Purchase Property; Pursue the Australian Dream

To own your own plot of land one day was one of the many goals that we accepted as a given. Having a place to call your own has been the staple for many Australians in the past century.

Sadly, it seems that many of us are now foregoing the hope of owning a home. Seemingly perpetual rising house prices, high interest rates and intimidating deposits deceive us into thinking that owning a property is only for the wealthy upper-class or those lucky enough to have brought-in at the right time. There exists a notion that with each passing generation, less people will be able to enter the property market. While this notion has some ounce of truth, it is far from the full picture.

Always remember, becoming a property owner is no easy feat, but not impossible!

While some may find some strange comfort in the narrative that most Australians are priced out of the property market and will have to settle to rent for the rest of their lives, you shouldn’t underestimate yourself this way. My experiences working at Pursue Wealth have taught me that people, even those in uncertain financial situations, can pursue the Australian Dream of owning land.

Time and time again, we have helped people achieve this dream. Are you looking for your first home? Are you expanding your business and need a commercial lot? Or perhaps you are looking to (wisely) throw your money into a real estate investment?  We often break down and walk our members through the tenants of purchasing property, creating a simple step-by-step process.

Naturally, the first step after securing a deposit will require you to find the home loan. Mortgage brokers are plentiful and finding the right one can be tricky.

We recommend our besties across the corridor broker Pursue Property (https://www.pursueproperty.com.au/). Here, you will be provided with an accessible service that connects you with over 30 select lenders for mortgaging services. It is a service that we recommend to our members and anyone else who is in the market for a decent broker.

Although we have made the hunt for a mortgage broker easy for you, we encourage that you pick up some of the lingo that our brokers use. Pursue Wealth already has a blogpost written with the basics terminology of property investment (see here: https://pursuewealth.com.au/how-much-deposit-do-i-need-for-a-property/), we have included a quick jargon index to expand on that post. The information here and there should help you delineate the options you’re faced with:

What is a Home Deposit

A deposit is a percentage of the property price paid upfront to a lender. Depending on whether you are purchasing a residential, rural, commercial or an option-to-purchase property, lenders will adjust the amount required for a deposit accordingly. The most common deposit for residential properties is 10% of the purchase price, whereas rural property deposits can go as low as 5% and commercial property deposits range between 20-40%.

Interest Rate (Variable vs Fixed)

This is the percentage of interest a lender will apply to your mortgage. You should be aware of the two types of interest: variable or fixed. In the case of a variable interest rate, the percentage of interest you pay on your loan will fluctuate, typically in parallel to the RBA’s rates to adjust for inflation. On the other hand, fixed interest rates do not fluctuate; either for the entirety of the loan or for a set period of time.

Comparison Rate

This is a percentage that represents the comparative (true) cost of a loan. It is combines both the interest rate and the terms & fees of the loan. The greatest tool in your kit when determining whether or not a loan is right for you.

Honeymoon Rate

A honeymoon rate is a term lenders use to describe repayment a set period of lowered repayments with the intention of letting lendees “ease into” the repayment process.

Offset Account

An offset account is a savings account that offsets the interest paid on your home loan. Let’s say you have $100,000 yet to pay off a mortgage and you have $20,000 sitting in an offset account, you will only be charged interest on $80,000 of the mortgage. Offset accounts can be very handy as they lower your interest rate, winner for all you owner occupiers!

If you have found a home loan that you can agree upon, rejoice! You are already dug in and are well on your way to becoming a property owner. The next step will be securing the loan. Mortgage eligibility is based on two essential foundations: the deposit and your serviceability.

As explained above, your deposit is a percentage of the property price. There are associated costs associated with the deposit, such as land transfer tax (stamp duty), potentially lenders mortgage insurance (LMI) and other conveyancing costs.

Stamp duty is a state tax paid on large purchases, ranging from 1.4% to 5.5% of the property’s value. Many exemptions apply. A calculator on Victoria’s stamp duty tax is available at: https://extranet.sro.vic.gov.au/SRO/calcs.nsf/landtransfer.xsp?OpenForm.

