Articles – Page 2 – Lending Clinic

How to turn your gambling problems into a skill to make money

According to https://bigthink.com/philip-perry/mathematics-confirms-rich-people-arent-smart-theyre-lucky, 20% of the people own 80% of the wealth. What’s more, luck was the single greatest determinant in wealth acquisition.

Let me paraphrase it. Although you can amass a reasonable amount of wealth through skills and hard work, the majority of people become wealthy through luck. Arguably, some of these people take reasonable risks and get into calculated gambling ventures to allow them to get exposed to and bump into “luck”. You cannot encounter the mythical being called “luck” if you just stay at home all day. You have to go out and venture out, to meet your “luck”.

The majority of businesses disappear after long periods of time. The majority of high-performing stock fund managers disappear after long periods of time. The majority of property moguls disappear after getting overburdened with debts due to having too many properties. Their luck runs out. You cannot be “consistently lucky”. It is important to stop after you have accumulated a considerable amount of luck, because your luck will run out.

Casinos tend to win over the long term, because the gamblers don’t know when to stop after they get lucky. They keep playing.

But luck is important and is a key determinant of building wealth. You need to get exposed to luck.

Here in March 2021, I propose to you, one gambling venture which may allow you to meet Luck. You buy an apartment unit which has been sitting on the market for some time. You can get this information by asking the agent or by monitoring www.realestate.com.au, or by asking your mortgage broker who has access to the RP Data database. It is likely that you can buy that apartment without too much competition (after all, it has been sitting on the market for a few weeks). So, the apartment will be “easy to buy”. This will be quite unlike “buying a freestanding house”, which is a “difficult job” due to the sheer number of competitors also wanting to buy the same house that you set your eyes on.

So, you buy an apartment which nobody wants today, hoping that 5-30 years from now, it will be worth 2x, 3x or even 50x in value.

Properties go through an up and down cycle. Today, everybody wants a freestanding house because they are afraid of coronavirus in apartment buildings, they want to work from home next to the beach 1-2 hours from the city, and need a big space. But 5 years from now, there is a reasonable chance that people will love apartments and city centres again. Over the last 100 years, people slowly gravitated towards the city centres. A 100-year trend is more likely to hold than a 1-year trend of living in regional areas. The attractiveness of online shopping and the beach probably won’t last.

Apartments have become cheaper and cheaper. Houses have become more and more expensive. Soon, a house will cost double an apartment, at a similar floor area. People will then realise that they get a better value buying an apartment, and apartment prices will start to rise again. The gap will narrow down.

Smart people take reasonable gambles, but not reckless gambles. Your gambling venture may be more reasonable if you buy an apartment which you are reasonably content to live in for the next 5 years, and can force yourself to live in for the next 30 years. It doesn’t need to be your dream home. But it should be something you can tolerate for a long period of time.

If you wait 30 years, almost any apartment you buy will have gone up in value. Plus, you will not need to pay rent for the next 30 years. You will have paid off your mortgage completely. So you will own an apartment without a mortgage. If you still don’t like it after living in it for 30 years (which is unlikely, because you will have got used to it), you can sell it and get yourself a lot of cash. You can use this cash to retire and rent in your ideal location for the rest of your life.

Not such a reckless gamble, is it?

Disclaimer:
This is not a financial advice and is not any form of advice. It is an entertainment article, about a potential gambling venture you might want to undertake. No responsibilities are accepted if you lose money.

FREE Home Buying Program & Money Saving Program

Not sure how to save 5%-15% deposit for a home? We have launched a FREE home buying program that will help Sydney wannabe home owners save money and get into a suitable home.
Our expert cheapskate lending specialist will reveal over 20 tricks to save money FAST.
Interest rates today are around 2% and the mortgage repayments are often lower than the rent for the same property.
Not to mention the property value goes UP over time, and the mortgage balance goes DOWN over the same period.
Get into the property ladder and build wealth over the next 10-20 years 🙂
Let’s get rich together!

Hmm so… I’m in… but… how much cash do I need to buy my first home?

The precise answer depends on whether you’re trying to take advantage of any government grants, concessions, special home loan schemes, blablabla, there are probably 4 different “incentives” you can exploit, by restricting yourself to a certain property type, certain price range based on the property type (land with a building contract; brand new property to be paid when completed; or second-hand property), certain household income level, certain blocks of land which are already titled, certain builders which have their building contracts ready to go, or waiting until you and your partner get Australian citizenships (some incentives are not available to permanent visa holders). Things get “complicated” and “messy”.

