One of the things people tend to debate about quite a bit is the epic Renting Vs Buying conundrum.
The arguments are as thus:
Renting
The idea behind renting for life comes down to the argument that having a mortgage causes you to spend an outlandish amount of money, up to $700,000 on the average house, on interest payments. The alternative involves, rather, saving those extra amounts you would normally pay on interest into a high return savings account, shares or superannuation earning you up to 9% over the same 25 year period. This provides flexibility on your housing arrangements if you wish to travel or work overseas.
Mortgage
The idea behind a owner occupier mortgage is the obvious - investing in property which appreciates in value over time as you live in it and pay back your loan. The more you pay and the more frequently you pay, the less interest you will need to pay to the bank. You can increase the value of your home with additions and renovations, as well as avoid issues associated with renting. It's generally more stable and secure.
Both arguments are sound. But I personally see a flaw in the Renting argument.
That flaw is living in Australian culture. Why? Because our culture is all about lifestyle. We love to consume. We love to travel. We love new toys, new types of beer, going to Bunnings, buying jet skis and boats we never use.
The renting argument relies on the fact that you will save at least 1/4-1/3 of your income on a monthly basis and invest it somehow. Not only that, but you will do it for 25 years without fail.
For some people, this is easy. They don't feel like they need a lavish lifestyle and are good with their money. But for most, the majority, don't. They like to go out on weekends, to buy that new Wii game, to have 6 ebay auctions going at once. It would be extremely difficult for them to find ways to cut $1000 out of their income.
A mortgage forces you to save money. You have no choice but to pay the bank. Anything left over is yours to spend how you please, just without the guilt of savings. So that way, the next time you go on holiday, you *really* know you could afford it.
Monday, July 28, 2008
Experiences of a House Purchase - Pt.1
I originally wrote a blog in early 2007 about my house experiences, but ended up completely wussing out and deleting it.
This was a stupid decision.
I lost a lot of fantastic information and a lot of people were interested in how it went down. So, due to popular demand and my urge to add to the increasing amount of unread blog posts on the internet, I will re-write my personal experiences.
I live in Australia, so obviously, my situation is Australia centric. But a lot of what I experienced would be the same across the western world, so it could be interesting to overseas readers.
Also, please take what you read as my personal opinion. Please take your own situation into account and talk to a financial advisor or solicitor before you do anything massive like sign a contract or accept a loan.
Part One - Making the first move
I first started my house search in early 2006. I had already done my university stint, as well as a fair amount of travel (Europe and Asia), and pretty much figured that I was going to stay in Brisbane. I had a lot of good relationships, connections and a good job on the way so I wasn't worried about being tied down. I quite like this city.
Bit of background. I was 23 at the time, single (in terms of purchasing) and was looking for a 3bed, 1 bath house to purchase. I wasn't interested in a unit or townhouse due to the terrible problems I'd had with strata's while renting and was very game to get out of the shit.
My cousin had recently purchased a house in the middle south-west corner of Brisbane for an extremely interesting price (sub $200,000) which had intrigued me about the area. I looked into prices and found that the recent 4 year boom hadn't really hit things too hard there. The trend had gone up, but not at the ridiculous rate the rest of the city had gone.
At the time I wasn't making a lot of money, sub 40's in fact. This had, as you can imagine, restricted the amount of money I could borrow. A few online calculators (any bank or lender website will have one like this) put me in the spot of around $250,000, at the max. Speaking directly to financial planners or mortgage brokers varied though - some got back figures ranging from $220k to $270k. Interestingly enough, non-bank lenders (at the time) were willing to provide a lot more money at a lower rate then the banks.
Note: This was pre-credit crunch. You'd be lucky if a non-bank lender will give you anything without a ton of LMI (Lender Mortgage Insurance) nowadays, but I'll go into that later.
This made me think. I didn't have any capital. I had about $10k in sitting in shares but I didn't want to touch that. I would probably have to borrow the lot and hope like hell that house prices didn't drop. I jumped on the net and read a hell of a lot about real estate speculation, trends in Brisbane and essentially educated myself on all things buying.
