The home buying process doesn't have to be nerve-wracking. Find out how to prepare to make your mortgage application worry-free.
A bit of preparation can save you a lot of headache down the road. This is particularly true when it comes to buying a home.
The home buying process can be a bit intimidating, particularly if you're going through it for the first time. However, if you put in some legwork before looking for a property or sitting down with a lender, you can save yourself a lot of stress.
Learn to compare your home loan options
Start now by learning how to compare home loans. It’s a mistake to believe all home loans are created equal, or that a low rate is the only detail to consider.
Comparing home loans is relatively straightforward if you know what to look for. You’ll want to analyse home loans based on their rate, fees and features.
Your home loan interest rate is the number one determinant of how much you’ll end up paying. A seemingly small difference in rates can make a big difference to how much you pay over the life of a 30-year loan.
Say for example you have a $750,000 home loan for 30 years at 4.00%. Over the life of that loan, you’d end up paying $1,289,021. Now, if you instead opted for a loan just ten basis points cheaper, at 3.90%, you’d be paying $1,273,504. That’s more than a $15,000 difference.
Although when comparing home loans by interest rate, remember to look beyond the advertised rate – pay attention to the comparison rate. A comparison rate combines the advertised rate with a home loan’s fees and expresses this cost as a percentage. If a home loan has a low advertised rate but a much higher comparison rate, odds are it’s packed with fees and might not be as good a bargain as it first appears.
If you do notice a discrepancy between the advertised rate and the comparison rate, you should look closer at a home loan product to determine the fees it charges.
Some home loans charge upfront fees for application or settlement. While these one-off fees can sometimes run into the hundreds of dollars, they’re not quite as significant in the context of a 30-year home loan.
However, some home loans also carry ongoing or annual fees. These fees can add up over the life of your loan. Sometimes, the fees are for associated features. If the features are ones you’re likely to use and which help you better manage your home loan, they could be well worth the price. But make sure you determine what the fees are for and put some thought into whether the benefits of the features the loan offers outweigh the costs of the fees.
Home loans often come with helpful features that can save you money and give you greater control over your debt.
Some features you might want to look for include offset accounts, redraw facilities and split facilities:
- An offset account saves you money by reducing the amount on which interest is calculated by the amount of funds you hold in the account.
- A redraw facility allows you to access any extra funds you’ve paid into your home loan. If you’ve gotten ahead on your repayments, a redraw account allows you to withdraw the funds if and when you need them.
- A split facility allows you to take advantage of different home loan products by splitting your home loan into separate accounts. For example, you could put a portion of your home loan on a fixed rate and a portion on a variable rate.
Get your home loan documents in order
Before you apply for a home loan, you can save yourself a lot of back and forth and subsequent delays if you get some basic documentation in order.
Lenders may vary slightly in the sort of documents they require, but you can count on being asked to provide a few things.
- Identification. You’ll need to provide 100 points of identification, which could include a drivers licence, a passport or a Medicare card.
- Financial history. Your lender will need proof of income and employment. You’ll likely need to provide your four most-recent payslips or your tax returns. If you’re self-employed, you’ll need BAS statements or an accountant’s letter.
- Financial position. You’ll need to provide documentation of any assets or liabilities you have. Assets can include your superannuation, any properties you own, shares or other investments. Liabilities would be any debts, including credit cards, personal loans or HECS debt.
- Property information. If you’ve already found a property, you’ll need to provide the signed contract of sale. If you haven’t found a property, keep your lender updated throughout your property search. They’ll eventually need to do a valuation of the property.
Get yourself pre-approved
Home loan pre-approval is a powerful weapon when it comes to your property search. Pre-approval is the first stage of getting a home loan and is basically a lender's agreement in principle that, should all your details check out, they would be willing to lend you a specific amount of money at a certain rate.
Home loan pre-approval doesn't take long. You can generally get pre-approved for a home loan in 1 business day if you have all your documents in order. While pre-approval is not a binding agreement for a lender to extend you credit, or for you to accept it, it does give you a good idea of your borrowing capacity and buying power.
Having pre-approval will be enormously helpful in your property search. You'll be able to narrow down your hunt to a specific price range, and can attend auction with a reasonable degree of confidence that you'll be able to finance your purchase. In private treaty negotiations, pre-approval can also give you an edge over prospective buyers who have yet to arrange finance.
Learn how to research property
Knowing what you're looking for, where you want to buy and your strategy and goals will help reduce the stress of your property hunt. Before you begin looking, you'll want to answer a few questions about your goals.
Owner-occupier or investor?
Are you looking for a house to live in or to rent out as an investment? The strategy you choose will dictate the kind of finance you need to arrange, and could change the areas in which you look and the type of property you're looking for.
Apartment or house?
You'll need to decide if you want to buy a unit or a house. There are pros and cons to each. Units tend to be less expensive and are often newer, but don't afford as much privacy and can offer limited potential to add value. Houses offer more freedom for renovation and expansion, but could also require more maintenance and have a higher financial barrier to entry.
Location, location, location
You also need to narrow down your search to a geographical area. Once again, where you decide to buy could largely be dictated by whether you're buying a house to live in or for an investment. Your price range will also help determine the area you buy in.
Prepare yourself to buy
Once you've sorted through your home loan options, arranged finance and decided where to buy, you'll need to prepare yourself to move quickly.
If you're buying at auction, you may attend several auctions before you have success. You can increase your chances of success by reading some of our auction tips.
However, once you do find success at auction, you'll need to be prepared. That means you'll need to come ready to put down at least a 10% deposit. It's likely the seller will want a bank cheque, so come to auction prepared with a pre-printed cheque with the payee and amount fields left blank.
The same holds true if you buy by private treaty. As soon as the vendor agrees to your offer, you'll need to be ready to pay a deposit and sign a contract of sale.
With this in mind, it's wise to ask for a copy of the contract of sale prior to auction or any private treaty negotiations. Find a solicitor and have them examine the contract for you. This way you can sign with confidence when your offer is accepted, or you win at auction.
You'll also need to provide your lender with a signed copy of the contract as soon as possible. This will help speed your home loan toward full approval and settlement.
Prepare for your move early
After you've signed a contract to purchase a property and given all relevant documents to your lender, you'll have a few weeks' wait until settlement when your lender disburses the funds to the vendor and you take possession of the house. Use these weeks wisely.
The time between contract and settlement is usually about six to eight weeks. It's easy during this time to bask in the afterglow of your property purchase, but this is the period in which you need to be preparing for your move.
There are a number of logistical details to get sorted. You'll need to sort out the transfer of your utilities, internet and any pay TV to your new address. You'll also want to make sure you've changed your address for any billers or regular mail you receive, and it's wise to sign up for mail forwarding as well.
During this time you'll also want to sort out removalists. Depending on the time of year you're looking to move, removalists can book out weeks in advance. Locking in your move-in date now will save you some serious stress as you head toward settlement.
It's also wise to leave yourself a bit of time between settlement and your move-in day. You won't be able to actually move into your new home until your home loan settles and you take possession of the property. If you book removalists for the day of settlement, you could find yourself in dire straits if anything goes wrong with your home loan.
Finally, even though it's a tedious task, you should begin to pack up your home. The six to eight weeks between contract and settlement might seem like an eternity, but it will pass quicker than you think. Packing up your house now will keep you from having to scramble as moving day approaches.
Buying a house is a stressful process. In fact, it's one of the more stressful processes you're likely to ever experience. If you head into the process adequately prepared, you can minimise this stress and make your home buying experience something to celebrate.