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Buying a home: a how-to guide

March 22, 2022
by
Craig Gibson

Buying a new home is an exciting experience and a huge milestone for many. But what should be a joyful time can often be littered with complications and stress. 

To help you feel more confident along this journey, we've explained every step of the process and explored some of the often-overlooked details that can stall your progress to ensure you reach the best outcome possible. 

Key concepts covered here in the home buying process include: 

  • What type of buyer are you?
  • Know what you can afford
  • Costs of buying a house
  • First Home Owner Grant (FHOG) and other concessions
  • Types of home loans and understanding interest rates
  • Search for and view properties
  • Get an inspection done
  • Make an offer, exchange contracts and settle

Let’s start by identifying what type of buyer you are.

What type of buyer are you?

Family inspecting a home they're interested to buy with a real estate agent

The life stage you are currently at will influence the type of property you buy, the amount you have to spend and the objective of your purchase. 

If you are a first-time buyer, you're likely to be interested in entry-level apartments and houses to live in. There may be incentives like the First Home Owner Grant (FHOG) on offer to help you offset some of the costs of purchase. 

You may also be upgrading from your first property and looking for more room for your growing family with a slightly larger budget. Here you may also need to research school catchment areas if this is a priority for you. 

If your children have left home, you may be ready to downsize or be seeking a tree or sea-change home for your retirement. You could also be wanting to buy an investment property to secure your financial future. 

No matter what type of buyer you are, you'll need to know what you can afford.  

Know what you can afford

The first step is to work out how much you can afford to pay for a property. 

You can use online tools to estimate how much you can borrow, which will give you a ballpark estimate of the value of the home you can afford. You will need to input the following info into the calculator:

  • The number of borrowers applying for the loan.
  • The total income of each applicant.
  • An estimate of your monthly living expenses, including credit cards and other loans.
  • Loan term or length.
  • Repayment frequency.

The calculator will then give you an estimate of the maximum loan amount and monthly home loan repayments. This gives you a good idea of what home you can afford. 

You then need to understand all the costs involved in buying a property. 

Costs of buying a house or unit

There is a range of costs you need to budget for, including government taxes to your deposit and charges attached to your home loan. Knowing what these are upfront ensures you don’t get a nasty surprise later down the track. 

Upfront costs

Here's a summary of all the major upfront costs:

  • Stamp duty, which is a government tax on your purchase.
  • Mortgage registration fee, payable to your lender.
  • Title transfer fee, payable when you settle.

Example: On a property in NSW, with a purchase price of $850,000 the fee breakdown would be:

  • Mortgage registration fee: $146
  • Transfer fee: $147
  • Stamp duty: $33,585

You can use an online stamp duty calculator to work out these charges.

It's important to be aware that the costs of buying a property vary from state to state. Here's a breakdown of the costs in:

Deposit

And how much do you need for a house deposit? This is a common question for first-time buyers, and for good reason—it takes time to save for a deposit

There is actually no minimum deposit required, and many lenders offer low-deposit loans, although the standard deposit for a home loan is around 10 or 20 per cent. A deposit of 20 per cent ensures you don’t pay Lender Mortgage Insurance (LMI), which is an extra cost to budget for if you have a smaller deposit. 

Your home loan or mortgage also has fees and charges attached, including: 

  • Loan application fee.
  • Lenders mortgage fee.
  • Property valuation, to determine the true value of a property.
  • Lenders mortgage insurance (LMI), if you have a deposit of less than 20 per cent.

Other costs

You also need to budget for: 

  • A deposit to secure your home loan, ideally 20 per cent to avoid LMI.
  • Legal fees, for the services of a conveyancer or solicitor.
  • Building and pest inspections, to ensure the structural integrity of a property.
  • A strata search, for an insight into the finances of an apartment complex (if purchasing a unit).

Now that you have a clear idea of all the various costs involved, you can begin researching and applying for a home loan, otherwise known as a mortgage. 

The different types of home loans and why interest rates are important

Home loans can be a bit intimidating and confusing, but understanding how interest rates work is crucial as they have the greatest impact on your monthly repayments and the overall cost of your home loan.

Understanding how interest rates work is crucial as they have the greatest impact on your monthly repayments and the overall cost of your home loan.

When you start researching home loans you'll see the interest rate listed as a percentage next to the name of the loan, like this: 2.09% p.a. 

The p.a stands for per annum, which is the amount of interest you'll pay on the loan over a year. You actually want to look for the comparison rate, which includes the interest rate as well as all the fees you have to pay with the loan. With these added on, the actual rate is a little higher, for example, 2.12% p.a. comparison rate. 

