Home Research

In the period while I was working and polishing our financial history to a lovely attractive shine, I was also doing research.

I wanted to clarify several points for us personally:

- Exactly what was happening in the housing market?

- Did we want to buy land and build, or did we want to buy a pre-existing home?

- Where would we truly be happy to live?

- How much money was reasonable for us to manage repayments?

- How much money would we truly have to use for the home loan deposit?

- How much money would we need to pay all associated costs (Conveyancing Solicitor; Taxes and Fees; Moving Costs)? 

- What size mortgage did we want and how much would the bank give us?

- What kind of mortgage would the bank give us?

- What features/ inclusions did we want our home to have?

I also wanted to know:

- How do you actually buy a home, what is the process?

- What extra costs do you have to pay?

- What entitlements do first home buyers receive from the Government?

- What paperwork or official legislation is required and who, or how do I organise them?

- How do people sell homes?

- What happens at an auction?

- How do you negotiate with a real estate agent?

- How do you pick building inspectors and solicitors?

I started to answer these questions by googling, well to even find out what some of the right questions to ask were in the first place!

Answering the personal choice questions first:

I had kept my eye on the houses and land being sold for some time online.  I also went to local real estate agents offices and picked up copies of their free printouts of their listings for both homes for sale and rentals.  I wanted to know what different homes were renting for in different areas.

A couple of great websites I used were:

www.realestate.com.au 

- helps you find listings in whatever area

and www.onthehouse.com.au

- Excellent because it gives you property details and sales history as well as unimproved land value, the land use classification and identification, as well as an estimate of the possible sales price.  The site also lists comparable listings and gives you information about recent sales in the area.  I found having this kind of knowledge about a property before you speak to the real estate agent, to be very handy when it came to negotiation! 

Also the 'Public Trustee' website is good to find houses and they often sell for relatively cheaper prices.

I also went to a few open homes and chatted with real estate agents and checked out exactly what you were getting for the prices they were asking.  I even attended 2 auctions to see how they worked and also to get a true idea of what was happening in the marketplace.  I deliberately chose a relatively crappy house and land option (not in the flood zone) to see what was happening at the bottom (bottom for us anyway) and then one with much larger land.  Auctions show what real people in a group are willing to bid and pay for houses and I saw that even though the real estate agents were talking up the market, that other people were giving houses much lower price tags they were willing to pay.  

I wanted to familiarise myself with the whole process so that I was not nervous, or stupid later on.  The biggest surprise for myself was that other people were putting very similar value to homes that I had allocated in my own mind!  I was also surprised to see how the real estate agent were hanging on tightly to their high price tags and were not willing to negotiate, the prices were falling faster than the agents wanted to admit...  I saw both houses be 'passed in', or not even be put on the market to sell at auction because no one was giving a high enough starting bid according to the real estate.  That told me a lot about how hard I was going to have to fight, to get them to be reasonable!  I also made sure to follow up and see what houses I was watching online had sold for, especially auction prices because they gave instant feedback.

This also taught me something new.  If a house is not sold at auction, then it immediately becomes available for normal buyers to buy it the slower way.  You should still consider attending auctions because even though you cannot bid, you may be able to negotiate with the owner on the same day, if it does not sell in the auction.  Sometimes only 1 person bids at the auction and then they are given 'first option' to negotiate with the owner.

The Government changed the rules for first home buyers and instead of offering $7000 to both land and pre-existing home sales, they made it $15000 for people buying new land only, I think they also must have intent to build within 1 year of purchase?  That 'first home buyer grant' is supposed to help boost your deposit and help you secure a mortgage.

A lot of people were upset by this but I saw it as an opportunity for us because it meant that the value of pre-existing homes would potentially fall even further because they were effectively knocked out of the market for the majority of first home buyers.  Even though people say the grant helps you to increase your deposit, in my mind it does not really help make a first home more affordable because it also causes the prices to increase exponentially.

I noticed following this Government decision, that land prices shot up and I could see that a lot of 'just land' was selling for the same price that we could buy a pre-existing 'house and land'.  An example, Years ago in the late 1990's you could buy a reasonable lot of land (approx. 500m2) in Forest Lake for $50K and then build a big modern house on it for approx. $100K, making the whole package $150K which would be totally worth it.......  Today for example I just googled the cheapest lot of land (668m2) is $280K, or $369K (581m2).  Add your build price of $100K+ on top of that and it would have to be an amazing property for you to get your money returned in future value!!! 