I cannot recommend this more. The 'net is a ridiculously amazing pot of information - there's heaps of free places to scout things like area profiles (trends of sale prices in an area, populations, crime rates) - RPData is a good one, although some of the meatier info costs money. It's also good for getting independant market values, since real estate agents like to embellish a tad. But, again, more on that later.
One of the first things you should do, even if you are just thinking of buying, is to hit up a mortgage broker. Now, a lot of people are mixed on mortgage brokers. But they are really a nessessary evil. You can, obviously, just walk into a bank, ask for the best deal and be on your way. The good thing about a broker is that they can walk you through a lot of the minefields.
They get paid commission from the banks, but if you get a good one they can help you out with advice on the legals, dealing with the bank on your behalf, securing documents for your real estate agent and so forth. They are also a "free" service, since they are paid by the bank who offers you the loan.
But their primary aim is to get you a loan. I first went into a local branch of Mortgage Choice, a pretty big retail mortgage broker in Australia. I sat down with a broker and told him I was looking at purchasing property. The first thing he did was get all of my financials - fulltime work or part time? Credit card debt? Car loans?
He dumped the information into the system, which then spat out a response from all the lenders they deal with. This was interesting. Some offered some great deals, but with interesting conditions. Others offered ridiculous amounts of money for high interest rates.
Note: Variable Vs Fixed Interest rates - Variable rates move up and down at the lender's discrection. Variable home loans usually offer much better deals, but your monthly payments can be unstable. Fixed rates are more secure, since they are locked in for a period of time, but the loan tends to be pretty restrictive too.
I had made the decision previously to deal with a bank, rather then a non-bank lender. Why? Security. It's unlikely for a major bank to go down, but not a smaller lender. The recent issues with sub-prime loans and such have been a pretty good example of that.
I told this to the broker who took them out of the system. Things made a lot more sense after that, since the banks tend to be a lot more conservative. The average amount available for me, at 100% borrowing, was around $250,000. Interest rates? Around 7.25% fixed. I told the broker I'd think about it. But he then asked if I'd like to be preapproved.
A pre-approval is basically a guarantee from the bank that they will give you the money. It's useful to have when you are house hunting, since you can make offers quickly, but most purchase contracts can have conditions like "subject to finance" which means you can get approval post-offer.
The other thing he mentioned, and that I mentioned before, was LMI - Lender Mortgage Insurance. LMI is applied when you borrow more then 80% of the purchase price, and can be a one off fee or a yearly fee. This is so the lender can cover any of the costs involved incase the loan defaults and the lender has to foreclose the property. So basically, unless you have a 20% deposit (which can be a pretty hefty amount), you'll be paying LMI. The broker will usually factor this into your payments too.
Anyway, I didn't bother with pre-approval since I didn't know what I was going to do. He gave me a great first home buyer pack which had a FANTASTIC booklet from the Queensland government, which was basically a step by step guide to everything. Which leads me to my next point...
The other thing you should do is check out the legal situation on purchasing in your state. For example, in the ACT you don't actually purchase your land, you lease it on a 99-year basis, and the government automatically renew it. This is called Leasehold. The land is permanently owned by the federal government (the crown) and there are various conditions involving its use.
In QLD and most other states, 99% of the land is Freehold. This means you own it outright, with a few conditions. Thus, you can do what you like on, or with it, within the law. Its important to talk to a solicitor about any of the legal ramifications of purchasing a house. Make sure you get a good one lined up before you make offers, because believe me, you are going to need them.
Other things like stamp duty, council fees and the other hefty fees should be investigated too. As well, all of the states and territories currently have a "First Home Owner Grant" (FHOG) scheme which allows a buyer to get a cash grant from the govt of around $7000. This comes in very useful.
Anyway, since I knew what I was working with, I started looking a bit more seriously.
Unfortunately, the small amount of money I had restricted my purchasing area. I was then forced to look in area I had previously rejected - which in Brisbane, was Ipswich and Logan.