To achieve their goal of buying a home, the majority of Australians will find it easier if they don’t spend too much energy on “optimisation”. It is difficult enough for a lot of Australians to save $50k, they need “laser-sharp” focus to save money quickly.

Therefore, in our FREE Home Buying Program, we focus on only 1 goal, which is “saving $50k” and not on optimising and exploiting every single bit of government incentives out there. We want “our energy” to be available to be spent on “saving $50k”. The principle and mindset we advocate is “it is better to achieve something (buying a home) than to create a lot of roadmaps and achieve nothing other than having a lot of roadmap sketches that already make us tired”.

Without relying on a lot of government incentives and restricting ourselves to multiple criteria, it is quite possible to buy a home with 8% deposit. Therefore the price range should be up to $600k.

This means you buy an “apartment in Sydney”, or a “house in the middle of nowhere (supported by an employment letter stating you can work from your house in the middle of nowhere)”.

But everybody is trying to buy a freestanding house??

Yes that’s true, but also a lot of Sydneysiders are still renters, because they haven’t been able to buy a freestanding house, and they insist on not buying an apartment until they can buy a freestanding house. Everybody wants a house, and in fact, as of March 2021, the majority of houses in Sydney sell for 20%-30% above their price guides in the online advertisements. If you want to buy a house, you have to be better, earn more money and save more money than a lot of other people (your competitors).

I (personal opinion) do agree that houses are “better” to buy than apartments, but houses should be your second, third or fourth property after you’ve had more experiences with properties. Unless you earn a crazy amount of income and save money crazy well, you can’t buy a house. I have personally bought 2 apartments and I still haven’t been able to buy a house yet. Buying a freestanding house is a challenging goal. I’m not better and more successful than a lot of other people, therefore I cannot buy a freestanding house (which a lot of other people want to buy).

I (again personal opinion) do believe than by successfully buying an apartment, you’ll already be more successful than the average Sydneysider who rents a house. To successfully buy an apartment, you still need to be able to “save” money (save $50k). You don’t need to be able to save money to rent a house.

Over the long term of 10-20 years, apartment prices still go up in Sydney. You can go to Google or https://www.realestate.com.au/neighbourhoods/ to find out some historical apartment prices.

Even if apartment prices go down a bit, you need to consider the “rent” which you don’t have to pay if you own the apartment. Multiple the weekly rent by 52 weeks in a year, then multiply it by the number of years you’ve owned the apartment, and you’ll have your “inflated” (hypothetical) apartment value. This hypothetical value is likely to be higher than your apartment purchase price.

If you’re currently renting a “freestanding house”, to make yourself feel better, you can in fact look at the weekly rent you’re currently paying for that house, multiply it by 52 weeks and then the number of years, and then add it onto your “apartment” purchase price. This gives you a figure which represents the hypothetical value of your apartment home, plus the “savings” which you’ve been “forced to make” by downsizing into a smaller home. It still forms part of your “wealth”, because if you had not made this move, you would have had less savings (or less money to spend on entertainment and holidays, if your savings account has $0 balance when you do the calculation).

OK sure… what’s next? Help me buy an apartment and let go of my dream of buying a freestanding house in Sydney!

Thank you so much for reading this far into the article (if you skipped the reading, do go back above where I explain why buying an apartment is not a bad idea and why you’re more likely to be successful if your goal is to buy an apartment rather than a house).

Contact us to get our personal FREE help to save $50k FAST. As a bonus, we will also review your payslips & existing debt position, and set a realistic expectation on the type of property, location and price range you can buy as your first home.

Interest rates today are around 2% and the mortgage repayments are often lower than the rent for the same property (and remember that the principal repayments actually stay with you as equity/net wealth; the interest charges and the council/other rates are pretty much guaranteed to be lower than the rent). Not to mention the property value typically goes UP over the next 10-20 years, and the mortgage balance goes DOWN over the same period (completely paid off within 30 years).

First Home Buyer Benefits

A lot of our customers are first home buyers. We like them and we want to help them grow their personal wealth through property.

In this article, we will outline the main government benefits available to first home buyer benefits, with a particular focus on New South Wales (NSW). Details for other states and territories can be obtained from www.firsthome.gov.au.

Generally speaking, to get the benefits you need to be buying the property to live in it. So if you are a first property buyer, but not a first home buyer (home = you live there), generally speaking you do not qualify.