We decided not to buy land and build, this was also because we had kids and it would mean you have to pay rent and a mortgage at the same time for many months until your new house was built.  We decided that option was beyond our budget.  Not only that, we were not prepared to put up with the stress of the situation.  I have spoken to several people who built their home and they went through a lot of stress trying to make sure the home was built properly to plan, every single person I personally spoke to had trouble with builders reading the plans properly.  They also had to make sure they got the mortgage installments from the bank in time to pay tradesmen etc.  Sometimes when you build, you are paid the mortgage in installments instead of a lump sum, these installments can be dependent on the property reaching specific milestones in the building project.  If for some reason you don't reach a milestone (problems crop up) you might not get paid and have trouble continuing and finishing!

We also figured that if you look at homes that have been standing for several years, if there are problems with the way they were built the faults will have started to show already and would help us to steer clear of the duds.

I decided that since a mortgage could now cost less than paying rent and we had been managing our current financial situation just fine, that would be my marker for how much we could afford.  I did more research to get an idea of quotes for 'home and contents' insurance and also potential 'rates' in Brisbane and Ipswich, plus water/ sewerage costs.  I divided this by the months of the year and added that to my weekly amount to pay.  From this I decided that we could happily relocate from a rental to our own home and still be able to pay those extra costs if we got a mortgage around $200K.  I also could see from the housing market that it would be possible to find a home worth less than $200K and that was what I primarily focussed on.

We were not looking for the most fancy house, we just wanted to enter the housing market and stop renting.  We did want to be comfortable though because we would likely be living there for many years.  We were ok with doing some renovation but did not have a huge budget for that, the plan would be to live in the house and then slowly save and then make changes as we went.

After years of renting, I had a pretty good idea of what features and inclusions it was good (or great!) for a home to have (built-in cupboards, security screens, fans, air-conditioning, reasonable bathroom and functional kitchen, large bedrooms and living space, covered outdoor area, covered car parking, energy efficient hot water system or gas, extra toilet, garden sheds or other additional dry/ protective storage areas, internal laundry, large enough yard for kids, some lawn but not too much to mow, privacy from neighbours, fully fenced for pets, good street position, not too much traffic or noise, not in a flood area).  We wanted a place that we could move into and live straight away, somewhere that would also be good for potential renters in the future, that ticked as many of the boxes as possible.  As well as house features we wanted such as, a position that was close to public transport and other facilities like shops, schools, businesses and highways etc.  An area that had a relatively good likelihood of demand and reasonable rental return.

We were not planning to try to buy houses at auction, you must have the cash immediately to pay %10 deposit in 1 or 2 days after signing.  You are buying the house 'as is' at auction and you can't do a building inspection or anything like that afterwards, it is too late!  You have to arrange and pay for a building inspection in advance of the auction day and you might not even win on the day.  Auctions are a more risky and expensive option for the buyer.

You have to think hard about all these things yourself, you must decide what is right for you and your family, before you even start looking!

Savings Management - Home Stretch

I have mentioned several times that our savings for the deposit was relatively fluid in the lead up to our application.

This situation changed in the home stretch.  When you are not touching your credit card and making sure you have a good repayment history, you also have to leave your savings account untouched, except for deposits.

This tells the bank that you are able to make all your repayments, pay all your living expenses and save without touching the money.

You are therefore paying rent and then trying to boost your savings as much as possible at the same time.  When you own your own home, you don't have to pay rent, you pay a mortgage instead.

This is probably the hardest period in the lead up to getting a home loan, it will likely be one of the hardest times in the whole journey of owning your own home....  This is why people find it hard to get a home loan.

I had gotten a job and organised all my direct debits for required repayments, now was the time for me to sell my shares.  This is because the bank likes to see that you have had the deposit saved and untouched for several months before you even apply for the home loan.  It makes you look like a better option, less of a risk for them to invest in because you will likely make sure you re-pay your mortgage.

My shares were finally starting to recover but slowly and not by much and I put them on the market for several weeks until they reached the $8 each that I wanted to sell them for as a minimum in November 2012.  We had also used a chunk of our savings to help pay for the new car and just come through Christmas.  I could have waited until I was able to slowly replenish my savings account but I figured this would take several months and we wanted to take advantage of the current housing market.

In Australia house prices were still high but in December 2012 they were the lowest they had been in 5 years or so and in January 2013 interest rates for home loans were the lowest they had been in 50 years.  I had been watching the market and figured I could possibly get a first home for less than $200K.  It was the best time for us.

We made the decision to ask family members for a small loan purely to boost our savings deposit.  This was a personal loan, not a gift.  We agreed on repayment rates and the money was deposited and left in our savings account.

It was important to make these large deposits from our shares sale and the personal loan into the savings account early, so it could be left for several months to create a favourable financial history for us.

Everything was set, all our financial affairs and preparations were in order, we just had to keep on working and following the plan for 3 - 6 months until I had cleared the minimum employment period as a casual worker to qualify for a joint home loan.