Like any modern buyer, I went to the net. I found the most useful sites for property were - RealEstate.com.au and Domain. Almost every real estate firm in the country lists homes on these two sites, which makes it easy for you, since the search functions are fantastic.
It's also recommended that you hit the areas you are looking to buy in on the ground. Get a good real estate agent (or two!) and tell them what you want. It works. A few months into my search, I had about 4 agents ringing me with houses before they were on the market - an hour can mean the difference between getting and losing a house. Hit up the windows of the local places too - a lot of the houses don't go online for a few days after the real estate agent takes the job.
But anyway, I'll go into that more in the next part, so stay tuned!
Continued in Part Two - Dealing with Real Estate agents, Jenman, Auctions, Nasty Asbestos, The viewing grind and Solicitors!
I'll also cover things like Stratas (Body Corporates), private listings, things to watch for in contracts and a couple of other tidbits.
This was a stupid decision.
I lost a lot of fantastic information and a lot of people were interested in how it went down. So, due to popular demand and my urge to add to the increasing amount of unread blog posts on the internet, I will re-write my personal experiences.
I live in Australia, so obviously, my situation is Australia centric. But a lot of what I experienced would be the same across the western world, so it could be interesting to overseas readers.
Also, please take what you read as my personal opinion. Please take your own situation into account and talk to a financial advisor or solicitor before you do anything massive like sign a contract or accept a loan.
Part One - Making the first move
I first started my house search in early 2006. I had already done my university stint, as well as a fair amount of travel (Europe and Asia), and pretty much figured that I was going to stay in Brisbane. I had a lot of good relationships, connections and a good job on the way so I wasn't worried about being tied down. I quite like this city.
Bit of background. I was 23 at the time, single (in terms of purchasing) and was looking for a 3bed, 1 bath house to purchase. I wasn't interested in a unit or townhouse due to the terrible problems I'd had with strata's while renting and was very game to get out of the shit.
My cousin had recently purchased a house in the middle south-west corner of Brisbane for an extremely interesting price (sub $200,000) which had intrigued me about the area. I looked into prices and found that the recent 4 year boom hadn't really hit things too hard there. The trend had gone up, but not at the ridiculous rate the rest of the city had gone.
At the time I wasn't making a lot of money, sub 40's in fact. This had, as you can imagine, restricted the amount of money I could borrow. A few online calculators (any bank or lender website will have one like this) put me in the spot of around $250,000, at the max. Speaking directly to financial planners or mortgage brokers varied though - some got back figures ranging from $220k to $270k. Interestingly enough, non-bank lenders (at the time) were willing to provide a lot more money at a lower rate then the banks.
Note: This was pre-credit crunch. You'd be lucky if a non-bank lender will give you anything without a ton of LMI (Lender Mortgage Insurance) nowadays, but I'll go into that later.
This made me think. I didn't have any capital. I had about $10k in sitting in shares but I didn't want to touch that. I would probably have to borrow the lot and hope like hell that house prices didn't drop. I jumped on the net and read a hell of a lot about real estate speculation, trends in Brisbane and essentially educated myself on all things buying.
I cannot recommend this more. The 'net is a ridiculously amazing pot of information - there's heaps of free places to scout things like area profiles (trends of sale prices in an area, populations, crime rates) - RPData is a good one, although some of the meatier info costs money. It's also good for getting independant market values, since real estate agents like to embellish a tad. But, again, more on that later.
One of the first things you should do, even if you are just thinking of buying, is to hit up a mortgage broker. Now, a lot of people are mixed on mortgage brokers. But they are really a nessessary evil. You can, obviously, just walk into a bank, ask for the best deal and be on your way. The good thing about a broker is that they can walk you through a lot of the minefields.
They get paid commission from the banks, but if you get a good one they can help you out with advice on the legals, dealing with the bank on your behalf, securing documents for your real estate agent and so forth. They are also a "free" service, since they are paid by the bank who offers you the loan.
