Before you embark down the road to buying your first home (or any home for that matter) you need to get a rough idea of how much you can reasonably afford to spend. But where do you begin? Here is a simple equation that helps answer that all important question as well as highlight some of the key financial matters you should be concentrating on:
Spending power = Borrowing power + deposit + government grants and concessions – home acquisition costs
Let’s look at each segment in more detail:
Borrowing power - this quantifies the amount a lender is willing to lend to you. To work this out, a lender looks at things like your income, your personal expenses, current financial commitments and credit rating. There are free online tools that will give you an indicative feel for your borrowing power but remember at the end of the day it is your lender who will decide how much they think you can afford. Click here for an example of a good borrowing power tool.
Deposit – this is the amount of your funds you’re able to contribute to the purchase price. The bigger the deposit, the more you can spend or the less you have to borrow. Its a good idea to try and save up at least a 10% deposit – so if you were looking at buying a property worth $350,000 try and save at least $35,000.
Government grants and concessions- if you’re a first time buyer you could be eligible for certain grants and concessions. These could give you extra cash or save you money on certain government charges – like stamp duty. Each State has its own benefits scheme so you need to check your entitlements and your eligibility. Click here for more information.
Acquisition costs – these are the other costs associated with buying a home and include things like lenders fees (lenders mortgage insurance, application fess), legal fees (conveyancing) and other government charges (land transfer, mortgage transfer and stamp duty). On top of this you could include things like inspection fees, insurance and moving costs.
Once you know the amounts for each part of the equation you’ll be able to work out how much you can afford to spend on your home.
When I took out my first home loan some twenty-five years ago the most important thing I focused on was the interest rate. Why? Because back then a loan was a loan was a loan and cost was pretty much the only real differentiating factor. Today however things are very different and the cheapest home loan doesn’t necessarily mean it’s the best home loan.
Competition amongst lenders has seen significant development in product innovation. Innovation is good because it means lenders are more aware of the needs of their customers and are developing products that meet customers’ changing financial and lifestyle requirements. There are lots of different loan types available today, the more popular include: variable rate, fixed rate, capped rate, interest only, split rate, low-doc, introductory, no deposit and non conforming. (For information on the features, pros and cons of these loan types, see my article Which home loan is right for me?).
Different loan types offer different features. The more features you have, the more the loan will cost because it costs the lender to supply these features. It’s important for you to work out what you are likely to need from your home loan, now and in the future. For example, do you want the certainty of a fixed rate loan, or the flexibility of a variable rate loan which allows you to make extra or lump sum payments? Do you want tobe able to offset your savings against your home loan and thereby reduce your interest cost or do you want the ability to be able to take a repayment holiday or draw down any extra equity you have built up? It really depends on your lifestyle, financial and personal objectives.
So remember that while cost is important, don’t forget your home loan is going to be your companion for quite some time so it needs to be able to support you now and into the future. You may find it’s worth paying a little bit extra now for features and flexibility in return for greater savings over the longer term – especially if you discover that a cheaper rate did not translate into the right loan.
My tip:
When choosing a home loan start by identifying what product and features you need, then compare lenders for the best deal. Don’t forget to compare all the loan costs (not just interest) like lender fees and charges.
For many Americans, Ireland holds a special place in their hearts. Most have never been there but claim  ancestry and a love for all things Irish. For the fortunate that have been able to walk on the Emerald Isle they leave with a vow to return and take with them many great stories of the Irish scenery, pubs and hospitality.
And then there's the very fortunate few that have been able to buy a piece of the island for themselves. Whether it's a sprawling county estate in the most southern tip of Ireland, a thatched roof cottage on the west coast or an apartment in Dublin's fair city, Irish Americans were buying a piece of Ireland at a time with property values turned ordinary Irish citizens into millionaires overnight. When small run down farm houses were being bought up for more money than the average Irish farmer could make in a lifetime and it wasn't just the Americans buying into the Irish charm it was Germans, French and the Swiss too.
