Not having a deposit or a guarantor
Not having any savings of your own to put towards the purchase is mistake number one.
As a minimum, you should have at least 5% deposit of the property value which you’ve saved through regular deposits into a savings account over a period of 3- 6 months.
Banks love this!
If you have less than that, there are some options available to you.
Secondly, if you have no deposit at all, your Mum and Dad might be in a position to act as a guarantor on your home loan.
In this way, you won’t need to provide a deposit upfront, can avoid the expensive Lenders Mortgage Insurance (LMI) that applies when borrowing over 80%, and cover the other costs associated with buying a home (stamp duty, legal fees, and the rest of those nasty surprises).
House hunting before getting pre-approval
Here’s the problem with not getting mortgage pre-approval or conditional approval before venturing out into the magical world of house hunting:
You’re not prepared to make an offer and could potentially miss out on your dream property while you try to sort out your home loan.
The absolute worst thing you can do is put down a deposit and sign the Contract of Sale before getting conditional approval.
You risk losing your deposit, and this could set you back months in your property search.
The bottom line is that you don’t know whether you’ll be approved by the bank, whether it’s to do with your credit file, the nature of your employment, or your financial situation and living expenses.
We’ve lost count of how many would-be borrowers tell us they’ve paid a deposit only to find they were knocked back for a home loan by their bank.
As a result, we’re left scrambling to find you a lender before settlement while you try to extend the settlement date with the vendor (seller), assuring them that you’ll get your mortgage approved.
Avoid pulling your hair out and get home loan pre-approval first.
Not speaking to a mortgage broker
We may be beating our own drum here (just a little :D).
Mortgage brokers are usually able to negotiate a much sharper interest rate than if you were to go to a bank directly.
However, more importantly, they’re specialists in the lending policies of many different lenders. Well, at least our brokers are specialists!
Having access to major banks, lenders, second-tier lenders and specialist or non-conformers is particularly important because most first home buyers are simply unprepared for the tighter lending policies that now apply.
Many applicants are declined because they choose the wrong lender, while others don’t apply at all because they have the misconception that they won’t qualify with any lender.
Not everyone has a deposit, works full-time, and is buying a standard residential property in a major city.
The beauty of a mortgage broker is that even if you don’t fit into this neat square, they can comprehensively assess your situation, usually for free, and come back to you with some options.
The alternative is applying with lender after lender, getting knocked back, adding enquiries to your credit file, and, as a result, making it even more difficult to qualify.
Not doing your homework
Before you even step foot in an open house, you should ask yourself what you want out of buying a property:
- Single or couple lifestyle: Local cafes, shopping centres, booming nightlife, beaches, bushland and trails – having these perks closeby is probably more important to you than having a semblance of a backyard or more than one bathroom.
- Family lifestyle: You need plenty of room to grow and keep an eye out for local schools, recreational centres, parklands, and playgrounds.
- Quality public transport: This is a given no matter whether you have children or you’re a childless Gen Y-er.
The next step: don’t listen too much to the media!
Headlines about property booms and busts are designed to sell papers (or online subscriptions in today’s day and age), and most reports are based on opinion and short-sighted data.
There are more reasonable steps you can take to make an informed decision:
- Reliable property data is vital: Websites like CoreLogic (formerly RP Data), Residex and Australian Property Monitors (APM) are all reputable sources that provide up-to-date data on property sales nationwide.
- Start with notable property websites instead: The problem with property data is that it is subscription-based so, to get started, sites like realestate.com.au and domain.com.au (which partners with APM) allow you to set-up alerts for new properties on the market, not only in your area but houses in surrounding suburbs.
- The old “properties sold in the last 6 months” rule: You know where you want to live so the next step is to compile a list of properties that match your home wishlist and what their sale prices were. Six months’ data will give you a good average so you’re not going into the buying and negotiating process entirely blind.
- Emerging suburbs and infrastructure: Avoid the media black hole but keep your ears and eyes open to new property developments and any infrastructure projects that are underway. The surrounding areas are growth suburbs!
Armed with data and knowledge, get out there and head to open homes. The more, the better!