Let’s explore 4 different categories of home buyers, what benefits they receive, and what the key requirements are (in NSW):

Buying an established property

You can get stamp duty waived if the property price is no more than $650,000 (saving you $24,740).
You can get the stamp duty reduced if the property price is more than $650,000 but less than $800,000.
Bargain hunters will be pleased to know that the biggest stamp duty savings is if the property is exactly $650,000. For example if the property is $700,000, the discounted stamp duty is $10,490 and the savings is $16,500.
You, and your spouse or partner, must never have owned or co-owned residential property in Australia.
You, and your spouse or partner, must never have received an exemption or concession under this scheme.
At least one of the first home buyers must be an Australian citizen or permanent resident.
You or one of the other first home buyers must move into the home within 12 months after the settlement date and live there for at least 6 continuous months.
The official name of this scheme is the First Home Buyer Assistance Scheme (FHBAS).

Buying a brand new property

You can get the same stamp duty waiver/reduction as someone who is buying an established property above.
You can also receive a grant of $10,000 if the property price is no more than $600,000. This grant can be used as part of your funds to complete (deposit), however usually it cannot be counted as part of your “genuine savings”. There are lenders who do not need genuine savings and your mortgage broker can help if you do not have at least 5% genuine savings.
The other eligibility criteria for the $10,000 grant is substantially the same as the eligibility criteria for the FHBAS. You and your spouse/partner must never have owned or co-owned residential property in Australia (unless you owned or co-owned it on/after 1 July 2000 and did not live in it for a continuous period of at least 6 months). You and your spouse/partner must never have received a first home owner grant in Australia. At least one of the first home buyers must be an Australian citizen or permanent resident. You or one of the other first home buyers must move into the home within 12 months after the settlement date and live there for at least 6 continuous months.
A brand new home is when this is the first time the property has been sold, and the property has never been lived in before, including by the builder or a tenant. It includes most off-the-plan apartment units, a substantially renovated home and a home built to replace demolished premises.
This $10,000 grant is part of a scheme officially called the First Home Owner Grant (New Homes) Scheme (FHOG).

Buying a vacant land

You can get stamp duty waived if the land price is no more than $350,000 (saving you $11,240).
You can get the stamp duty reduced if the land price is more than $350,000 but less than $450,000.
These benefits are part of the FHBAS, so the eligibility criteria are similar as the FHBAS to buy an established property. You must move into the home within 12 months of the completion of construction.

Building a brand new property

You can get the stamp duty waiver/reduction if you qualify as above.
You can also receive a grant of $10,000 if the total value of the property (including the land and building) is no more than $750,000. This grant will be paid on the date of first progress payment by the lender.
The $10,000 grant is part of the FHOG scheme, so the eligibility criteria are similar as the FHOG to buy a brand new property. You must move into the home within 12 months of the completion of construction.
Owner builder is acceptable.

What now?

As can be seen, there are huge benefits available to a first home buyer buying their first property to live in. Check out our article on How to Purchase a Residential Property to get started.

This article was written on 15 February 2019 and reflects the government schemes as of that date. First home buyer schemes change regularly so please check the current schemes on www.firsthome.gov.au. This article is general in nature and is not to be relied upon. You must seek advice from your solicitor.

Rentvesting: Is it any good?

Okay, there are so many articles out there on Google about rentvesting. What is rentvesting? This is where you buy an investment property (somewhere far away) while continuing to rent (in a desireable location). Some folks call it the reinvention of the home ownership culture, or the trend of the millennials.

Of course, everybody’s circumstances are unique and you should be seeing a financial planner if you would like to get a tailored advice. But in this article I thought I discuss rentvesting versus buying your own home, in a general manner.

Why do people rentvest? It can be any one of the following reasons:

Their income is not big enough to purchase any sort of property in the suburb they want to live in (near their work, near a bunch of restaurants and cafes, near their friends)
They believe that land appreciates and building depreciates, so they rather purchase a house somewhere far far away, than purchase a unit in the city
They can potentially afford a bigger property (if they still live with parents rent-free) and believe that property value will grow quickly so want to maximise their capital gain by purchasing the most expensive property they can afford
They need to move around a lot, perhaps due to work, so renting is more practical
Maybe they think the suburbs which are good to “invest” are not the same as the suburbs which are good to “live in”
Maybe they have a long term plan, to sell the investment property a few years later and then use the profits to put on a deposit on a dream home they want to buy

Why would people choose not to rentvest?