However these are the few that may not be so fortunate after all. Recent developments in the Irish property market may have these Irish Americans cringing at their miscalculation as news of Liam Carroll, the largest Irish developer whose companies are reputed to have built more apartments and office buildings in Ireland than any other company may be on the brink of flooding the Irish market with cheap apartments and unfinished office buildings.
Ireland, whose property market has been severely hit by the real estate crises with the values in some areas dropping by as much as 75%, is bracing itself for further declines in values. Mr. Carroll filed for bankruptcy protection after Dutch owned ACC Bank, applied for The Zoe Group to be placed in receivership. Mr. Carroll is indebted to 7 banks to the tune of €1.3 billion euro, with €130 million of it owed to ACC Bank.
 The decision by the Irish Supreme Court last week to overturn an earlier ruling for protection is based on the principle that the 3 year survival plan provided by The Zoe Group and independent accountants was hinged on their prediction of the recovery rate of the Irish real estate market, a rate that could not be satisfactorily evidenced. A provisional liquidator has been appointed to two of Mr. Carroll's six companies held under The Zoe Group.
Should Mr. Carroll's properties be placed on the market, their current depressed values are estimated to be around €300 million, an amount considerably less that the €1.3 billion owed, the market will then be overflowing with cheap alternative accommodations and office facilities, further reducing the already beleaguered property market. However the Irish governments National Asset Management Agency, who are preparing to start buying up bad bank loans, have indicated that it will consider the long term value of these properties when placing a value on them.
Either way, the Irish real estate market and economy is looking at a long and treacherous road to recovery. Should The Zoe Groups assets be sold at their current value, property values will decline even further. If however, they are sold at values high enough to satisfy their indebtedness then the Irish government and ultimately the Irish taxpayers will pay the price.
With hundreds of acres of property, particularly along the west coast of Ireland being owned by Americans, the effects of Liam Carroll's collapse will be felt by many Irish Americans here too.
Have you ever considered buying property in Ireland and if you did when did you acquire it? Was is during the real estate boom of recent years?
Canada being a developed North American country has a well defined and mature process when it comes to buying real estate. Like the United States, much attention and focus is given to protecting the rights of both the buyer and the seller. While at times this can result in excessive documentation, buyers must remember that following the process is in their interest.
It is strongly recommended that those looking to buy real estate in Canada get themselves pre approved if they are seeking a loan to buy real estate. A pre approval not only provides the buyer an estimate of the loan they can qualify for, it also gives the seller the necessary confidence in the financial ability of the buyer. In addition, a buyer with a pre approved loan can now focus on the properties that are in line with their budget rather than spending time and money on finding properties which later turn out to be beyond their financial capacity.
A good place to start for a buyer of real estate in Canada is to find a licensed real estate agent. A licensed real estate agent who understands the budget and the kind of house the buyer is looking for can more often than not find properties which are hard to find otherwise. A licensed real estate agent can also help a buyer of real estate property prepare and submit purchase offer, negotiate with the seller or the seller’s agent and help ensure that the entire process is smooth and transparent to the buyer. In addition to a real estate agent, a buyer of real estate in Canada will also need the services of a lawyer or a notary if the buyer is purchasing the real estate in Quebec. The lawyer (or the notary) will ensure that all the processes are followed and help ensure the legal interest of the buyer of the real estate.
After identifying the property, the next step in the process is to furnish a legal document to the seller known as an ‘Offer to Purchase’ or ‘Agreement of Purchase and Sale’. If the buyer has a real estate agent or a seller, they will prepare the document for the buyer and ensure that the terms and conditions stated in the document along with the price are what the buyer and the seller had agreed to. Typically, the document undergoes several revisions as the seller and the buyer review it to ensure their interests are honored in the document. Once the terms and conditions have been agreed, the agreement becomes final.
The buyer of real estate in Canada should be cognizant of the costs involved in buying a property. Listed below are some of the costs that the buyer has to incur:
o Mortgage insurance and loan application fees
o Appraisal fees
o 5% deposit that is typically paid when an offer to purchase is accepted
o Down payment of around 25% less the 5% deposit
o Home inspection fee
o Land and deed registration fees
o Prepaid property tax refund
o Home insurance
o Survey costs
o Legal fees
o Title insurance
The last and final step in the process is closing of the escrow. On this day, the transaction is completed and ownership transferred to the buyer. The buyer can now have the title deed registered in their name.