LMI is an insurance policy a lender may take out on your mortgage, to protect them from a potential default. The costs of LMI may be added onto your loan amount and so you will pay interest on it. Their choice to opt for this insurance rests on the size of your deposit, so you most likely won’t have to worry about LMI if your deposit is 20% of the property price. Furthermore, LMI on an investment property (explained below) are tax deductible for up to five years of the mortgage.

Saving for a deposit may be the most difficult part of securing a home. At the close of 2018, Victoria’s median inner-city house price sat at a whopping $1,380,500 ^{[source: https://reiv.com.au/property-data/premium-research#median]}, a standard deposit of 10% would be $138,500, excluded associated costs like stamp duty.

While that may seem to be a herculean amount to save towards, keep in mind that first home buyers are going to opt for residential properties that are at the cheaper end of the market, so the median should not concern you.

Units such as apartments are also infinitesimal cheaper to invest in than houses. Whilst units are sometimes regarded as “lesser” investments, as historically they have not risen in value as much as houses. The benefits are that median apartment is less than half of the median price, and they allow you to live in suburbs that you would never imagine being able to buy into. It is also intriguing to note that houses dropped in value by 4.60% from September to December in 2018 whereas apartments only fell by a mere 1.10%, according to the Real Estate Institute of Victoria.

Keeping a positive cash flow is a must! Your savings must always be on the rise. Pursue Wealth has already created guides for people trying to save for a deposit. For families, Pursue Wealth’s Catherine Jansen has written an excellent blog on how to save as a family (see here: https://pursuewealth.com.au/familysavings/).

For individuals, especially those who are yet to own their first property, here are our two hottest tips for attaining a deposit.

Move back in with family

If you have moved out and are renting, it could be worthwhile to move back into home with family if possible. There is no shame in boomeranging home if you’re working towards moving out again. In fact, your yearning for independence may give you the extra discipline to save when living with family.

Secure a First Home Owner Grants (FHOG)

FHOGs were created in 2000 to draw young people into the ever increasing property market. For Victorians, this could provide you with up to $20,000 on your first home and a one-off exemption to the land transfer tax. The conditions of your First Home Owner Grant vary by the state or territory you wish to reside in; if you’re among those yet to purchase their first home, information on the matter is available at: https://www.sro.vic.gov.au/first-home-owner

Serviceability

This is when the lender will shift their focus onto you. The mortgagee will look at your ability to make loan repayments by looking at your current situation, looking at many factors that may or may not be in your favour when securing a mortgage, this includes:

Credit Score

Your credit score indicates how well you have repaid your debts. Your credit score can be assessed by multiple credit providers and will fall within a range of either 0 to 1,000 or 1,200. A score of 625 and above will put you into the “good” band for most scores. Understandably, banks are only going to want to lend to people without hiccups in their credit history, so maintaining a decent credit score is vital!
If you think your score will hold you back from a home loan, do not discount yourself from the property market just quite yet. There are many lenders that specialise in lending to people who have bad credit histories.

Residency

Lenders limit the amount a non-Australian citizen can borrow. It is only New Zealand citizen, or spouse of a permanent resident of Australia or New Zealand, that are provided the same mortgage options that Australian permanent residents are, typically up to 90% of the property price.  Foreign nationals, such as temporary residents, will have tighter mortgage options and may need a larger deposit.

Age

You must be at least 18 years old to take out a loan with a bank. Although there is a specified minimum age, banks are also usually reticent to provide loans to people, typically those over 55 years old. If you are nearing retirement age should apply for loans with options for offset accounts (jargon explained below) to reduce the time required to pay back the loan.

Type of Income

In most situations, the bank will use PAYG payslips to confirm your ability to make payments on a mortgage. Great news if you have long-term fixed employment; useless for those of you who are self-employed, in temp work, or receive their income through other channels may find it difficult to prove their incomes. For those who are self-employed, you will need to provide Business Activity Statements in lieu of payslips to demonstrate your income, otherwise you should discuss your options us. Other sources of income, such as income from rental properties and shares, are also factored into your income.

Assets & Liabilities

Lenders take into account your existing assets; including shares, superannuation and vehicles, as well as liabilities such as current credit card debt, outstanding loans and HECS/HELP debts to determine your ability to make loan payments. For credit cards, lenders will look at your combined credit limit when making an assessment, so it pays to cancel or limit cards that you do not use.