They are forgoing stamp duty waivers for first home buyers buying their first property to live in (roughly speaking in NSW this is around 4% of the property value, or $22,490 for a $600,000 property)
They are forgoing the $10,000 “grant” (in NSW) for buying or building a brand new home to live in
They are forgoing the capital gain tax exemption for principal place of residence (this can be quite large over time)
They do not like renting, they cannot renovate their home, cannot have pets, cannot host big parties, and so on
They want to boast to their friends that they have a home

So, which method of home ownership is better from a financial perspective?

One issue with rentvesting is that you are forgoing $20,000 – $30,000 of “deposit” from the waived stamp duty and/or the grant for a first home buyer. Therefore, it works better for people who have small income, but somehow has a lot of cash savings or perhaps parents who can help with the cash deposit. Some parents may have plenty of equity in their own property, and may offer this equity for you to use in lieu of cash deposit, using what’s called a “guarantor loan”.

Your maximum property purchase price is generally dictated by 2 factors: your income, and your savings/deposit. Rentvesting may work if income is the limiting factor.

How much deposit do you need to buy a home?

If you are buying for investment, the ideal scenario is to have 25% cash savings (20% for the property deposit, 4% for the stamp duty, 1% for the incidental costs). This gives an LVR of 80% and avoids you having to pay for lender’s mortgage insurance (LMI). LMI varies greatly based on a range of factors, but roughly speaking it is between 1% – 4% of the property price. Perhaps you can think of paying LMI as similar to paying for one year’s worth of interest, or one year’s worth of rent.

If you are buying to live in, you may be able to get the stamp duty waived, so you only need 21% cash savings (20% for the property deposit, 1% for the incidental costs).

Therefore if you have $100,000 cash in the bank, from a deposit perspective alone you can buy (cheaply) a $400,000 property as an investment, or a $476,000 property to live in. No LMI. Cheap interest rate (in fact banks nowadays also offer cheaper rates to owner occupiers, on top of the cheaper rates offered to those borrowing at 80% LVR rather than 90% or 95%).

How much income do you need to buy a $476,000 property to live in, if you borrow at 80% LVR? Between $60,000 – $65,000 gross annual salary before tax if you are single with no existing debts; less if you do a joint loan with your partner and there are two income earners.

What about if you rentvest, what property price can you afford with the same set of circumstances above? Well, your cash savings is only $100,000, so you can only buy a $400,000 property unless you’re willing to pay lender’s mortgage insurance (LMI) and the interest rate may be a bit higher too. But what if you don’t care about LMI and rate? Surprisingly it works out to be slightly less than $476,000 if your rental expense is approximately the same as the rental income you receive from your investment property, i.e. you are buying a similar property as what you’re renting in. You really can only buy a bigger property if you live with parents rent-free instead of doing a full-fledged rentvesting and paying actual rent.

So does rentvesting really work? I personally do not think it works for most people, but I am happy to be proven wrong.

Please leave a comment below with your thoughts.

Housekeeping Checklist after Getting a Home Loan

You have recently purchased a home or refinanced your home loan. Great!

Often, you are also changing your bank.

In this article, I will be going through a checklist to ensure everything is taken care of and you do not miss anything.

Set up internet banking and ensure all of your bank accounts and loan accounts are there. Balances may not be updated until the next day.
Activate your debit card and perhaps change the PIN number.
Tell your employer that you have a new bank account. They will pay your salary into the new account. Also contact your salary packaging company (such as Maxxia), if you have one.
If you have rental income, Centrelink payments or other regular credits into your account, change them too. Perhaps also tell some of your friends and relatives.
Go through your transaction listing over the last 3 months. Identify any direct debits taken out of the bank account(s) at your old bank. Contact those companies and change them to the new bank account.
Do the same thing but this time watch out for direct debits against the Visa Debit Card or Debit Mastercard.
Think about any direct debits taken out yearly, half-yearly or quarterly, and change them too.
A number of banks now have an account switching form. If it works properly, this is supposed to request your old bank to provide a list of all direct credits and direct debits to the new bank, then your new bank is supposed to send letters to each of those companies and request them to change the bank account details. However this process can take a few weeks or a few months, and some companies may not act on instructions provided by your new bank. It also does not capture direct debits linked to debit cards. You can complete this form just in case there are additional direct debits you did not know about, but please do not rely on it.
Wait a month or two, then contact your old bank to close the bank account(s) once you see that there are no more debits or credits there. This includes offset account(s), as they are usually not closed automatically. If you want to, you can also copy across all of your BPay payees and account payees (e.g. friends’ bank account details), or just wait until you need to pay them and sort it out then.
If you are doing debt consolidation (e.g. using a home loan to pay off a credit card), please remember to contact the relevant financial institution to close off the credit card (this is not done automatically).
Repeat all of the above steps for your spouse. Perhaps print a duplicate copy of this checklist to tick off separately.
Most loans have monthly repayment frequency, with the direct debit being on the same date of the month as the settlement date (e.g. every 21st of the month if the settlement date was on 21st of January). Monitor the first loan direct debit to make sure it has gone through. If your repayment frequency is weekly or fortnightly, the direct debit usually happens on the same day of the week as the settlement day (e.g. every Thursday if the loan settled on a Thursday).
A number of banks offer “cashback” incentive which can take anywhere from a few days to perhaps 3 months to be paid. Ask your mortgage broker or lender how long it is expected to take, and monitor the payment.

