Puzzle Finance Blog
What to do when your home-renovation dream turns into a nightmare
Every renovation project is inherently optimistic, because homeowners start out with a plan to improve their home with visions of glorious new living spaces or at least a shiny updated bathroom galvanising them to power through the less pleasant side of home improvement projects. While most people come through the mess and expense and enjoy the results, the biggest fear of many homeowners is that they will be among the unhappy group who suffer from inflated costs, low-quality workmanship or an incomplete renovation.
The worst-case scenario for that situation, which thankfully doesn’t always happen, is that they will be forced to sue their contractors. Some are able to get all or part of their money refunded. But others never get repaid for their financial loss, much less the time and aggravation of renovation disaster.
Jay Timmons and Rick Olson, married homeowners in McLean, never thought they would be among the unlucky group.
“We’ve renovated many homes before and had remodelled the first floor of our home with a builder who did an excellent job,” says Timmons. “Unfortunately, when we hired him again to redo our upper level and add a garage and bonus room, the experience turned into an absolute nightmare that was extremely disruptive to our kids and to our lives.”
The remodelling project at Timmons’ home was supposed to take one year and instead has taken nearly three years and cost 70 per cent more than the original contract price.
Timmons and Olson, as experienced homeowners, anticipated some delays and hurdles during their renovation, but as the problems piled up and weren’t addressed, they became concerned.
“We ended up with a multi-page list of incomplete items and defective work,” says Timmons. “The contractor reassured us that everything was fine but kept asking for extra money. We were stunned to get a bill of $100,000 in overage charges, particularly when our project wasn’t finished.”
Olson says that in retrospect they should have asked for receipts during the project instead of trusting their contractor.
Eventually, the list of problems grew to more than 300 items, some minor and some major, such as the lack of tile or a toilet in the new master bath. They hired an intermediary to talk to their builder after they couldn’t get satisfaction and, when the intermediary was unable to move the project forward, they hired an attorney.
“After 20 months, the builder abandoned the project with hundreds of items left incomplete, including the floors and the heating and air conditioning system,” says Timmons.
The homeowners turned to Bowa, a custom design/build remodelling firm in McLean, for a renovation rescue.
“Unfortunately, we get requests pretty frequently from homeowners who are at an impasse with their contractor,” says Josh Baker, founder, co-chairman and owner of Bowa. “Our first recommendation is always to try and work it out with the original contractor because that’s the fastest and least expensive option.”
If the relationship with the original contractor is broken, if the contractor is unreachable or if the homeowners don’t trust the contractor to finish the work correctly, a new contractor can be brought in to examine the home.
“Often when we investigate we find that the work has been done so poorly that we have to start over from scratch, which costs even more money for the homeowners,” says Rick Matus, senior vice president of Case Design/Remodeling in Bethesda.
Baker says a rescue renovation typically starts with approximately four weeks of research to determine what needs to be fixed and completed.
“Rescue renovations are far more challenging than projects we’ve designed ourselves,” says Baker. “The homeowners and the home are usually in distress. We typically uncover multiple problems that they didn’t even know about and that will cost them more money, but they also need to protect their investment in their home. On the other hand, the gratitude from people once we’ve fixed their home is tremendously satisfying.”
Timmons and Olson lived with their young children in their McLean home during their three-year drama, which included a burst pipe that had been installed by their first contractor in an unconditioned attic not properly insulated. The water damage from that issue wiped out about one-third of the renovation that had already been completed, says Olson.
“We were living in the basement with our kids, who were 2 and 4 when this started, and now we have a third child,” says Timmons. “The original contractors had not taken appropriate steps to protect the house when they took off the roof, and we ended up with mold on the basement drywall and flooring. We moved into the unfinished upstairs while that was remediated, and then, after the pipe burst, we moved out for four months into a rental home. The disruption to our kids’ lives was terrible, particularly because the oldest was starting kindergarten by then.”
Once Bowa started work, its staff scheduled the work so that the family always had a place to spend time together in some part of the house.
“Having a full-time supervisor onsite, as Bowa provided, makes a huge difference in how a major remodelling gets accomplished,” says Olson.
Sometimes a home improvement project is completed before problems appear.
“One client called us about 90 days after her contractor finished a barrier-free bathroom, which looked beautiful but had started to leak into the room below,” says Russ Glickman, president and founder of Glickman Design Build in Potomac. “The homeowners wanted us to guarantee a repair, but although we could patch it, we couldn’t provide a guarantee because without tearing it apart we didn’t know what other problems existed. We ended up remodelling the shower stall and rebuilding it, but we had to make sure that the shower door, which had cost $4000, still fit.”
In the end, the entire project cost about double the original price because it had to be done twice.
While that situation was certainly painful and costly for the homeowners, a couple in western Loudoun County, Margit Royal and Jerald Wolford, had their entire home compromised by shoddy construction. Wolford, who had retired, ended up returning to work to help pay for the additional cost required to repair numerous problems.
“We were living in North Carolina and decided we wanted to build a home in the Virginia countryside for our retirement,” says Royal. “When we found the land we wanted to buy, the seller turned out to be an architect with a portfolio of homes to show us in the area. Since we were doing this long-distance, we liked the idea of having an architect who lives and works in the area.”
The couple interviewed several builders recommended by the architect and checked their licenses, but Royal says their biggest mistake was not checking on the architect, who turned out not to be licensed and whose design caused some of the problems that were then compounded by contractors’ faulty work.
“About two-thirds of the way through what was supposed to be an 18- to 20-month project, we started noticing issues with sloppy work,” says Royal. “Some of it was simple, like splashed paint in drawers, but they also stored the wood for our trim in an unheated garage so it warped and then couldn’t be stained the way we had planned. The exterior stain wasn’t applied properly, and the interior stairs were too narrow.”
Worse, stress cracks appeared on the roof three times within three months, sliding-glass doors were installed upside down, and a transom window cracked; all before the couple moved into their new home.
“After we moved in, we had repeated hot-water failures in the master bath because they had installed an undersized tankless water heater,” says Royal. “One of the worst issues, which unfortunately happened when we had family visiting, was that sewage started coming up in a guest bathroom shower. While fixing that problem, we found a gas line leak that had been caused by the original plumbing installers.”
At this point, fearing other unknown problems, Royal and Wolford hired Joe Lucas, a forensic home inspector with Advisor LLC in Bethesda. Lucas found 220 defects and insufficiencies in the home and recommended Bowa to fix their problems. The extent of the problems with the home required nearly two years of investigation and repair. Royal’s renovation cost about 30 percent above the original cost of building the home, plus approximately $100,000 in legal fees.
The Royal-Wolford home problems were more than frustrating: The homeowners and their guests were living in unsafe conditions from the gas leak, sewage issues and a weak roof. Matus worked with a similar case on a home in Bethesda.
“The project was a renovation of a basement with a powder room and a full bath and the homeowners called us after the job was finished because the bathroom smelled like sewage,” says Matus. “When we got there, we found numerous problems, but the worst was that they had cut into the joists of the floor above to run the duct work and left that floor 298 per cent overloaded, which is incredibly dangerous. We had to rebuild the first floor from underneath.”