Improve Your Repayment History

I have mentioned several times that you need a good repayment history.

This was especially important for us as we did not have a large deposit saved for our purchase.  If you are applying and you are on the edge of consideration, you have to prepare more carefully.

We were definitely on the 'edge of consideration' because when we first began organising ourselves, we had only one full time worker and one SAHM.  We had a deposit but it was not large, we had 1 personal loan and 1 credit card.

The best way to prepare for a home loan is to actively improve your repayment history in the lead up to submitting your application (At least 3 months in advance but 4-6 months would be excellent!).  By this I mean, make sure that you have an excellent repayment history with not 1 single blip in the months before you submit your application.

You should do this even if you do have a pretty good repayment history, just to make sure it is perfect and cannot hold you back in anyway.

Why will this work?  

1. Because several months of recent repayment history will have an effective impact no matter what your past history.

2. It is highly likely that the bank will not really bother to look back into your financial past beyond 3 - 6 months anyway, especially if your credit report does not list any official defaults.

Our Mortgage broker had advised that it would be best if we were both working to improve our chances.  It was excellent that one of us had permanent, full-time work for several years and that was a main consideration by the bank.  I managed to get full-time work but it was only as a casual, which is not viewed as favourably as a permanent position.  You need to have been working continually for at least 4 months for the bank to include your employment as a positive.  This actually depends on which bank you choose for your home loan, the minimum is 4 months casual work for some but most others prefer 6 months minimum.

As soon as I got a job I decided to improve our repayment history at the same time as I would have to wait 4 - 6 months anyway!

Ironically, our child care costs sky-rocketed so even though I was working, we were not really better off financially and were even a bit worse off on a weekly basis!!!!  When I started work, I had to also pay more in weekly fuel and toll road costs each week.  I also had to update my wardrobe as my SAH clothes were not suitable for a professional workplace.  In the first month of starting work, we actually had to live off our savings more because I had to pay several extra costs in bulk immediately (like new clothes and child care deposits and 2 week advance payments).  I was basically working in order to satisfy the bank requirements and not much else because my wage was not stunning but it all counted in the long term!

I mentioned before about being able to use your rental history to your advantage.  Another thing regarding rent, is that the bank will realise in your assessment, that if a significant portion of your weekly wage is going towards paying your rent, it will be harder for you to save a larger deposit.  This is why they look favourably to you being able to pay all your living expenses and still save something.  Why?  Because, you will effectively be swapping your Rental payments for your Mortgage re-payments.  They know you have that covered but they also want to know that you will have some ready cash available to help you cope with everyday financial issues that crop up and also to enable you to save to pay for improvements/ maintenance for your new home etc.

It all sounds simple and straightforward but what if you do not have a perfect 'repayment' record?  What if you have had your credit card for so long, that you cannot actually remember if you have a good repayment 'history' or not?!

I mentioned previously that you should first check your credit history report to see if there are any defaults listed against your name.  This is a pretty good clue.

A more likely situation for most of us, is that we have not had a default officially listed but sometimes we were a little late with our monthly repayment and got a reminder letter from the bank etc.  Not terrible but still not ideal and may make the bank reconsider or pause, especially if you do not have a big deposit saved.

I found the best way was to set up a direct debit from our savings account to be removed the day after we received our weekly wage.  I was repaying our personal loan at slightly more (extra $15) than the minimum payment each week.

How to manage the credit card and how it would affect our chances for the loan?  This was my biggest concern for our personal repayment history.

I was unsure if I should make a big effort to pay the balance down to nothing before starting on my whole home loan journey.  That would mean sacrificing our savings deposit and starting again from the beginning, it may mean that we miss the current break in the housing market!!  Not good.

My Mortgage broker advised me that if you have a credit card, the bank instantly counts the entire balance limit of your card against you.  It does not matter if you have a zero balance owing, if you potentially have several thousands that you could spend.

He said that this means you are better off having your savings in the bank as a bulk deposit amount, rather than paying off the entire balance on your credit card to zero.  Unless of course, you pay it to zero and then cancel the card entirely.

A better senario is to pay it down a bit so it is not sitting right on the upper limit but there is a bit of leeway.  You should also make sure you pay more than the minimum each month and do not spend more than you repay.

My solution was to pay off a chunk to make sure there was reasonable leeway and to then simply cut up my credit card.  I then set up a weekly direct debit to ensure I paid $100 above the monthly minimum repayment for the credit card.  I had no card so I could not use it and was spending nothing each month.

Using a credit card is a lazy habit, not having one means you have to spend mindfully but you are really no worse off, you just have to plan in advance and be a bit more boring LOL!

Improve Deposit Impact - Credit Score & Rent History

When you reach the time that you want to take advantage of the housing market and you have to go with whatever deposit you have managed to save, you can improve how you present your overall financial picture to effectively boost the deposit impact!!