That’s quite a long checklist, no doubt.

But hopefully you are liking your new property, or enjoying great savings on the home loan you just refinanced.

Please contact me if I can be of assistance in any way.

How to Purchase a Residential Property

Today I will explore the step-by-step process of purchasing a residential property, either for you to live in or for investment.

For a first time property buyer, this is an exciting and scary activity at the same time. It is a long process and you probably do not know what will happen next and what you are meant to do. I hope this guide will get rid of some of your nerves because it outlines exactly what will happen.

For the seasoned property investors, you probably have your own ideas of what works best for you. The sequence of steps outlined below is not the only way, and it may not be the best way. But the below steps worked well for me when I was starting out.

This is a long guide intended to be read slowly over the weekend.

Look at Properties Online

The first step is to take an initial look at property listings websites, such as www.realestate.com.au and www.domain.com.au, to find what’s “out there”. I personally prefer www.realestate.com.au, as it tends to have slightly more listings in the suburbs I am interested in.

If you are investing, www.realestate.com.au also has an “Invest” section (www.realestate.com.au/invest) where you can see the top performing suburbs, based on either annual price growth or rental yield (cash flow), as well as the average 5-year annual growth for a particular suburb you are interested in, for a particular type of property (for example, you can filter based on 2-bedroom units only). Also important is to look at the number of property sales and rentals reflected in the data. A suburb may have a stunning 30% annual growth, however you may not achieve this growth if the figure was based on only 10 home sales, or if there have been plenty of new developments which naturally have higher prices compared to the existing older properties.

If you are buying to live in, you can still consider the above statistics. My personal philosophy is to purchase a home with good growth potential, even if I will be living there. I will start off with a pool of suburbs and properties with decent growth potential. I will save/bookmark those properties on www.realestate.com.au, then narrow down my choice based on whether I personally like the floor plan, aspect (north and east are typically good), distance to work, public transport and amenities such as shopping centre, restaurants and cafes (or you might want to be close to a good public school or hospital depending on the stage of your life). Based on these considerations, I will start to un-save/un-bookmark those properties I do not like.

The same principles can be applied when buying for investment, however you will want to focus on “what most tenants like” in the area, instead of what you like personally. More amenities are generally better even though they may not be relevant to you. Domain has a suburb profile which I found quite helpful to get an insight to the demographics in the area (www.domain.com.au/suburb-profile).

Get a Home Loan Pre-Approval

By now, you have looked at a few properties you like, online, and possibly in person too. But can you afford them? A mortgage broker can do a quick analysis of your borrowing power with various lenders. Generally speaking, if your income is from a permanent full-time job, which only pays you a base salary, without overtime, bonus or commissions, it is very easy to work out how much you can borrow and you will get a similar answer from let’s say the top 10 banks in Australia. However you receive overtime, bonus, commissions, or perhaps different types of payments from Centrelink, business income, rental income or overseas income, there will be noticeable discrepancies in your borrowing capacity, depending on which lender you go to. This is because those other income sources are typically not counted in full, as they are considered to be less stable than a base salary set in stone in your employment contract.

Different lenders apply different percentage factors to different sources of income (for example, a particular lender may count 80% of commissions and 75% of rental income). They also have different policies about how to calculate it (for example, a particular lender may average your commissions over the last 6 months before multiplying it by 80%, whereas another lender may average your commissions over the last 2 years). Therefore it is quite important to see a mortgage broker, or see a few different lenders (banks or non-banks) if you prefer to do it yourself.