Case also had to redo both bathrooms because the plumbing had been installed incorrectly, causing the sewage smell as well as the danger of frozen pipes since the water pipes were installed on uninsulated exterior walls.
“Unfortunately, the homeowners could only afford to pay to put the home back to the way it was before the renovation,” says Matus. “We gave them a second proposal to complete the renovation the way they wanted it, but they didn’t have enough money. They sued the first contractor and then eventually decided to sell the house without renovating it.”
Steps to resolving renovation problems
Most contractors establish a work schedule with payments at different milestones, so it may be possible to find an appropriate stopping point or at least a time to reevaluate the project, says Matus.
“Some of the triggers that indicate it may be time to stop a project are when the contractor isn’t showing up when he’s expected or when you’re consistently asked to pay extra money,” says Matus. “You should also call a halt if you see shoddy work or you ask an inspector to check the work. But, of course, when your house is torn open, the last thing you want is to stop. At that point, your only recourse is to find some way to get it finished by your original contractor or a different one.”
Whether you’re facing a failed project or are frustrated with the pace or quality of work on your home, how you handle the situation depends in part on your contract and your jurisdiction, says Glickman.
“First, read your contract because you may have a mediation or arbitration clause that will guide you,” says Glickman. “If you reach the point where you feel you must file a lawsuit, hire an independent, third party inspector to review your contract and written plans to point out the differences between what was promised and what has been done.”
Glickman says photos and an engineering report, which could cost a few hundred dollars, are important to validate your claims against a contractor. The inspection and documentation will also be valuable if you need to bring in a new contractor.
“Sometimes when a contractor realises you plan to bring in an inspector and file a lawsuit, they will jump back in and fix their mistakes,” says Glickman. “That should be the goal if the contractor is competent to do the work.”
If you do bring in a new contractor, their guarantee for their work depends on how far along you are in your home improvement project. Matus says that if the project is still in process, Case can come in and take it over and provide a warranty for all of it. However, if the project has been completed, such as a finished roof or addition, the company can only guarantee any additional work they do such as adding siding or flashing, not the entire scope of work.
“It’s always an individual call as to how to handle a renovation problem,” says Glickman. “If you don’t trust your contractors or they’re making your life miserable or they’re not showing up, then you may want to pull the plug. But if you don’t have the money to hire another inspector and another contractor, you may be willing to put up with more or at least give your contractor 30 days to fix the problems.”
Tips to Avoid a Renovation Nightmare
● Make sure you work with a licensed contractor and check for complaints online and on sites such as Angie’s List, Washington Checkbook, the BBB and the local department of consumer affairs.
● If a contractor doesn’t show up for an early appointment, that’s a red flag that you should avoid hiring that company.
● Be wary of contractors who offer a price far below the quotes you receive from other contractors. Low cost sometimes means low quality or a lack of experience.
● Find out if there are licensed subcontractors or other employees who can work on your project if your contractor gets sick or injured.
● Do your research to find out about the experience a firm has with the type of job you require.
● If your renovation is major, such as a large addition or complete remodel, make sure there will be a full-time supervisor on site and request lien releases from any subcontractors.
● Have an attorney experienced with home improvement look at the contract. You have a three-day right of rescission which should give you time to review it before it becomes binding.
● Ask your contractors for copies of their worker’s compensation and liability insurance policies. Check your own insurance to find out what it will cover during the renovation.
● Make sure your agreement has a balanced payment schedule with a maximum of one-third paid upfront and the other payments due when work milestones are completed rather than on a particular date.
● Ask for an extended warranty on all work of at least one year in case problems show up after the job is complete.
The Washington Post
Posted by Michele Lerner - Domain (Fairfax) on 12th April, 2016 | Comments | Trackbacks | Permalink
Why investing in property doesn't add up
Investors get carried away with optimism in every boom in an asset class but once the froth is blown off the top of the market, the herd generally understands the easy money has left the building and expectations become more realistic.
And the realistic residential real estate expectation now is that the average investor buying housing today is going to lose money over the next few years. That's not because of any Doomsday Brigade price crash. It's enough for prices to go flat for investors to lose money.
The residential real estate investment boom peaked last June and has been deflating steadily since then. The latest ABS housing finance figures record investor housing finance commitments as being flat in February on January and up 4.1 per cent on a seasonally adjusted basis. The graph tells the story.
The Reserve Bank and APRA might like to take the credit for initially calming investors' exuberance, blowing that froth off by forcing banks to wake up to themselves, but now investors should be working it out for themselves. Exceptions aren't the rule
Of course there are always exceptions - the occasional bargain buy, the place with unrealised potential - and most of the alleged real estate experts think Brisbane will do better for the next year or so than the rest of the capital cities but, on average, housing prices are expected to gain very little over the vaguely foreseeable future.
A quick sampling of reasonably credible forecasts ranges from AMP's Shane Oliver appearing a relative optimist with a prediction of 3 per cent growth in housing prices this year, while ratings agency Fitch is saying 2 per cent and NAB 1 per cent.
BIS Shrapnel, when not caught up in dubious negative gearing modelling, thinks the key markets will gain this year but fall a bit in the next two, leaving house prices up just 2 per cent over three years and units negative.
For the sake of the exercise, let's be mildly optimistic and go with 2 per cent annual growth, a little better than the headline inflation rate.
With stamp duty of about 5 per cent and other transaction costs of, say, 2 per cent, the average property bought today and sold in three years wouldn't quite break even on a nominal basis and would be down maybe 6 per cent in real terms.
Then there's the reality of rent. The March CoreLogic rental review showed combined capital city rents had actually dipped a fraction over the past year. Would-be investors routinely underestimate costs, so that CoreLogic's national average gross rental yield of 3.5 per cent is likely to result in a net yield that may well start with a one rather than a two.
Let's again stray on the side of optimism and say there's a 2 per cent net rental yield. That certainly puts the negative into negative gearing even at the top marginal tax rate when investor interest rates are now in the upper fours, if not five.
For Treasurer Scott Morrison's alleged army of housing investors on "average" incomes and, therefore, average income tax rates, the tax deduction still leaves plenty of red ink behind with little prospect of capital gain making up for it if the market goes flat to digest the boom's surge.
Housing returns have beaten the sharemarket very handsomely over the boom years while equities have done nothing - but equities doing nothing now are winning hands down thanks to the much richer franked dividend yields, no stamp duty and negligible transaction costs. But don't expect the ever-present housing spruikers to say that.
Read more: http://www.theage.com.au/business/the-economy/why-investing-in-property-doesnt-add-up-20160411-go39c6.html#ixzz45YZdMacP
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Posted by Michael Pascoe -- The Age on 11th April, 2016 | Comments | Trackbacks | Permalink
How to help your adult children into property
Generational wealth raised its head again this week. A study released this week revealed parents are worried about high housing costs in major cities and whether their children would ever be able to buy in those cities.
The idea of helping your kids to succeed in life is strongly ingrained in Australians, and buying their first house is the acknowledged first step. So how do you help your kids? You can give them some of your money to get them a house deposit, or you can help them help themselves:
If you have the resources, you take money out of the bank and give it to your child for the house deposit. The strings attached are up to you. If you do give money for a house deposit, the lender will usually want a statement that the money does not have to be repaid. If borrowing above 85 per cent of the property value, many lenders will also require some kind of savings history to be demonstrated in addition to any gift.
