot make your loan repayments, they will pay instead. The bank usually requires this relative to use their property as security. This can be an awkward conversation to have: “hey mum, if I borrow money from the bank and can’t pay, are you ok with the bank selling your house?”. However, the best way to frame this request is to make it clear that the relative is only guaranteeing whatever part of the 20% you have not yet obtained. Once your loan is less than 80% of your home’s value (i.e. you own 20% of the property), your relative is released from their guarantee. If you have chosen the “right” property (more on that later), the value of the property might increase so that even if you do not pay the loan off quickly, you might reach that 20% mark within a couple of years.

Thirdly is – putting it simply, you need save some money yourself. However a few banks won’t even require you to have saved 5% of the price. Provided you have 5% made up of a combination of savings, First Home Owners’ Grant and/or a relative guarantee, some banks will take into account the fact that you have been paying rent while saving for your deposit, so will not require you to have saved 5% yourself. This is an exceptional circumstance and banks must comply with strict lending requirements to ensure they are lending to you in a responsible way. Given I am not a qualified financial advisor, if you wish to go down this route, I suggest teaming up with an experienced broker and financial planner.

Remember that unless you have a total of 20% made up of these three factors, you will be paying thousands of dollars of Lender’s Mortgage Insurance which really eats in to the money you have saved. It’s wasted money.

With house prices increasing faster than our incomes, Buyers need to be creative when obtaining a deposit. However as soon as you are on the property ladder with that “right” property, its value should increase and you are then well on your way to financial freedom, that dream home, or both!

Next week – Minimising entry costs

Disclaimer: Andrew Pine is a property solicitor practising in Queensland. Andrew is not qualified to give accounting or financial advice. This article is written solely as an opinion of the writer. This article should not be relied upon for legal, accounting or financial advice. You should always seek advice which is tailored to your individual circumstances.

 

Article 2

Minimising entry costs

So you have managed to obtain a deposit! Whether you got there by saving every paycheque while living on canned food, received help from a parent by way of a cash payment or personal guarantee, you obtained the First Home Owners’ Grant, or you gained your deposit through a combination of all these things – you have achieved that first step. Congratulations!

 

But wait, why are taxes and fees being deducted from this deposit? It was difficult to obtain that deposit as it is. So what can I do to minimise entry-costs so that my hard-earned deposit isn’t paid to the State Government or banks when I buy?

 

  1. Stamp Duty

The Australian property market is heavily taxed. Stamp duty, Land Tax, Capital Gains Tax and Income Tax are just some of the taxes you could be up for if you invest in the Queensland property market.

However if you are an Australian citizen, this is your first home and you are living in it, the only tax which applies when you are acquiring the property is Transfer Duty – also known colloquially as Stamp Duty.

Stamp Duty is charged by the Queensland Government at Settlement (which is the day you pay the Price (less any deposit you have already paid) to the Seller and become the owner of the property). The amount of Stamp Duty you must pay is determined by three things – the type of buyer you are, the price you pay and whether the property has a house built on it or is vacant land.

Domestic First home Buyers receive the best stamp duty deal. Click here for more details . In short, if you are a first home buyer who is buying a new or established house, you will not pay stamp duty if the Price is $500,000 or less. If you are a first home buyer who is buying vacant land to build a house on after you own the land, you will not pay stamp duty if the Price is $250,000 or less.

Good luck finding decent land in South East Queensland for $250,000! Don’t worry, you can still avoid (or at least reduce) the stamp duty you pay. National builders are aware of your predicament. Many of them have therefore purchased land in desirable parts of town and are willing to sell it to you, provided you build a house through them. You are therefore essentially purchasing the land and the house through the Builder. This is often referred to as a house and land package. By purchasing the house and land together you are entitled to not pay stamp duty if the Price of both together is $500,000 or less and construction of the house is completed before you become the owner of the property. Even if the Price of the land and the house combined is over $500,000, this arrangement is often the best for minimising the amount of Stamp Duty you must pay. This arrangement also often entitles you to successfully obtain the First Home Owners’ Grant referred to in our previous article.

We suggest you check the Queensland Government Treasury website, as well as discuss this matter with your conveyancer to ensure you can minimise stamp duty for your particular circumstance.

Written by Andrew Pine , Property Solicitor

 

  1. Lender’s Mortgage Insurance

Haven’t got a deposit which is 20% of the Price? Don’t worry, you might still be able to receive a loan. But expect to have a percentage of your deposit deducted to pay the bank’s Lender’s Mortgage Insurance (LMI).

Put simply, LMI is an insurance premium a bank must pay to its insurer when it lends money to a borrower who is risky. You are a risky borrower if you are not fronting up with 20% of the Price. Do you think the bank is therefore going to pay the LMI bill? Of course not, they’re going to pass this bill on to you! And how are they going to pass it on to you? They’ll deduct this cost from your deposit, which makes your deposit smaller, which makes you a higher risk, which means they will charge an even higher LMI. Gosh this sounds like a no-win scenario!

Never fear, there are ways to reduce or negate this evil LMI cycle.

The most effective is to have a parent (or friend) guarantee the shortfall between the deposit you are left with after paying any Stamp Duty (and associated costs) and the 20% threshold.

Using a simple scenario with no Stamp Duty – if the Price is $500,000, 20% is therefore $100,000. If you are only able to save $60,000, a parent or friend can personally guarantee the remaining $40,000 by allowing a mortgage to be placed on their own home. This person (called a guarantor) is therefore not borrowing any money in this transaction – only you are. The guarantor will be liable if you fail to make your repayments under the loan, but only up to the agreed amount (which in this example is only $40,000). In such a circumstance it is unlikely that the guarantor will risk losing their own home, if you default on your loan repayments. Their risk is limited to a small percentage of it ($40,000 to be precise). You may all agree that this risk is a small price to pay for the significant reduction in LMI charged by a bank.

In any guarantor scenario, independent legal advice tailored to each person’s individual circumstances must be obtained by experienced practitioners. You are therefore encouraged to engage a lawyer should you wish to consider this option.

 

Next week: Contracts – protecting yourself

Disclaimer: Andrew Pine is a property solicitor practising in Queensland. Andrew is not qualified to give accounting or financial advice. This article is written solely as an opinion of the writer. This article should not be relied upon for legal, accounting or financial advice. You should always seek advice which is tailored to your individual circumstances.

Contact details for Andrew Pine.

 

 

 

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