And that’s it. If you tick all the boxes of as a model mortgage candidate, you should be able to secure a home loan with ease. You will need to discuss the finer points of your home loan with your provider. We hope that the information we have provided you will arm you for negotiations, we encourage those.

Property ownership does not end with you securing a roof over your head. Real estate investments are the most stable investments one can make, so we strongly encourage our clients to do so. Not only will you gain in the long run, it will cement your foothold in the property market.

In fact, some people will sooner buy an investment property before they buy a property for their own use. Commonly known as “rentvesting”, people choose to pay rent for on their own home (usually a property they cannot afford to buy) and pour their savings into an investment property. This lightens their own rent payments, letting people to live a freer lifestyle while getting an earlier start on their portfolio investment.

If you’re considering a start in investment properties, you will have to look at property for sale in a completely different way. When looking for a home to live in, or a commercial property to work in, buyers view potential homes as a “lifestyle asset”. They will buy properties with features that meet their own needs. This includes: visual appeal, locale, liveability, parking, access to school zones for families, public access for businesses, and etc.

Aspiring property investors will need to learn how to view property differently, as an “investment asset”. You must view your purchase as a tool for wealth generation. This means finding a property that will let you deliver the most value for your money.

As a tool for wealth generation, you may consider prioritising capital growth above rental yield. A property with a high rental yield ordinarily is able to pay for itself and pay dividends to its owner even after all their expenses (positively geared). The downside is that these investments may not grow as fast as low rental yield properties. Properties with low rental yields may not pay for themselves, yet these properties may outgrow properties that have higher rental yields, ultimately, delivering a higher return when sold back onto the market.

With that in mind, here are the vital considerations that you as a property investor will have to seek out in an investment property:

Area Growth

Does your property’s area have a long-term history of sustained growth? Your property will only have any value if its baseline value rises over time. As the GFC has taught us, boom-and-busts are abundant in the world of real estate.
Generally, it is wiser to invest in familiar areas. If don’t have the time to research and analyse the past five years of your area’s real estate market, it’s going to be to your benefit to buy into areas that you’re familiar with.

Renovation Potential

Does the property have a large renovation potential? If so, consider to what renovations would be cost-effective. To readers who are experienced in trades, or have personal connections to people who work in trades (i.e. a family member), note that you have an upper-hand in renovating properties.  You will be able to leverage your skills and connections to reduce the costs of renovations and thereby be able to renovate properties while spending less.
To those who neither have the skills or contacts, it may be less cost-effective to renovate, so consider opting for properties that need relatively small amounts of renovation to get as much bang for your buck.

Rent Appeal

Does the property appeal to renters? Although your focus is on capital growth, you will still need renters … and trying to figure out what renters want is hard! It’s easy to become overinvolved and attempt to pawn off a property that is of your own taste than that of the everyday renter. The key word here is reasonable. For residential real estate, it is best to aim for the baseline of a good home: reasonable parking, a reasonable living space, kitchen & bathroom in reasonable condition, reasonable access to amenities such shops and public transportation, reasonable school zones.
It doesn’t always pay to focus on any one key area, unless your property is in an area that attracts certain demographics; such as students, who will have a higher need for access to public transportation and a lower need for parking and school zones.

With these being thoroughly considered, figure out how you’re going to cover the maintenance costs on your property. As a property investor, you are judged liable to your tenants for the integrity of your property. This can sound scary, but never fear, you’re in luck! Like LMI, most of the costs involved in investment properties are considered tax deductible, unburdening your wallet.

Currently, tax deductible maintenance costs include: council rates & land tax, repairs, rubbish removal, advertisements for tenants, body corporate fees, surveyor fees, notary fees, debt collector fees, pest control fees, cost of getting tenants’ keys cut, water utility charges that not charged to the tenant, legal expenses related to eviction, security system provision & maintenance, and servicing fees for air conditioners, heaters, smoke alarms, elevators and automated doors.

You don’t have to be raking in huge amounts of money to make the move into real estate. It is a tired cliché that all real estate investors are wealthy. So long as you are in the know of the property market, opportunities to break into it will appear sooner than you thought.

The Australian Dream is an adventure we can all pursue. We have services available to people who want more information on how to dip their toes in the property market. Contact us! We would love to hear from you: https://pursuewealth.com.au/chat/