If you have sufficient wealth in property equity, you can "go guarantor" on your child's entire loan. These loans are sometimes referred to as family guarantee loans as they are most often restricted to immediate family. This means they don't have to save a deposit, but they get the loan based on your security and you're on the hook for the guarantee amount until that mortgage is discharged. If considering being a guarantor, remember that you gain no property rights from the guarantee, and it may limit your ability to borrow.
If the home loan is too much for your child to enter into by themselves, you could also become a co-borrower with them. This is a joint-and-several arrangement which means if your child stops repaying the mortgage, you have to pay it all – not just your half. The benefit here is that you actually also benefit from any capital gains. Insurance
As a guarantor or co-borrower, you don't want to be left with the whole debt because of death or injury to your child. Agree on life insurance policies that cover the debt.
One tip for aspiring parents who want to be in a position to help their children with a deposit: the best opportunity to save towards this goal is before you actually have them. That means planning early.
However, not every parent thinks it's a great idea to make a house purchase easy for their child. They'd rather prepare their kids for handling their own financial security.
Preparing of kids starts with attitude – understanding that if you curtail your week-to-week consumer spending, you can save for medium-term goals such as buying a house, and long-term goals such as retirement.
The right attitude is supported by budgeting, goal-setting, saving and prioritising; and basic education about compound interest, risk and return and the assets you borrow for.
We can't blame our kids if they don't know these things – it's up to us to teach them.
Mark Bouris is executive chairman of Yellow Brick Road.
Read more: http://www.theage.com.au/money/how-to-help-your-adult-children-into-property-20160406-go01q6.html#ixzz45SwRG5b5
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Posted by Mark Bouris - The Age on 10th April, 2016 | Comments | Trackbacks | Permalink
Borrowing to buy property in your SMSF? Keep your eyes open
In its response late last year to the Murray Financial System Inquiry, the federal government said it wouldn't proceed with the recommended ban on borrowing by self-managed super funds (SMSFs) to buy property investments. According to the response document, it didn't "consider the data sufficient to justify significant policy intervention".
SMSF borrowing may not be a problem for the government, however it's likely to cause financial distress for some investors in coming years, especially as SMSF property investing has been such a fertile ground for financial mischief. Let's look at the issues you need to consider to ensure you're not one of those directly affected.
Your first call to action is to seek independent, genuine financial advice before proceeding with any investment or superannuation strategy, particularly when borrowing is involved. When I say "genuine financial advice", I'm not talking about the real estate agent selling the property, a mortgage broker lining up your finance, or anyone – licensed financial adviser or otherwise – who has a financial interest in you proceeding with the purchase.
Unless you're already quite wealthy, you'll probably spend a large proportion or many times your net wealth on a property purchase. That means – for better or worse – the investment outcome will be life changing, so spend the time and money to get expert advice from someone who genuinely places your financial interests ahead of their own.
Secondly, make sure you go in with your eyes wide open. Thanks largely to the addiction state governments have to stamp duty, property trades are subject to absurdly high transaction costs.
The moment you buy a property 5 per cent or more of the purchase price disappears in upfront costs. If you borrow 50 per cent, the "leverage effect" means you effectively vaporise 10 per cent or more of your equity (the funds you've contributed) on day one. Unless your timing is impeccable, there could be a significant waiting period before your superannuation balance gets back to its starting point.
The "leverage effect" also comes into play as property values fluctuate. A key reason many people have made their fortunes in property is because they've managed to borrow such a large proportion of the purchase price. This has allowed them to take on far more risk than their savings would have otherwise dictated and it's paid off for them.
But this also works in reverse. If you buy a property and it falls 10 per cent in the first year, the combination of the price drop, transaction costs and the leverage effect means your super balance might be down by 30 per cent a year later. You'll need strong nerves to ride out a rough year or two for property prices, assuming you have the financial resources to do so.
One of the key points to remember with SMSF property loans is that they aren't a normal home mortgage. For instance, they contain "review events" that allow the lender to review and potentially terminate your loan.
If you keep up with your home mortgage repayments, the loan remains in place for its 25 or 30-year term. Whether you start a family, renovate or change your marital status, the bank isn't going to come in and review your circumstances and decide it wants its money back. But with an SMSF loan a range of fairly normal events that the lender deems to be "review events" can allow them to do exactly that.
For example, let's take a look at the Commonwealth Bank SuperGear loan. According to the Product Information Booklet, the loan's review events include exceeding the product's loan-to-value ratio (LVR) based on the latest valuation; any event which might impact the future value of the property (a bad neighbour moving in?); a change in the investment strategy of the SMSF; the SMSF commencing pension phase (which every SMSF will do at some point); and a change in any of the SMSF members (even as a result of death).
This list is so broad, it's difficult to imagine an SMSF that won't have multiple review events and every single one of them may give the Commonwealth Bank sufficient cause to terminate the loan. To stay safe, think of SMSF loans more like a margin lending facility or a credit card than a long-term home loan, and ensure you have a financial back-up plan that allows you to repay the loan if it gets called in.
If you're using your super to invest in property, do so with your eyes wide open to the risks. Many people are going to come unstuck in coming years and you don't want to be one of them.
Richard Livingston is a founder of Eviser ( eviser.com.au). This article contains general investment advice only (under AFSL 469838).
Read more: http://www.theage.com.au/money/borrowing-to-buy-property-in-your-smsf-keep-your-eyes-open-20160327-gns254.html#ixzz45Svm2auC
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Posted by Richard Livingstone - The Age on 10th April, 2016 | Comments | Trackbacks | Permalink
Shh: Estate agents spill beans on bargains
Trying to find – then successfully snare – a home or investment property can be incredibly stressful.
You're out of your depth, prices have been out of control and, probably at least once, you've found yourself out of luck. But, for anxious buyers, the tide is slowly turning.
Property price growth is at its slowest in three years, with Melbourne the highest at an annual 9.8 per cent and Sydney at 7.4 per cent, says CoreLogic RP Data. Auction clearance rates dropped to 73 per cent and 76 per cent respectively last weekend, on APM figures. Plus the banks have neatly removed investor competition with targeted rate slugs.
It all means a shift in the power balance between buyers and sellers … and I've managed to persuade several brave real estate agents – people who, after all, make a living acting for vendors – to confide in us how to bag bargains.
1. Know your stuff
Research not just the prospects and prices in an area but also for your target property. Domain (a Fairfax Media site) offers decent suburb profiles and property-specific information such as sales history via the new Home Price Guide - all free. (Our fabulous turncoat agents also remind you to inspect at different times, as well as to talk to neighbours about any issues and, umm, idiosyncrasies.) The good news is that in many states agents either are, or will soon be, required to give buyers a list of recent comparable sales as well.
2. Get and double-check the guide price
No longer should you operate in the information vacuum many estate agents have preferred. In many states – including NSW, Queensland and probably shortly in Victoria – they're now usually legally required to give a guide price in a range of 10 per cent. But even so, or if that's not the case in your state, Domain's Home Price Guide also estimates a property's current low, mid and high potential price (and yield). Keep asking the agent if any guide price is still valid, too. Consumer Affairs Victoria's guidelines say it should be updated to reflect any higher offers that have already been rejected.