But their primary aim is to get you a loan. I first went into a local branch of Mortgage Choice, a pretty big retail mortgage broker in Australia. I sat down with a broker and told him I was looking at purchasing property. The first thing he did was get all of my financials - fulltime work or part time? Credit card debt? Car loans?
He dumped the information into the system, which then spat out a response from all the lenders they deal with. This was interesting. Some offered some great deals, but with interesting conditions. Others offered ridiculous amounts of money for high interest rates.
Note: Variable Vs Fixed Interest rates - Variable rates move up and down at the lender's discrection. Variable home loans usually offer much better deals, but your monthly payments can be unstable. Fixed rates are more secure, since they are locked in for a period of time, but the loan tends to be pretty restrictive too.
I had made the decision previously to deal with a bank, rather then a non-bank lender. Why? Security. It's unlikely for a major bank to go down, but not a smaller lender. The recent issues with sub-prime loans and such have been a pretty good example of that.
I told this to the broker who took them out of the system. Things made a lot more sense after that, since the banks tend to be a lot more conservative. The average amount available for me, at 100% borrowing, was around $250,000. Interest rates? Around 7.25% fixed. I told the broker I'd think about it. But he then asked if I'd like to be preapproved.
A pre-approval is basically a guarantee from the bank that they will give you the money. It's useful to have when you are house hunting, since you can make offers quickly, but most purchase contracts can have conditions like "subject to finance" which means you can get approval post-offer.
The other thing he mentioned, and that I mentioned before, was LMI - Lender Mortgage Insurance. LMI is applied when you borrow more then 80% of the purchase price, and can be a one off fee or a yearly fee. This is so the lender can cover any of the costs involved incase the loan defaults and the lender has to foreclose the property. So basically, unless you have a 20% deposit (which can be a pretty hefty amount), you'll be paying LMI. The broker will usually factor this into your payments too.
Anyway, I didn't bother with pre-approval since I didn't know what I was going to do. He gave me a great first home buyer pack which had a FANTASTIC booklet from the Queensland government, which was basically a step by step guide to everything. Which leads me to my next point...
The other thing you should do is check out the legal situation on purchasing in your state. For example, in the ACT you don't actually purchase your land, you lease it on a 99-year basis, and the government automatically renew it. This is called Leasehold. The land is permanently owned by the federal government (the crown) and there are various conditions involving its use.
In QLD and most other states, 99% of the land is Freehold. This means you own it outright, with a few conditions. Thus, you can do what you like on, or with it, within the law. Its important to talk to a solicitor about any of the legal ramifications of purchasing a house. Make sure you get a good one lined up before you make offers, because believe me, you are going to need them.
Other things like stamp duty, council fees and the other hefty fees should be investigated too. As well, all of the states and territories currently have a "First Home Owner Grant" (FHOG) scheme which allows a buyer to get a cash grant from the govt of around $7000. This comes in very useful.
Anyway, since I knew what I was working with, I started looking a bit more seriously.
Unfortunately, the small amount of money I had restricted my purchasing area. I was then forced to look in area I had previously rejected - which in Brisbane, was Ipswich and Logan.
Like any modern buyer, I went to the net. I found the most useful sites for property were - RealEstate.com.au and Domain. Almost every real estate firm in the country lists homes on these two sites, which makes it easy for you, since the search functions are fantastic.
It's also recommended that you hit the areas you are looking to buy in on the ground. Get a good real estate agent (or two!) and tell them what you want. It works. A few months into my search, I had about 4 agents ringing me with houses before they were on the market - an hour can mean the difference between getting and losing a house. Hit up the windows of the local places too - a lot of the houses don't go online for a few days after the real estate agent takes the job.
But anyway, I'll go into that more in the next part, so stay tuned!
Continued in Part Two - Dealing with Real Estate agents, Jenman, Auctions, Nasty Asbestos, The viewing grind and Solicitors!
I'll also cover things like Stratas (Body Corporates), private listings, things to watch for in contracts and a couple of other tidbits.
A new blog eh?
I created this blog originally to write about my experiences purchasing a property, but decided there's a couple of other bones I have to pick so it'll probably be about anything and everything.
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