When you apply for a home loan, the bank assigns you an overall credit score with your financial debt and expenses given a negative rating and your savings and assets a positive rating.  Overall you may have a satisfactory rating even if you do have some debt in your name.

1.  You can apply for a joint loan (2 names, not 1) so that all your income and debt/ expenses are combined.  This is good if you both work, or both have a steady income and you live together, as it effectively cuts costs in half and doubles income.  It also means that you both have joint responsibility and ownership of both the loan and the home.

2. You could also choose for 1 person only to take out the loan, even though you are in a partnership.  This is good if only 1 person works and earns a high enough income to support a loan.  If the other partner stays home to look after the kids, or is a student for example and does not have a regular paid income, they could actually reduce the chances of getting approved for a loan if they are included on the application.  If they are a SAHM it means childcare costs are reduced and that can be a significant saving if the kids are young and may make the other partners financial situation look better.  It is probably why you made the decision to SAH in the first place.  You may have a Govt. income (like family tax) but this is not recognised by the bank.  It means you must trust each other completely because ownership of the house will be in one name, even though you both saved together and are jointly paying!!

You might have a personal loan or a credit card and be worried about it!

I was told that a bank does actually expect a couple to have 1 personal loan and 1 credit card.  It is not ideal but it is workable depending on how they manage it!  Multiple personal loans and credit cards however are not good and you need to pay them off and get rid of them before you can get a home loan, this is of course income dependent.

The negative impact of these can be reduced though depending on your repayment history.  If you have a good history of re-payment, with no defaults – then this can actually improve your chances with the bank because you can prove you can pay all your regular expenses and still make regular repayments.

The same goes for paying rent, it is actually good if you have been paying a rent similar to what the mortgage repayments will be, as you will be able to effectively prove in advance that you could manage to pay the mortgage and all other commitments because you are already doing it.  This is one of the few benefits of current rents in Australia being higher than a mortgage repayment!!!!!!!

Saving is hard.  Some weeks I would put $5 into my savings account and the next week take out $50 just to tide us over.  At different times of year your savings take a hit (Christmas, Birthdays, Starting School Year).  If you stay steady and be mindful through these times however you can usually return to your original balance and keep it going upwards in the long term. 

You should also try to get a little cash for your assets whenever possible, it takes longer and a little more work, than just throwing things away but why shouldn’t your family benefit from your asset and you can sometimes help the planet too by recycling?!

I preferred to save up and then purchase so I owned outright before taking delivery.  We had bought our 2 old cars this way, paying approx. $2000 for each of them and owning them several years.  We just used public transport until we had saved up the cash to buy a car.  We were going well and then in 2011 one car blew a head gasket and was a write-off.  I sold the car seat covers for $80 and I rang around to all the scrap yards and second hand dealers and sold the car for $150 and used my RACQ membership to get a free tow to the scrap yard.  Then in 2012 our other cars rego was coming up for renewal but it would need a bit of work to make it roadworthy, so we drove this till the rego ran out and then sold it ‘as is’ for $200 :) not a lot of money but at least we did not have to pay to have our dead cars removed.  We were back to walking and other public transport.

It was not the best timing, as I did not want to spend all our savings.  We decided to get our first ever personal loan to enable us to buy a reliable car for our family in August 2012.  This did mean we also used a chunk of our savings but not all and we were still on track for the home loan!

We had a credit card and it did help us get through some tight times over the years.  A credit card is pure debt and not a good financial plan, it has high interest rates and you pay extra in the long term than if you just used cash….  We all know this, but sometimes you just have to live in the now!  I liked having this as if helped me feel more secure, less worried about financial crisis.  False security probably because without credit card repayments, I would have more cash in hand :)  

However, you can turn a credit card into a positive if you have a good repayment history and you ultimately choose to get your home loan from the same bank as your credit card.  It means you already have a repayment history with that bank and again makes a negative into a positive on the credit score!

I am sharing this because even with a recent personal loan and a credit card, we managed to get a home loan in 2013.  This is because we had a good repayment history, with no defaults!

You can also make your rental history work for you!  We had lived at our latest rental property for 3 years and I asked the real estate agent for a printout of our ‘rental ledger’ (payment history) and I also asked for them to write a letter describing us as reliable tenants.  Oh let me mention here, that I had managed to forge a good relationship with our property agent, despite all the intrusions and she was happy to write this letter when I explained we were going to try for a home loan.  What does the bank see?  3 years in one place, several renewed leases so landlord obviously happy, no defaults, good tenant overall = reliable and secure….  It will also help if you are buying a home in the area near your rental house because you seem settled into the area and happy to stay there!