3. Play your cards close to your chest
All your experience to date might have been in snaffling rental properties from hoards of other applicants – you do everything to convince them you're uber-intelligent, successful and flush. For goodness sake, agents say, keep these things to yourself when purchasing property and downplay the worth of any existing property you have to sell. It translates to a vendor as "we're on a golden ticket here" and you could well end up paying more.
4. Wait for auction
Bidding early has become much more popular in the boom, particularly in Sydney and Melbourne, as buyers seek to get in first. But agents are upfront in saying you have to "pay a premium" for the vendor to give up the opportunity for a competitive auction. They also report that, at auction, buyers generally bid what they were earlier prepared to pay anyway. For these reasons in still-hot areas such as beachside Sydney, some agents send 90 per cent of their properties to auction. Across the country, the Real Estate Institute of Australia says the average is 30 per cent. Regardless of the market, a pre-auction bid carries the highest risk of buyer's remorse: you will never know what might have happened if it had gone to auction and you'll have to live with that. The key if you decide instead to go head-to-head at an emotionally charged auction is not to breach your upper limit (see breakout). Auctions are short; mortgages are looong.
5. Combat fake offers
Fierce demand for a property? Other bidders about to snap it out from under you? Prove it! It's a common real estate tactic to say this and make you feel pressured to put forward your best offer there and then. The Australian Competition and Consumer Commission considers it misleading or deceptive conduct to make up other offers, but you'll rarely know. Agents say the most effective way to ensure you don't miss out is to make an unconditional offer – furnish a signed contract and deposit cheque – reflecting what you are prepared to pay; even if this is less than a rival unconditional offer, it is extremely difficult for a vendor to pass up certainty. As one said: "A bird in the hand and all that." It also nicely transfers the fear of missing out – FOMO – you may be feeling, to the vendor. They might not see a profit that high again.
6. Start 7 per cent below your best offer…
... But let me first clarify that this varies greatly by state, suburb and property, and obviously it's a very different dollar amount in cheaper and expensive markets. But regardless of the market, you need to give yourself the capacity to safely bid up – because a vendor will usually reject at least one of your offers. If you max yourself out at the outset and love the place, you'll quickly find yourself in a dilemma about whether to go beyond your sensible borrowing limit.
Agents also quietly suggest you get a vendor who has rejected your bid to put in writing the amount they'd accept; it will both prove they've been presented with the offer and tell you what you need to do to seal the deal.
7. Hold your nerve next time
It's tough, I know, but don't become increasingly desperate if you've repeatedly missed out. Our friendly estate agents admit they smell it a mile away. It is as indicative of a higher price opportunity as the words "motivated seller" are of a lower one. This is one piece of information, unless you've found yourself dealing with the same agent more than once, to keep to yourself. And, if you're upsizing to accommodate a growing family, shop before the baby bump makes your time pressure (and nesting instinct) obvious. On the plus side, you're more likely to have an offer accepted if a vendor knows you've missed out a few times: it's very possibly, truly the highest you can manage. Calculate how much can you safely borrow
Step 1: Divide your deposit by 20 then multiply by 100. This is your upper limit with a 20 per cent deposit, a decent equity margin and one that avoids extortionate lenders' mortgage insurance. (Divide your deposit by 10 then multiply by 100 if you are happy to borrow 90 per cent, etc.)
Step 2: Plug the amount this means you would be borrowing into a home loan repayment calculator – at a 6 per cent rate, a competitive 4 per cent today plus eight potential rate rises. Are repayments less than one–third of your monthly before-tax salary? If not, reduce borrowings until they are.
Step 3: Never offer beyond these safe borrowings plus your deposit (remembering they'll need also to cover costs), either privately or at auction.
Read more: http://www.theage.com.au/money/shh-estate-agents-spill-beans-on-bargains-20160406-go08ee.html#ixzz45YYxAI6e
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Posted by Nicole Pedersen-McKinnon -- The Age on 10th April, 2016 | Comments | Trackbacks | Permalink
How to save for your first home
Interest rates will almost certainly go down further. The good news is home loans are getting cheaper – the bad news is prices in some areas are going up. And, of course, as happens every few years, there are voices coming from everywhere telling us young people can't afford a home any more.
Guess what – nothing has changed that much. Buying your first home has never been easy, but it is certainly still possible.
First, get rid of the idea that home ownership is restricted to high-income-earners. Right now across Australia there are people who are doing it tough and there are people whose finances are in good shape. Guess what? Their financial position has got nothing to do with their income – it's how they manage their money.
Managing your money gets back to choices. You can choose to take your lunch to work or buy it; you can choose to buy a new car or make do with your old one; you can choose to spend $35,000 on a wedding or $35,000 on a house deposit.
I am not going to go into a long list of money-saving strategies here – there are hundreds of websites and books that can do that. But it is important to stress that it is the choices you make, not your income, that will determine how well off you are financially.
If you decide to divert some of your income to investment, your net worth will grow. If you decide to spend it all on consumption, you will be forever battling the debt treadmill.
Once you have got your finances under control, the next step is to set yourself the goal of buying a home. If you are not strongly motivated, there are ways to build your desire to do this, in particular, thinking about what will happen if you choose one action over another.
If you decide to rent, all your life you will be at the mercy of the landlord – if you decide to buy a home you will be acquiring an asset that will grow over time and, when paid off, will give you free rent for the rest of your life.
After you retire, you could even take out a reverse mortgage and live off it.
You can also consider the unique benefits of home ownership. Australia's population is predicted to increase by more than 10 million people in the next 20 years, which will create a strong demand for well-located properties. Furthermore, in some areas homes are now selling below their replacement cost. Given that scenario, it is hard to see anybody losing money over the long term if they buy a well-located property.
Once you have your finances under control, and have convinced yourself home ownership is a worthy goal, you need to set a specific plan to make that goal a reality.
The secret is to focus so hard on the goal that everything else becomes immaterial. Start by looking at homes where you would like to buy, and then hang photos of them on the wall where you will see them every day. Talk to lenders to find out how much deposit you will need, and then make a sub-goal to save that within a specified time.
If you were a couple each earning $850 a week after tax, you could decide to live on one income and bank the other $850 a week into a savings account. In just twelve months you would have $45,000, which would be an adequate deposit for most properties.
As your savings grow the success pattern you are forming will be reinforced. Mark my words – you'll be more than adequately rewarded for your persistence.
Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: firstname.lastname@example.org
Read more: http://www.theage.com.au/money/how-to-save-for-your-first-home-20160406-gnzzyp.html#ixzz45YYODDV3
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Posted by Noel Whittaker - The Age on 6th April, 2016 | Comments | Trackbacks | Permalink
Approaching 40 and still don’t own a home? Here’s what you need to know
For those who thought being 40 was still all about swimming in the fountain of youth, then it might be time to rethink that idea — especially if you’re in the market for your first home.
In today’s society, being on the ‘wrong’ side of 40 is a perfectly normal life stage to have a baby, get married, or be Leonardo DiCaprio, however it’s an age bracket that makes mortgage lenders take a second look.
Before the outraged cries of ageism begin, there’s actually a legitimate reason why financial power houses look at age when it comes to first homebuyers. It comes down to retirement.