South Africa's residential landscape is rapidly changing, with developments springing up in every town. From entry level priced units to prime golf estates, the concept is the answer to the growing need for lock-up-and-go living within a secure environment.
"The growth of the development sector is phenomenal at the moment," says Kevin Mountjoy, Bond Choice inland sales director. Property currently rates as one the best asset classes in South Africa, showing returns of between 15 and 25 percent per annum over the last five years, which is why home buyers and investors alike are clamouring to get into the market. However, buyers need to do some homework before signing on the dotted line in order to safeguard their interests.
Home buyers should consider these important factors when looking at a development:
Location
The golden rule in property is location, not only in relation to work place, schools and amenitie5-J but also in terms of security, with some areas more prone to crime than others. Speak to police and prominent estate agents in the area for an independent opinion, and ask the developer about the security measures to be implemented.
Sectional title
Most units in developments are sold under sectional title ownership today, which means that, in addition to buying your specified living area, you will also probably be buying the exclusive use of areas such as your driveway and garden. You will automatically become part owner of what is known as common property in the development, as well as a member of the body corporate. Broadly speaking, there are three types of sectional title developments:
Phased developments are usually large and will, as the name suggests, comprise a certain number of phases to be built over a period of time.
Exclusive developments generally comprise townhouses, simplexes or duplexes and are usually smaller than phase developments with all units being built simultaneously.
Duet development : Two homes are built on a single stand after a sectional title register has been opened.
Cluster homes
Some cluster home developments offer an alternative to sectional title ownership, where owners hold individual titles to the units and their gardens, along with shares in the common property. While in these instances there won't be bodies corporate, the norm is for owners to form home owners' associations to handle general issues such as maintenance and administration, sharing the costs in the form of a monthly levy.
Buying off plan
The main benefit of buying off plan is that you don't pay transfer duty if the developer is a VAT registered vendor, which is a significant saving. Also, you get in 'at ground level', and it's common for the price to go up once the first phases are complete. However, there are risks to this method of buying, so it's important to deal with a developer who has a proven track record. Another important check is to ensure that the developer is using a reputable builder. "Your purchase agreement will be with the developer, so any dispute you might have regarding unsatisfactory workmanship, delays or building defects must be directed to the developer and not to the builder or the financial institution financing the development. It is always important to read your agreement carefully.
Your deposit
It is standard practice to pay the developer a deposit to secure your unit. Before you part with any money, have a look around the show house to get an idea of the quality that you can expect for the rest of the units, then get in writing exactly what you'll be getting for your money. Insist on looking at the site plan to ascertain the exact location and style of the units, enquire about how many phases are being planned and get a firm commitment from the developer in terms of completion date. Once you've signed the purchase agreement, you will put your deposit into an attorney's trust account, not to be touched by the developer. You will then only have to pay the balance of monies owing on transfer of the unit into your name.
Buying into an established sectional title development
In some ways this is a lot easier, although usually more expensive because you can see what you're getting. But again you need to ascertain some facts. Firstly, ensure that the body corporate is financially sound by asking to see a copy of the latest audited financial statements. Then, find out what the monthly levy is and if there are any special levies required for future projects, bearing in mind that well-run developments often have healthy reserve funds in place to pay for major future expenses. This information is available either through the body corporate or the managing agent if the development employs such a person. If you're not sure of your way around financial statements, don't allow yourself to be rushed into making a decision and signing the purchase agreement. After all, when you sign the agreement it is binding. Currently involved in over 170 new developments, valued at over R9 billion, Bond Choice is well positioned to offer the best advice on first time buying, holiday home and investment buying, up or down sizing, and we will use our industry knowledge to assist you, the buyer, to get the best investment value from your purchase.
How do you know you are paying the right price for your dream home? Are you paying too much – what is it really worth?