At the time of writing, a single person earning $50,000 annual salary can generally borrow around $300,000 for a property to live in if they have no debts or credit cards; or potentially around $450,000 if it is for investment and they are still living with parents rent-free (because there will be rental income in addition to salary). A couple each earning $50,000 annual salary can generally borrow around $600,000 for a property to live in; or potentially around $900,000 if it is for investment.

At this stage you want to think about the properties you looked at online previously. Can you afford the property you wanted? If you are aiming for a bigger property and you’re still quite young, it may be a worthwhile strategy to forgo living in your own home for a while, continue living with mum and dad, and purchase an investment property instead. You can move into it a few years down the track when you have a few pay rises up your sleeve and do not need to rely on rental income anymore. You may forgo the first home buyer benefits, but you may still come out ahead if the property value grows quickly. Discuss this with your parents if you like.

Know Your Costs

Now you have your home loan pre-approved for a particular amount. Great!

Remember to also look at your savings, not only the pre-approved loan amount. There are banks who can work with 5% deposit. But there are additional costs which can be loosely broken down into 3 groups:

Stamp duty: You can get a reasonably accurate estimate of stamp duty through a third party website such as www.stampdutycalculators.com.au, but in NSW for most properties it is around 4% of the property purchase price. In NSW, you can currently get stamp duty waived completely if it is your first property, you will live in it and the purchase price is not more than $650,000 (a reduction in stamp duty is available for homes up to $800,000). Vacant land has lower thresholds in NSW. In addition to stamp duty waiver or reduction, first home buyers buying or building a brand new home in NSW will also receive a $10,000 grant, subject to certain conditions.
Lender’s mortgage insurance (LMI): If you are borrowing more than 80% of the property value, i.e. 80% Loan to Value Ratio (LVR), in most cases you will need to pay lender’s mortgage insurance (LMI). The cost of LMI depends on a range of factors, but for a first home buyer purchasing a $650,000 property to live in and borrowing at 95% LVR, the LMI is typically around 4% of the property purchase price.
Incidental costs: There are other costs such as solicitor cost (typically around $1,500), removalist cost (perhaps budget for $500), pest and building inspection report (if buying a house; typically around $500), strata report (if buying a unit; typically around $250), lender fees (let’s say $500), fees to the land title office (around $500), and “adjustments” for items such as council rates, water rates and strata levies already paid by the vendor ($1,000 – $2,000). These incidental costs add up to $3,500 – $5,500 in most cases.

It is important to clarify your home loan pre-approval conditions with your mortgage broker or lender. Some lenders can pre-approve you for 95% of the property value + generous or unlimited allowance for LMI. More often than not though, you can only borrow 95% of the property value, including LMI. This means instead of contributing 5% deposit, you need to effectively contribute around 9% deposit (5% towards the property and around 4% towards the LMI in the above example for a first home buyer in NSW purchasing a $650,000 property). You also need to set aside $3,500 – $5,500 to cover the incidental costs mentioned above. Remember that LMI depends on a range of factors and a good mortgage broker or lender will be able to give you a more specific figure for your particular scenario. You may also need to pay for stamp duty if you do not fit the criteria to get it waived, for example if you are buying the property for investment (even though it is your first property).

Therefore, as a first time property purchaser, buying a property for investment does not necessarily mean you can buy a bigger property. Your pre-approved loan amount may be bigger, but you need to pay stamp duty and you may not have enough savings to pay for this extra cost item. Worse still if you are buying a brand new property in NSW, you will not receive the $10,000 grant. Of course, your parents may be happy to pay for the stamp duty for you and give you extra $10,000 on top, if they are nice.

If you like everything to be on the safe side, ideally you also want to have further savings left over, in case the bank’s valuer deems the property value to be lower than your purchase price, and you need to cover the difference with cash. In the current market, this happens quite often and does not necessarily indicate that you are overpaying for the property.

If you are buying for investment, I would suggest not maxing out your pre-approved loan amount and go 5% lower, because the rental income may be valued at a lower figure by the bank’s valuer, and this will reduce your borrowing power. Check what rental income your broker or lender put down on the system to obtain the pre-approval.

Go Back to Your Shopping List

Now that you have your home loan pre-approval in place and know what additional constraints may be placed by your cash savings, it is time to go back to your shopping list, inspect the properties you saved earlier if they are within your budget, or find cheaper ones if they are not. If you saved those properties on www.realestate.com.au, you will get an email every Friday evening, with a suggested Saturday inspection plan.