Put bluntly, if you’re househunting after 40 (and most home loans these days are for 30 years) then you’ll be around 70 when that last payment is made. And chances are your wage earning days will be behind you.
Despite this hurdle, the first-home buying public continues to age. Whereas a generation ago Australians were making their final mortgage repayments by their 40th birthdays, by 2012 one in five first-time buyers were more than 40 according to a Mortgage Choice survey.
THERE ARE SUCCESS STORIES
Cindy Lavelle, 53, and Bern Smith, 50, are first homebuyers from Brisbane who recently took the plunge into homeownership after raising two children who are now in their 20s.
“We thought about it over the years, we kept saying to each other we should buy a house but time just goes by so quickly. They next thing you know — you’re 50!” Ms Lavelle said.
She said the pair can’t help but feel an inkling of regret that they didn’t get on the property ladder sooner.
“Definitely, there is a little bit of that. If we’d bought years ago, maybe we would have paid it off by now,” she said.
“My advice to anyone putting it off is to not wait. Just do it. If you have to cut back on little luxuries then do it and once you get used to putting a certain amount aside each week then you’ll make a difference,” she said.
While embarking on the first homebuyer journey later in life has been fairly hurdle-free, Ms Lavelle said the pair, who work in the childcare industry and warehousing, did have to jump through a few hoops and answer plenty of questions.
“The broker wanted to know a lot about our super. How much we have, or will have later by the time we retire. Those are things you just don’t think about when you’re younger,” she said.
Reversing the natural order of things, Lavelle and Smith’s son jumped into homeownership at a particularly young age.
“My 28-year-old son and his wife actually bought their first place when they were both 21! They lived with us for a while, so I guess you could say we helped them before ourselves,” Ms Lavelle said.
Lavelle and Smith recently bought a block of land and will soon break ground building their dream home in suburban Brisbane. And because the couple are getting into a newly built property they are actually eligible for a helping hand.
“Yes, we’re actually going to get the first home grant!”
WHAT HAPPENS WHEN YOU BORROW OVER 40?
Tim Brown, CEO of lending at mortgage broker and financial planning firm Yellow Brick Road, said being over 40 can make lenders more curious, but doesn’t have to be a problem.
“There’s no doubt the older you are the more questions get asked. The obvious one is why haven’t you bought a house before now?” he said.
“And some of that can be because of circumstances; maybe they’ve been overseas for the last 20 years, they’ve gone through a divorce, which is probably the most common, and they’ve got no money left or then there’s the third scenario — maybe it just wasn’t a priority in their life,” he said.
Mr Brown said lenders will most likely be more wary of borrowers who fall into the third scenario.
“As long as a lender can understand where you’ve been spending your money then they’ll tend to be much kinder. So, if you could actually show that you’ve been looking after your mother for the last 10 years, or you were living overseas and there was no need for you to own a home at that point, but you do have strong super, then that could help your case. As long as you can document that you have some ability to make repayments,” he said.
Even lifelong renters can make a case.
“What we look at with first home buyers is their ability to pay rent on time so as long as you’ve got clean rental record that would also help. Especially if you rent is equal to or more than potential your mortgage repayments. That will also get a lender might to look more kindly at you,” he sad.
Finally, Mr Brown said the length of the loan could also be renegotiated depending on age.
“They might make a decision that if you want this loan, they’ll give it to you but it has to be paid out over, say, 15 years and then they give you what the new repayments are,” he said.
“But I think anyone who was heading towards retirement would want to pay the debt down sooner anyway. Nobody wants to be in retirement and still paying a debt off. Although that can be a real situation these days,” he said.
Posted by Kirsten Craze - News Limited Network on 4th April, 2016 | Comments | Trackbacks | Permalink
Why people overpay at auctions and how to avoid it
Paying more than a home is worth is a buyer’s worst nightmare come auction day.
Time and again, people spend more than they’d expected or budgeted in the heat of a competitive auction environment. But there are strategies to consider that will ensure you don’t pay too much.
The most important and fundamental tip to know when buying at auction is to identify prior to the day how much the home is worth and what you’re prepared to pay, Good Deeds buyer’s agent and Location, Location, Location host Veronica Morgan said.
If you don’t know how much is too much, you’re quickly in a situation where you’ll pay above and beyond what you should.
Buyers must ask themselves: “At what price will I kick myself if someone else buys it? Really know what your limit is and then you need to stick to [it],” she said. Knowing your limit
Researching comparable properties in the area is crucial. But while buyers can prepare themselves for auction weeks in advance, real estate agents are “very skilled at getting people bidding” as it’s what they do “day in day out,” she said.
Knowing your limit will help you when savvy auctioneers attempt to squeeze out an extra few thousand from your wallet.
There are two situations when buyers are most vulnerable to overpaying or buying an unsuitable property – up to a month after missing out on the home they really wanted at auction, and right after you’ve sold and you start to panic about moving twice.
In these situations, buyers need to make sure their head rules their heart, Wakelin Property Advisory associate director Jarrod McCabe said.
“If in the weeks leading up to the auction you have done your homework about prevailing values for the property type in question in that location, you will be able to set a bidding limit before the auction that is realistic and fair,” Mr McCabe said.
Watching how much you’re increasing your bids by when at the auction can also make a difference.
“Just because you have the budget to increase the bid by $30,000 doesn’t mean you should; doing this can see you pay well over other bidders’ limit in the one go and can cost you tens of thousands,” he said. Researching before auction
Having a strategy for your bidding and considering your actions on the day will ensure you’re mentally prepared but doing your homework and due diligence is just as important, Propertyology’s Simon Pressley said.
“Persist with getting the vendor to accept a pre-auction offer by getting your own terms as close to auction condition terms as you can,” he said.
Carrying out searches on the property ahead of time is critical, including finding out about easements and council approvals of any extensions and renovations, as well as getting professional building and pest inspections.
EPS Property Search’s Patrick Bright said auctions are “very much about competition … You want to be a winner while trying to spend as little as possible – two things that are in conflict with each other”.
“All you need for a property to sell for a silly price at auction is to have two poorly researched, emotional buyers who get carried away with their bidding and I suggest that you are not one of them,” he said.
Posted by Jennifer Duke - Domain (Fairfax) on 1st April, 2016 | Comments | Trackbacks | Permalink
Broken fence, peeled paint could cost sellers $90,000
Property sellers could lose up to $90,000 and have fewer bidders at auction by scrimping on fixing the front fence or tidying-up the garden. In a national survey of more than 1000 people by finder.com.au, almost 90 per cent said they would likely offer below the asking price if the exterior of the property was unappealing.
They say they would offer 13 per cent below the asking price, on average.
Based on the median Australian house price of $695,788, vendors could see $90,452 knocked-off their asking price if their property lacks street appeal by having a broken fence and a garden that could do with a tidy-up.
Bessie Hassan, a spokeswoman for finder.com.au, says the survey results show a property’s street appeal should never be underestimated.
“A bad first impression can be money down the drain,” she says.
“Sellers could be left bitterly disappointed with offers if the kerb appeal of a listed property is not up to expectations.”
Real estate agent Norman So of McGrath in Sydney’s Concord says, in his experience, first impressions are very important.