None of us want to pay more than we have to when buying our first or subsequent property. Houses and units are expensive and the way prices are going the average property will be beyond the means of the average Australian in the not too distant future. The last thing you want to do is waste your time and effort pursuing properties that you can’t afford to buy.
Estate agents are under the microscope for under quoting – the practice where the property’s advertised price is materially lower than the eventual sale price. It is not uncommon for homes to sell for between 10% to 30% above their marketed value. So on a home with an asking price of $300,000, buyers may end up paying between $30,000 to $90,000 more.
This can lead to a lot of time wasting by prospective buyers as they pursue properties they ultimately cannot, and probably could never afford. Plus there’s the disappointment and emotion behind losing out on a property you had you heart set on and thought you had a decent chance of buying.
So what’s the solution? Basically you need to inform yourself as much as possible before you get serious about a particular property. The starting point of course is to speak with the selling agent to get a feel for the vendor’s expectations. You might even consider putting in an offer (even if the property is up for auction) and see what happens. You might pick it up for a bargain, or your offer might be rejected. At least you’ve established what the seller’s base line price expectation is.
Next check out what other properties are selling for. Go online and check out sales listings and attend a few auctions to get a feel for where prices are going. The other thing you could do is to buy an independent property valuation report. This will provide you with the valuer’s estimate of what your property is worth, supported by historic and current sales data as well as the valuers view on the property itself, taking into account its individual characteristics and features.
The problem with an independent valuation is that they can be relatively expensive – anywhere between $300 to $500 each. So if you are looking at a number of properties, costs can quickly add up.
There are other forms of independent reports that are considerably cheaper. These are computer based and the good ones provide detailed and comprehensive analysis of a property and its surrounds. They can sell for between $50 and $100, meaning you can get some useful property intelligence on multiple properties for a much smaller outlay. (Check out a special I’ve been able to find - detailed Residex property reports for only $25 – they’re normally $75!)
The key to working out how much a property is likely to be worth is to make sure you get as much independent information as possible before getting too serious about a property. For-armed is forewarned. But remember, a property is worth what somebody will pay for it.
My tip:
When looking to buy a property, try and be as objective as possible. Don’t get carried away with emotion and don’t over-commit. Research the market thoroughly and look to establish a property’s value through independent means.
We all know that banks are not charitable organisations. They exist to make money. And they make a lot of money through charging fees to customers. Billions of dollars in fact. There has been a lot of negative publicity of late about the extent of these fees resulting in a rethink of how and when fees are levied.
But bank fees are with us and they can add up, particularly when we’re talking about home loans. Interest cost is by far the biggest cost of a home loan and not surprisingly a low rate is something we look for. But a low rate can sometimes come at a cost. This cost could be a reduction in product features or the imposition of a range of fees and charges to make up for the banks’ lost interest income. In fact, these fees and charges can be significant, adding up to thousands, if not tens of thousands of dollars.
There are lots of different types of home loan fees. These include:
- Up front fees – like application and loan processing fees
- Ongoing fees – monthly account fees
- Default fees – fees levied if you fail to meet your home loan obligations e.g. if you miss a payment
- Termination fees – a penalty levied for paying off your loan early. This is typically charged where you take out a fixed rate loan and decide to pay it off before the end of the fixed rate term – this fee can be substantial (many thousands of dollars) and often comes as a shock to borrowers
- Settlement fee – a fee charged to close out your loan
- Other fees – this could include fees for making a draw-down, extending your loan or requesting a duplicate statement
So before you sign on the dotted line there are two things you should do:
- Check and compare the Comparison Rate between products and lenders which will give you a good indication of the relative cost of the loan(s). But note that the Comparison rate only takes into account certain costs ascertainable at the time the loan was taken out, and not costs that are dependent on a future event. See my Yahoo7 Finance column Comparing home loans using Comparison Rates for a run down on how to use Comparison rates.
- Get your lender to set out and explain all the costs associated with the loan. Run some ‘what if ‘ scenarios like what would happen if you wanted to pay your loan off early, or if you wanted to borrower more money, or if you wanted to make extra or lump sum payments, or if you got into financial difficulty. Your lender should be able to supply you with a list of all their fees and charges.