Pretty, you’ll narrow down your list but you need to be realistic and stay within your budget. This leads to the next big mistake.
Borrowing to your limit
Just because the bank says you can borrow up to $1 million, doesn’t necessarily mean you should.
Your borrowing power limit is the upper threshold of the mortgage repayments that you can afford to make without putting yourself into financial hardship.
Of course, this is under the assumption that your income, living expenses, the interest rate, and your situation as a whole don’t change.
We all know that life – and rates! – don’t work that way.
Having a baby, buying a new car, going on a holiday, or, you know, generally living life can quickly you change your financial situation.
Some are events are outside of your control such as losing your job or getting injured or sick.
This can quickly see you struggling to make your home loan repayments.
From there, it can be a slippery road to missed repayments and even mortgage default.
No matter what the banks tell you and the interest rate buffer they apply, you should consider your lifestyle and your short, medium and long-term plans.
Letting your emotions run wild
Whether you’re negotiating with a private seller, buying at auction, or attending an open house, keep your cards close to your chest.
Your dream home may be staring you right in the face but try to avoid mentioning things like “This will be a great rumpus room for the kids” or “The verandah will be perfect for family barbeques”.
If the real estate agents pick up on this, you’re gone. Like any highly-trained salesman, they’re trained to read your verbal and non-verbal body language.
They will take you for a ride with the price if they see that you’re overly interested.
The best way to combat emotion is with education (see above about not doing your homework).
You might also want to check out this infographic on how real estate agents can stretch the truth.
Not doing a property inspection before buying
When house hunting, use this property inspection checklist to get a feel for the property.
During the cooling off period, book a licensed property inspector to undertake a pest and building/strata inspection.
What if I purposely bought the property as a “fixer-upper” to quickly sell or rent out?
That’s fine, but you should organise a licensed property inspector to check for any potential structural damage because you may find that the cost of repairs may not be worth it.
If you’re investing, it could mean your return on investment (ROI) takes a big hit.
Underestimating the costs of buying a property
There’s a common misconception that you just need 5% of the property value as a deposit to buy a property.
This 5% deposit is actually paid to the vendor so they know you’re serious about the purchase.
What many first-time buyers don’t realise is that you need around another 5% to cover:
- Stamp duty.
- Mortgage registration and transfer fees.
- Loan application or establishment fees.
- Lenders Mortgage Insurance (LMI), which only applies if you’re borrowing more than 80% of the property value (but there are LMI waivers!).
As you can see, your deposit can quickly get eaten up by these extra costs so either focus on saving as a bigg deposit or ask Mum and Dad if they can act as a guarantor.
Signing the Contract of Sale without legal advice
It’s common for real estate agents to pressure you into signing the contract “so you don’t get gazumped by another buyer”.
Don’t sign anything until you know your rights are protected!
Book a conveyancer to go over the contract with you before you sign and understand that you always have the option to negotiate.
Consider the following with your conveyancer:
- See if you can extend the cooling off and settlement period if the vendor allows it to accommodate any delays.
- If you’re buying off the plan, make sure there is a sunset clause that allows you to pull out of the contract should the development not be completed by a certain date.
- Negotiate the payment terms and the amount of the initial deposit.
- Check for restrictions in the use of the property, such as easements, because they may or may not be registered.
- Ensure there is a clause that if there is damage or any loss to the property before settlement, you can cancel.
Confusing the actual costs of owning a home with reality
When a bank assesses your borrowing power, all they focus on is whether you have the capacity to make mortgage repayments.
They will add a buffer to the interest rate you applied for – so, instead of assessing you at 3.59%, they may assess you at around 6.00% – as a shock test to see if you could still comfortably manage your home loan repayments should your financial situation change.
However, this doesn’t account for the general costs of living in and maintaining a property such as:
- Paying utility bills.
- Paying council rates.
- Paying for internet.
- Home and contents insurance.
- General repairs and maintenance.
Consider your own cost of living and the kind of lifestyle you want while still paying down a mortgage.
You’ll need to make some sacrifices, of course, but owning a home shouldn’t stop you from living your life!
Call us on 1300 889 743 or fill in our free assessment form to start your home buying journey today and avoid the common mistakes.