“Even if a place needs a bit of landscaping if could knock-off up to 10 per cent from the price achieved for the property,” he says.
Real estate agent Trudy Biggin of Biggin & Scott in Melbourne’s Brighton, says there is no doubt that the initial response of potential buyers is very important.
“A lot of owners say to me that they are not going to replace the fence and that the new owners can do it,” she says.
“By replacing the fence they are likely to increase their potential buyer pool and increase the price,” Biggin says.
Michael Harris, the director of Raine & Horne in Sydney’s Newtown, says the bar has been lifted on presentation, driven by the advertising of properties online.
“Once-upon-a-time we used to run around taking our own photos,” he says. “Now, the photos are taken professionally with high resolutions and wide angles,” Harris says.
Compared to the rest of Australia, those in NSW and Victoria told the survey they were not prepared to drop their offers too much.
Only 5 per cent in NSW and 8 per cent in Victoria say they would be prepared to drop their offers by more than 25 per cent. In Queensland and the Australian Capital Territory 13 per cent say they could drop their offers by more than 25 per cent.
“It’s likely that because the property market is so competitive in Sydney and Melbourne buyers are less likely to make dramatically-reduced offers,” Hassan says.
Real estate agent Michael Harris says, in his area of Newton in Sydney’s inner west, there are more buyers than sellers and so buyers tend to “see-through” a fence that needs repair, for example.
Nevertheless, he encourages vendors to do as much as they can to spruce-up the property before putting their properties on the market.
Posted by John Collett - The Age on 31st March, 2016 | Comments | Trackbacks | Permalink
The secret mortgage rate banks don't like to discuss
There's a secret mortgage rate that banks use but don't disclose to customers.
The official cash rate is now 2 per cent and most mortgages are about the 4-5 per cent mark.
But that's not the rate lenders use when assessing your application for a home loan.
Instead, they use a benchmark assessment interest rate that measures your ability to pay the loan if rates increase to a certain level.
Most lenders keep this rate hidden, but my sources say it currently varies from 7.2 per cent at the lower end to 8 per cent at the upper end.
Also called a floor rate or a test rate, it's based on the lender's actual rate plus a buffer of 2.5-3 percentage points.
The benchmark rates are made available to mortgage brokers, but are difficult to find for consumers.
Lenders don't generally publish their benchmark rates on their websites, preferring to keep the marketing message simple. Two Big 4 banks told me it was confidential.
Sometimes you can find it published in information for investors - such as the annual report or full-year results – but it may not be out of date.
The difference between the actual rate and the benchmark rate is vast. Take someone with a $500,000 loan with both principal and interest to be paid over 30 years. At 4.5 per cent interest, the minimum monthly repayment is $2533. At 7.5 per cent, it would increase to $3496.
Of course, it's sensible for mortgage lenders to make sure borrowers can afford higher rates, especially with the cash rate at a historic low.
It's just a shame the methodology is so shrouded in mystery. It would be helpful for borrowers to understand this better.
I remember how frustrating it was trying to figure out our finance needs when we started our journey to buy a house.
I'd plug numbers into a home loan calculator on one of the bank's websites and come up with repayments that I thought were reasonable, based on our rent and savings rate plus some wiggle room for a rate rise.
Then the "how much can you borrow?" calculator on the same bank's website would tell me we couldn't afford the loan and I couldn't figure out why.
Now I realise that while the bank and I both factored in a buffer for a rate rise, we were using different figures. It would have been nice to know.
The variation among lenders would also be interesting to buyers who need maximum borrowing capacity. Obviously, it would be better for those customers to target the lenders with the lowest test rates.
The lender will also judge whether you can afford the repayments based on income, minus debt, other commitments and living expenses. They're not looking at a set percentage of income, but if you're doing your own sums remember that you're considered to be in "mortgage stress" if loan repayments exceed 30 per cent of your pre-tax income.
When you read about banks tightening their lending criteria, this can include raising the benchmark rate, as well as other measures such as applying a higher rate for living expenses (as ANZ did this week) or limiting low-documentation loans.
If you don't know that different lenders have different criteria, you might get knocked back by one, then give up.
Of course, understanding which lenders are conservative or aggressive is how good mortgage brokers earn their bread, but I can't see why the information shouldn't be public. I'm sure all the lenders already know the benchmark rates used by their competitors.
The other reason it would benefit consumers to understand the test rates is psychological.
In my household we are already trying to pay extra off our mortgage, but knowing that our bank thinks we can afford 7.5 per cent feels almost like a challenge to actually pay 7.5 per cent.
The benefits of doing so would be enormous.
Take that hypothetical $500,000 30-year loan. If your bank rate remains 4.5 per cent, but you choose to make repayments at the equivalent of 7.5 per cent, you would pay off the mortgage 12 years sooner and save more than $200,000.
If bank rates did eventually increase to 7.5 per cent, you would still save big bucks by making extra repayments now.
Knowledge is power.
Caitlin Fitzsimmons is editor of Money. Facebook.com/caitlinfitzsimmons
Read more: http://www.theage.com.au/money/the-secret-mortgage-rate-banks-dont-like-to-discuss-20160328-gnsmyh.html#ixzz44KGkj38l
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Posted by Caitlin Fitzsimmons - The Age on 30th March, 2016 | Comments | Trackbacks | Permalink
A room-by-room guide to renovating for profit
How to make money by renovating your home before selling.
Thinking of renovating your home before selling? You’re not alone. According to the most recent Westpac Renovation Report, increasing the property value, increasing comfort and updating style are the most common reasons for renovating, with the average Australian spending $ 47,984 per job.
We asked the experts to reveal what renovations offer the most value for money, breaking their advice down room by room.
A property’s facade is considered the most important element in attracting buyers.
“The house may have the ‘wow factor’ inside but prospective purchasers need to be drawn inside by an appealing facade,” says Ian Soderstrom from Istrom Homes Pty Ltd.
A striking facade helps to establish initial buyer interest and sets the tone for the rest of the property.
“Facades on period homes in particular are ageless … The need for a potential buyer to change it down the track is unlikely if done right,” says Simon Shrimpton, senior sales consultant at Jellis Craig Clifton Hill.
“An investment of anywhere from $3000 to $8000 on a single-fronted Victorian terrace can easily return up to three times the initial investment equating to $10,000 to $25,000.”
A fresh coat of paint on the exterior not only makes a property more attractive, but also gives the impression of a well-maintained home.
“If buyers find that the paintwork is overdue, people will assume that hardly any maintenance has been done on the house,” Jeroen van Zon, CEO of Hiresquare, says.
“The value of your house can easily go up a few thousands of dollars, [or] if you own a Victorian, federation, Californian or post-war style property with lots of wood decoration, the value can easily go up by more than $10.000.”
“The bathroom is the most heavily criticised room in the house, yet often the smallest and costliest, and therefore the most neglected,” says Wesley Spencer, architect and director of Rara House.
“There are endless worries associated with an un-renovated bathroom. Are there plumbing issues? Is there rotting? Will the floor heights match after removal of the original fittings? These are the type of issues a new home owner would not be prepared to face if they are already mortgaged to the nines and require registered building professionals.”