The key to all this is to make sure you are fully aware of all the fees associated with your loan, including how much they’ll be and when they’ll be charged.
My tip:
Don’t judge a home loan on interest rate alone. Always insist on a run down of any fees that may be charged and use the Comparison Rate as a starting point to determine a loan’s true cost.
I know it’s easier said then done, but first time buyers (or anyone else for that matter) should try and save as large a deposit as possible when buying a home. Sure, meeting day to day living costs and the increasing cost of property makes this a daunting challenge, but there are some major financial and personal benefits of contributing a reasonable amount of your own money towards the purchase of your dream home.
So what’s a reasonable amount? Ideally you should aim for 20% but as a minimum try and save at least 10%. On a home valued at $350,000 this translates into a deposit of between $35,000 and $70,000. So we’re talking about fairly sizable sums.
And now on to the benefits of which there are three big ones. The first big benefit is that your chances of getting your home loan approved will be much better because lenders will look more favourably on your application when you can demonstrate a savings track record – this shows your ability to control and manage your finances. In addition, lenders will see you as a less of a risk because you’re borrowing less of a proportion of the property’s value.
The second big benefit is that a larger deposit saves you money. You’ll pay less interest because you’re borrowing less (and this can add up to tens of thousands of dollars in interest savings). The other saving you’ll make is on Lenders’ Mortgage Insurance (“LMI”). LMI is an insurance policy designed to protect the interests of the lender and is applied when the amount borrowed exceeds 80% of the property’s value. This can add up to many thousands of dollars of extra cost which can be avoided altogether if you can save a 20% deposit.
The third big benefit is that a larger deposit gives you some emotional and financial security in case things go wrong and you find it difficult to meet your mortgage repayments. Lenders are likely to be more accommodating in the short term to help you work through financial difficulties when there is more unencumbered value in your home and support you with options like repayment breaks or refinancing. Someone who has less than 10% equity in their property may have little room to manoeuvre when times get tough and could even find themselves in negative equity territory if their debt builds up and or property prices stagnate or fall.
So remember, put together as large a deposit as possible – the benefits are worthwhile and substantial.
My tip
If you want to work out how long it will take you to save a deposit divide the amount you want to save by your monthly savings. So if you want to save $30,000 and can save $1,000 a month, it will take you 30 months or two and half years (30,000/1,000).
I’ve often been asked whether taking out a loan for an investment property is the same as taking out a loan for a house to live in. The answer is it is not.
Buying an investment property is about identifying a residential property asset that provides you with the right mix of rental return, capital growth and profit. If you choose the wrong property your investment strategy could go up in smoke. The same applies to choosing the right investment property loan. You want a loan that helps, not hinders your investment objectives.
This means that a loan that might be suitable for your home and lifestyle needs may be totally unsuitable for your investment property needs.
You need to ask yourself a number of key questions which include:
- How long do you want to hold on to the property before selling it? For example, if you intend to hold it for three years, it’s no good taking a five year fixed rate mortgage. You’ll be up for some hefty early settlement penalties which will eat into any capital profits you may make
- How much of your own funds will you contribute to the purchase price?There may be limitations on the amount your lender is willing to lend against meaning you’ll either contribute more of your own funds or look for other forms of security – like your existing home.
- What loan type do you need to maximise your tax strategy? For example, would you be better off with an interest only or amortising loan?
- Do you want to be positively or negatively geared? You may need to sacrifice flexibility for a low interest rate/low cost loan product.
- Do you want to pay the loan down quickly? In which case you should look at loans that allow lump sum and extra payments without penalty.
- What will your investment/ownership structure be? Will you own the property in your name or through a company or trust? You’ll need to make sure your lender is prepared to lend via these types of vehicles and whether they may require director or other types of guarantee.
So there’s a lot to think about before taking out an investment property loan.
My tip
The key is to make sure the loan supports your investment structure, goals and objectives. Be clear about what you are trying to achieve and when you want to achieve it.
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