Once you find a property you really like, go back to it 2-3 times. Perhaps bring your family and friends. They may notice something which you did not see before, such as a leaking tap or a half-broken bedroom window. Go back to it at different times of the day, perhaps it is noisy at night due to a nearby train line.

Make an Offer to Purchase

At this point, you have found a property you like and within your budget. There are two ways forward: you can do all of your checks and then make an essentially unconditional offer to purchase; or you can make a verbal offer, do some checks if the verbal response is favourable, then make a conditional written offer, and then do more checks.

What checks do you need to do, you may ask? You need to ask for the draft contract of sale and get it reviewed by your solicitor. You should also order a pest and building report for a house (a “must”, typically around $500), or a strata report for a unit (“highly recommended”). Often the selling agent already has a strata report, or has organised a “bulk buy” for a cheap price (e.g. around $50 instead of $250). For a relatively new building, the subsidised strata report should be good enough. You or your mortgage broker also need to order a valuation report from the bank (usually the first valuation is free, but if you back out and buy a different property, you may need to pay for the second one).

You see, there are essentially 3 sets of documents to be ordered or reviewed, and this costs money. Therefore you want to make a verbal offer first and make sure the vendor plays along. If the vendor is receptive to your verbal offer, let your mortgage broker know that you are about to make a written offer. A good mortgage broker can provide an educated opinion about whether the property is likely to be satisfactory to the lender or not, and they will also work out whether to order the valuation now or later. If your broker says the property should be okay, order the pest/building/strata report and then make a written offer subject to 3 things + 1 disclaimer: satisfactory contract review by your solicitor, satisfactory pest/building/strata report (also mention to them that you have already ordered the report and are waiting for it), satisfactory finance approval (which takes into account the property valuation and rental income valuation), and lastly a disclaimer at the bottom of your email that no contractual obligation is created until after formal contract exchange.

By submitting a written offer, you are showing the vendor that you are serious and you will be kept in the loop with any offers from other prospective purchasers. If there is a lot of demand for the property, you can also subject your offer to the property being taken off the market. However the vendor may not entertain this if your offer has a number of other conditions. It is also good practice to include an expiry date with your offer, both to protect yourself and also to give a sense of urgency to the vendor.

Auction or Private Treaty

There are two main ways a property is sold on the market: through an auction (public offer) or private treaty (private offer). For a first time property buyer, I suggest going the private treaty route. Auction comes with greater risks, because your winning bid is binding with no cooling off period, so this means you either have to get all of the above 3 sets of documents reviewed first (contract, pest/building/strata report, and valuation report), or take a bit of a gamble and hope that everything works out. Some solicitors offer to do contract review at no charge, but they may start asking for money after you go to 5 different auctions and give them 5 contracts to review. Pest/building report usually costs around $500, so this can be $2,500 if you have had a go at 5 auctions unsuccessfully. Valuation report is typically around $200, but some banks will subsidise it.

If you fall in love with a property which is up for auction, you can make an offer to purchase prior to the auction date. In the current market, most vendors will entertain pre-auction offers. One risk with this strategy is it may start a pre-auction bidding war because the vendor’s agent will start contacting everyone who visited the open homes. If you are buying for investment and are indifferent about this particular property, it may pay to wait until after auction and make your offer after it gets passed in (fails to have a winning bid). Please be aware however that in NSW, if the contract is exchanged on the same day as the auction, there is no cooling off period even though you did not bid during the auction. Other states/territories may have their own rules.

Exchange Contract

You have made your written offer and it has been accepted. You are now ready to sign and exchange the contract (by the way, written offer is optional, you can skip straight to contract signing). A property contract of sale is typically signed separately and then the copies are swapped (exchanged). You sign one copy and give it to the vendor (through your solicitor or the vendor’s real estate agent); the vendor signs another copy and gives it to you (through their solicitor or real estate agent).

A standard contract of sale in NSW offers 5 business days cooling off period. You can back out of the contract at any time before 5pm on the fifth business day after the day on which the contract was exchanged, except in limited circumstances. You can always negotiate a longer cooling off period prior to signing.

The cooling off period is usually the time for your solicitor to iron out the contract (if it hasn’t already been done at the offer stage), and for you to wait for the bank’s valuer to value the property and for the bank to assess the valuation report and formally approve the loan. You may also still be waiting for the pest/building/strata report, depending on the turn of events.