A complete bathroom renovation can be between $15,000 and $50,000 depending on the room size and quality of finishes selected. However, as the bathroom encompasses several elements, renovations can be tailored to suit a vendor’s budget.
For a luxury property, Soderstrom suggests installing a combined wall-hung vanity unit and hand basin (costing between $1500 and $2500) and a new shower screen (between $1500 and $2000 for a 10mm frameless corner shower base screen).
“A large mirror or even a mirror on an opposing wall instead of tiles can make a small-to-medium-size bathroom feel so much bigger and brighter,” Soderstrom says.
For a high-end $40,000 to $50,000 bathroom renovation, Shrimpton estimates a minimum return of $80,000 to $100,000.
For a more restricted budget, modestly updating the tapware and storage space is a simple way to modernise the bathroom.
“Don’t go overboard with the fixtures … Not everybody needs a built in toilet brush holder and even if they did, having all these items built in takes the fun out of deciding where to put things,” Spencer says.
“People need an element of exploration and excitement when inspecting a home … don’t deprive them of that by dictating every small aspect at no benefit to you.”
Despite being one of the larger areas of the home, the living room rarely requires more than a paint job before selling.
“To a buyer, the attraction of a home being ‘immediately liveable’ is a big draw card, and new carpet and paint are sometimes the only things required to satisfy that,” Shrimpton says.
“For a quick makeover, consider painting all the existing walls white and installing floating timber floors,” says Justine Stedman, director and principal stylist at Vault Interiors.
According to van Zon, the expected increase in price for a freshly painted living room is 2 to 3 per cent.
For older properties with more confined living spaces, connecting adjacent rooms can also be beneficial.
“People gravitate towards open-plan living areas. Combining living and dining areas by removing walls can really add to the feeling of light, functional space,” Stedman says.
If you require a support beam this can set you back anywhere from $30,000 to $50,000 depending on the scale of your renovation and how much you adapt the current floorplan.”
Original timber floorboards are known to attract buyers, and are often less expensive than installing new carpet.
“If there is a timber strip floor below [or original Baltic pine floorboards] I would remove the carpet or other floor covering and polish the boards,” Soderstrom says.
The kitchen is considered a ”make or break” room for potential buyers.
While it pays to remove any outdated kitchen elements, renovating to match the latest trends runs the risk of alienating buyers.
“Most buyers prefer neutral tones in kitchen design so think white, greys and avoid bold colours, as these can be too taste-specific,” Stedman says.
“If at all possible, try to incorporate a kitchen island (which may mean removing walls). It will be money well spent and will create the open-plan scenario that buyers like.”
According to Soderstrom, a completely new quality kitchen costs between $25,000 and $35,000.
“A return of $50,000 to $70,000 should be expected here,” Shrimpton says.
Bedrooms can be easily updated by adding new paint, carpets and blinds, but extensive changes are rarely worthwhile for generating profit.
“Buyers ultimately just need to see the scale of the room and what size bed they can fit in it,” Stedman says.
“Built-in wardrobes will add value and appeal to buyers, and if the room is tight, mirrored doors will increase the feeling of space.”
Updating garden and outdoor spaces adds to a property’s street appeal – an important element of any home on the market.
“Painting or spraying external fences in a very dark grey or green will make the backyard feel larger and blend in with garden foliage,” Soderstrom says.
Adding an alfresco dining area can also be a worthy investment.
“When building these areas, consider adding quality lighting and some form of roof covering [either fixed or retractable] to make the area all-weather friendly,” Stedman says.
Ensuring all areas of the garden appear neat and maintained is generally more valuable than laying a new lawn or significant landscaping.
“Having a definitive path to the front door is key and often overlooked,” Stedman says.
“It may cost anywhere from a few thousand to $5000 to get the front of your property right, but this is money well spent.”
If you don’t have a path, this can be created with stepping-stones, or hedges and woodchips.
“It is a good idea to make narrow walkways at the side and rear of a property look more presentable,” Soderstrom says.
“A lowercost option to paving or concrete are river stones or pebbles spread over a weed barrier cloth … These are much less expensive when delivered in bulk rather than by pre-packaged bags.”
Once considered a ”bonus” of an already great property, a study or home office is a valuable drawcard for attracting buyers who work from home.
“The key to making profit from a study is to add ample storage and function,” Stedman says.
“Think inbuilt bookshelves, a floating desk system [and] making sure that there are ample power, data points and task lighting.”
Study nooks are a valuable addition for homes without space for a closed-door office.
“Think about extending your kitchen or wardrobe joinery to create a study nook, either off the kitchen or in a bedroom,” Stedman says.
For city buyers in particular where space is scarce, a designated laundry can be very attractive to buyers.
“The laundry can be a major selling point but is often overlooked when refurbishing a property for sale,” Soderstrom says.
Introducing light into the space can be achieved by introducing single light external door.
“This, with a couple of coats of white or off white paint, will make a huge difference to the room,” Soderstrom says.
Soderstrom estimates a complete laundry refurbishment including cupboards, shelves, benchtop, sink, tapware and splashback to cost between $4500 and $7000.
“A return of $8000 to $14,000 should be expected here,” Shrimpton says.
Top home renovating tips:
– Determine if your home is in a development hotspot before renovating. No one wants to pay for a fully renovated home if their plan is only to demolish and rebuild.
– Consider adding an extension instead of renovating existing rooms where space permits.
– Distinguish between what you personally like and what most people like.
– Consult with your real estate agent before commencing works. If the property is a rare find – in a great location with relatively few properties on the market – buyers may pay premium regardless of its condition.
Posted by Amelia Barnes - Domain (Fairfax) on 29th March, 2016 | Comments | Trackbacks | Permalink
These are the major myths holding back first homebuyers
TO ASSUME makes an ass out of “u” and me and who wants to be an ass when it comes to buying real estate for the first time?
It’s true that if you’re not already on the property ladder (and don’t have a bottomless bucket of cash lying about) then big banks and lending institutions tend to look at you with a sharper eye. But the financial scrutiny is not usually as harsh as many potential first homebuyers think.
Jessica Darnbrough of nationwide home loan brokerage, Mortgage Choice, said the group’s brokers hear a lot of the same misplaced myths time and time again when first homebuyers start their property journey.
“I think it’s very important to know the difference between mortgage myths and mortgage realities and if you think you might not be able to get finance for whatever reason, then ask because you might be pleasantly surprised,” she said.
So, thought you knew what lenders want? Here are some of the biggest first-time buyer myths:
I NEED A 20 PER CENT DEPOSIT BEFORE I CAN EVEN START HOUSE HUNTING
False. That much-bandied about figure is what lenders want in an ideal world, but there are ways around coming up with such a hefty deposit. For first time buyers in markets like Sydney, that’s good news because a 20 per cent slice of an average home could set you back more than $150,000 in cold had cash.
“It’s a myth and that’s really important to note. Most first homebuyers think, ‘I need a 20 per cent deposit plus costs’ and that could be solicitor’s fees, moving fees and stamp duty as well which might add up to 25 per cent. But the good news it that’s just not the way it is,” Ms Darnbrough said.
“Most lenders will lend up to 90 per cent, or more. Some will even go as high as 95 per cent or 97 per cent.”