If you choose to exercise your cooling off rights, in NSW you will lose 0.25% of the property purchase price (this works out to be $250 for every $100,000). Hence a strategy is to make a written offer and requesting valuation and formal loan approval as soon as the offer is accepted. You then organise a meeting a few days later to sign the contract of sale in front of your solicitor or the vendor’s real estate agent, and pay the deposit. If you are lucky, the valuation may have come back, you can cancel the meeting if the valuation is too low and you may not have to pay anything if your offer to purchase was worded appropriately. If you are unlucky however, the vendor may sell the property to somebody else, because an offer may not be binding even though it has been accepted.

How much deposit do you need to pay, when and how? Usually you are expected to pay 10% deposit when you sign the contract, with a bank cheque, personal cheque or internet banking transfer. However you can negotiate this figure down to 5%, and you can also negotiate to pay it when the cooling off period expires. You almost always have to pay at least 0.25% upon signing the contract. If you do pay only 0.25% upon signing the contract and the balance when the cooling off period expires, you may want to consult with your solicitor to confirm that the contract does not need to be amended to specifically allow for this. In some cases the vendor may be able to use your incomplete deposit as an excuse to back out of the sale, if they find another buyer offering a higher price.

Sit Back and Relax for a few Weeks

You have signed the contract of sale. After a few days your solicitor should have finalised any modifications to the contract. If you’re lucky you also have received formal approval from the bank. If not, you can request an extension of the cooling off period, which is usually given. You wait a few more days anxiously, it’s all part of the experience, and you finally get your formal unconditional approval from the bank.

Congratulations! Now it’s time to sit back and relax for a bit. In NSW a standard contract of sale has 42 calendar days settlement period, which means you will officially own the property 6 weeks after you exchange the contract. You still need to go over the loan documents and sign them in the correct spots with the correct signatures, but for the most part, the property is yours!

Get Ready for Settlement

Your solicitor will provide you with detailed instructions regarding the settlement procedures, and there are a few different ways to do this. The below outline is the method which the majority of my clients choose in consultation with their solicitors. Essentially, you need to make sure you have your funds ready to pay for the remaining deposit, stamp duty, and any fees and adjustments. Those funds must be in the correct account(s) on the day of settlement and your solicitor must knows where those funds are.

When do you need to pay the remaining deposit and how? You pay the remaining deposit on the day of settlement. The most common way of paying for the remaining deposit is to transfer the money 3 business days in advance into your solicitor’s trust account, to ensure it is ready and cleared on the day of settlement. It is also possible to provide a bank cheque made to the correct party, but not a personal cheque. If your money is currently with a bank which does not have a full-service retail branch, you need to plan 1-2 weeks ahead. Check your online banking transfer limit, ask if they can transfer a bigger amount over the phone or at the branch, and potentially break up the amount over several days if necessary.

On top of the remaining deposit, you also want to include typically another $2,000 – $3,000 to cover the lender fees, fees to the land title office, and “adjustments” for items such as council rates, water rates and strata levies. Your solicitor will give you a precise figure usually the day before settlement, you may need to top up the funds you previously provided to your solicitor’s trust account. Alternatively, if you have nominated a shortfall account when you completed the loan contract, you can also transfer this shortfall amount into that account (this is usually only applicable with major banks).

When do you pay the stamp duty and how? In NSW, stamp duty for most transactions is payable on the day of settlement, or 3 months after contract exchange, whichever is earlier. This is usually paid to your solicitor’s trust account or directly to the government via BPay. Best practice is to pay it 3 business days before settlement. If you are buying an off-the-plan property in NSW as your main residence, you have 15 months to pay the stamp duty, but you need to pay it on the day of settlement if it is earlier. If you are buying an off-the-plan property in NSW for investment, you still need to pay the stamp duty within 3 months.

If you are moving in, you can start booking a removalist and shopping for furniture now, to be delivered in the afternoon of the settlement day.

You will also be invited to do a pre-settlement inspection, usually around 5 days before settlement. Check that the property is still in the same condition as it was last time, there are no unexpected damages and no missing appliances if they are meant to be included.

Settlement Day

This is the big day.

You will be notified by your solicitor that settlement has taken place. Sometimes it takes a few more hours for the vendor’s solicitor to notify the real estate agent. After this happens, they will contact you and you can collect the keys to your new home!

There will be a little bit of housekeeping which we will touch on in another article.

Congratulations!