“So, as a general rule of thumb 10 per cent is a far more realistic deposit size. The bigger the deposit the better, absolutely, but there’s nothing to say they have to have a 20 per cent deposit.”
BANKS DON’T LIKE LENDING TO SINGLES OR SMALL BUSINESS OWNERS
Not true. Sure, it might take longer to come up with the deposit if you’re a singleton, but as long as you meet the bank’s requirements, they don’t care about your relationship status.
“It’s bizarre to me but it’s something we hear from our brokers a lot. Single people will often think ‘Well, a bank isn’t going to lend to me while I’m single. I need a joint owner to buy with me like a partner, parent or a sibling’. But as long as you have the ability to service the home loan comfortably, you should have no problems finding finance.”
And for those keen househunters who are freelancers or have their own business, Ms Darnbrough said it’s a misnomer that lenders won’t give you finance.
“That is a huge myth. But there are a few rules and regulations that small business owners have to go by. You’re going to need to show two years of financials, that’s just an absolute,” she said.
“One of the biggest misconceptions is that people think even though they’ve changed careers, but were earning really good money in their previous job and built up lots of savings, banks will take into consideration they were earning good money once — they don’t. They don’t care what you were doing in the past, they’re looking at what you’re doing in the future,” she said.
I THOUGHT LENDER’S MORTGAGE INSURANCE PROTECTS ME
Wrong. That lump sum payment is there to protect the financial institution, not you the buyer.
“It’s such a common misconception in the world of home loans. People hear the words lender’s mortgage insurance and what they’ll really pick up on are the words ‘mortgage insurance’.”
“Often when brokers chat to people about protecting themselves and their assets the buyer will say ‘Oh no I’m OK, I’ve got lender’s mortgage insurance’.
“Unfortunately, lender’s mortgage insurance doesn’t protect the buyer. It just protects the lender in the event that the borrower defaults on the loan.”
But Ms Darnbrough said it was also important for buyers to note that the coverage is a one-off fee for first homebuyers who are looking to borrow more than 80 per cent of the property’s value (in other words putting up less than a 20 per cent deposit).
“And it can be capitalised over the life of the loan, so it definitely doesn’t have to come out of your saving or your deposit amount,” she said.
I WAS BANKRUPT/HAVE A BAD CREDIT RATING — I’LL NEVER GET FINANCE
OK, bankruptcy or a dodgy credit rating could pull the breaks on getting finance easily, but not for an eternity.
“People are constantly hearing credit history is important, and it certainly is important,” Ms Darnbrough said.
“But if you have discrepancies in your credit history, and you can explain those, then that’s not going to always leave a bad mark on you. People go on holidays, things come up, people forget to pay their credit card or phone bill from time to time.”
“People who’ve been declared bankrupt think ‘I’ll never get a loan’, but there are banks who deal with people who’ve had adverse credit histories and it might just mean that you have to wait a couple of years, but it doesn’t rule you out of the home loan market forever.”
I’LL FIND THE BEST HOME LOAN RATE ONLINE
Not necessarily. Ever clicked on a great hotel deal only to find that the “best price” is no longer available? That’s a bit like looking at some hot home loan deals online where the fine print can be very fine.
“We hear this a lot. Borrowers will tend to call their brokers and say ‘I’ve seen this amazing rate online. I can get a home loan for 3.99 per cent!’ The rates that are online are real rates, but they’re real rates for unique circumstances. So, say if you’re a first homebuyer and you’ve got a smaller deposit already you might not be eligigable for that particular rate or loan. Or maybe you’re building a property, so once again you might require a higher interest rate as well. “They’re for very vanilla circumstances like people who have the full 20 per cent deposit, or a great saving and credit history.”
MY CURRENT BANK WILL GIVE ME THE BEST MORTGAGE DEAL
Not these days. Grandfathers like to tell you that the saving account you opened on your 10th birthday will serve you well one day when it’s time to get a mortgage. Sorry Pa, those days are gone.
“For a lot of parents and grandparents mortgage brokers weren’t around when they were buying their first property. They already had their bank, so it made sense to go to the place they already did banking with because they could see their financial history. Also, often they knew the bank manager, went to school with them, or knew their family. These days there are so many more options and more lenders and brokers who can do the shopping for you,” Ms Darnbrough said.
“Sometimes lenders do recognise loyalty by offering potentially higher LVR (loan to value ratio) or something like that, but it definitely pays for the borrower to shop around.”
Posted by on 28th March, 2016 | Comments | Trackbacks | Permalink
Low rates provide great chance to pay off mortgage faster, saving on interest
Let's have some straight talk on interest rates. Granted, the Reserve Bank has not lowered rates since last May, but all that has done is delay the inevitable. Given the current upward surge in the Aussie dollar it's an odds-on bet that the trend will continue downwards, with more rate cuts in the short to medium term.
There has been a lot of speculation about the direction of rates in the United States, but the essence of all the noise has been that rates will either stay where they are, or rise by just 25 basis points. Such a tiny rise would be nothing in the scheme of things – all it would do is send a signal to the world that the American central bank believes the economy is making a strong rebound. Right now the evidence of this occurring is doubtful at best.
So what do you do if you've got a home mortgage now? One of the scariest statements I heard last year was in early December – it was from a TV commentator who said "homeowners were praying for a cut in rates to give them a present for Christmas". Get real – if you're having trouble coping with interest rates at record lows, where do you think you'll be living when they start rising again?
The present low rates are the gift that keeps on giving, and borrowers now should be celebrating the fact that they've got a once-in-a-lifetime chance to really make a dent in that mortgage.
You need to understand the way numbers work. At a rate of 5 per cent, a loan of $100,000 would require repayments of $537 a month if the term were 30 years. However, if rates rose to 8 per cent, the monthly payment for a 30-year term would be $734. The problem with a 30-year term is that you are maximising the amount of non-deductible interest you are paying – the good news is that at current low rates of interest it doesn't take a big increase in repayments to save a packet.
For example, if Jack and Jill have a $400,000 mortgage at 5 per cent that they are repaying at $2148 a month over 30 years, the interest over the life of the loan would be a staggering $373,000, even at such a low rate. If rates rose to 8 per cent, they would have to increase their payments to $2936 a month to maintain their 30-year term. Even if they could manage to do this, they would end up paying $656,000 in interest, which is 50 per cent more than they borrowed. However, if they were financially savvy, they could pretend interest rates were at 8 per cent now and repay $2936 a month. If rates stayed at 5 per cent, they would cut the loan to 17 years and save $181,000 in interest. Not only have they given themselves the potential to save a small fortune, they've also given themselves a valuable safety buffer if interest rates start to rise.
What about investors? There have been a lot of scary headlines recently about the banks putting up their rates by possibly 50 basis points, and speculation about what this might do to property investors. That's nonsense – for starters, the interest is tax deductible for an investor, which takes the sting out of it, and to go on with, 50 basis points is not going to be a deal breaker. Think about it: if you suddenly discover a terrific investment, do you really think that even a 1 per cent increase in the price of your finance would stop you buying it?
Interest rates are now at historic lows and no one knows when the cycle will turn. But, as always, the key to making money is to buy quality investments at the right price.
Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: email@example.com
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Posted by Noel Whittaker - The Age on 27th March, 2016 | Comments | Trackbacks | Permalink