There are three main types of interest rates attached to home loans, and you are free to choose which one suits you. 

Fixed interest rate home loan

With a fixed rate home loan, your interest rate is locked in (fixed) for a defined period, typically anywhere from 1 to 10 years. This gives you certainty about your repayments, but fixed loans are not very flexible in that they don’t have many features, like offset accounts which can help you pay your mortgage off faster. 

Variable interest rate home loan

With a variable rate home loan, the interest can change—go up or down—over time. This is usually based on the Reserve Bank of Australia’s cash rate, which lenders often track as a benchmark or guide for the rates they charge you. These loans come with additional features, like the ability to make extra repayments, a redraw facility, or an offset account where your savings help to reduce the interest you pay. 

Split interest rate loan

You can have elements of both fixed and variable rate loans with a split-interest loan that has a portion of the loan which is variable and a portion that has fixed interest. 

When you take out a mortgage with a lender there are two components to the loan: 

  • The principal, which is the total amount of money you are borrowing.
  • The interest, which is the annual cost you are charged for borrowing the principal.

When you make your regular mortgage repayments they go toward these two components. The interest rate has the greatest impact on your monthly repayments and the overall cost of your home loan. 

Example: here are two home loans, one with an interest rate of 2.33% p.a. vs a rate of 3.0% p.a. Our calculation is based on a 25-year loan term (or length) for a loan of $500,000.

  • On a home loan with an interest rate of 2.33% p.a., you would be paying $2,211 per month for a total of $163,155 interest (including fees) over the 25-year term.
  • On a home with an interest rate of 3.0% p.a., you would be paying $2,381 per month for a total of $214,317 interest (including fees) over the 25-year term.

In this case, if you took out the loan with the 3.0% interest rate you would have paid $51,162 more in interest over the life of the loan. As you can see a small difference in interest rates adds up over time, so securing a lower rate can help save you thousands of dollars in the long run. 

Your ability to qualify for a home loan will be based on your serviceability—essentially, whether or not the lender is confident you can afford to pay it back.

You'll generally be applying for a loan from a bank or a dedicated lender, with the approval process largely taking place online. Your ability to qualify for a home loan will be based on your serviceability—essentially, whether or not the lender is confident you can afford to pay it back. A regular job, steady income and a record of savings for your deposit are generally what lenders are looking for. Note that, if you are buying an investment property, you will need to apply for an investor loan that has some different conditions, including a slightly higher interest rate.

If you are a first-time buyer you also need to research any grants, concessions or discounts available in your state.

First Home Owner Grants (FHOG) and other concessions

If this is your first property purchase you may be eligible for a government first home owner scheme, as well as other incentives like stamp duty exemptions or discounts. These can help you get your foot on the property ladder by covering some of the upfront costs. These vary by state and also change over time, so you will need to research exactly what is available in your state at the moment:

NSW / VIC / QLD / SA / WA / TAS / ACT / NT

Now you can move onto the fun stage: searching for and viewing properties.

Searching for and viewing properties

Now you have a good idea of how much you can afford and borrow, you can start to narrow down a location that suits your needs. Some questions to ask include:

  • Do you have children or are you looking to have a family? 
  • How many bedrooms and bathrooms do you need?
  • Do you need a backyard and/or a garage? 
  • Do you have to live close to work or are you flexible with location?
  • Can you afford strata or council rates, home insurance and other additional costs?

You can start looking at online listing platforms like the Doorsteps app to create a shortlist of properties. You can then begin viewing properties in-person at open homes/inspections, which also allows you to look at the local neighbourhood. 

If you are after some professional guidance, you may wish to consider hiring a buyer's agent. 

If you are after some professional guidance, you may wish to consider hiring a buyer's agent. A buyer's agent, also known as a buyer's advocate can help you through the entire buying process, from finding and analysing properties to bidding at auction on your behalf. It's important to hire one with a strong reputation, so be sure to look at our guides that highlight the top buyer's agents in Melbourne, Sydney, Brisbane, and the Gold Coast.

If you are buying an investment property, you will be looking at slightly different criteria, like whether there is a market for rental properties in the area as well as local vacancy rates and average rents. 

A walk-through checklist of a property should answer questions like:

  • Does the floor plan suit your needs?
  • Does the property need renovating?
  • Is there enough natural light? 
  • Is there parking? 
  • What kind of privacy do you have from neighbours?
  • Are there any obvious signs of issues like mould or rising damp?

If you are happy with the property, your next step would be to get a building and pest inspection. This identifies any potential structural defects or problems that exist with the property’s electrical or plumbing systems. A pest inspection is also recommended, especially if the property is a timber construction. Inspections can feel like money down the drain, but a thorough building and pest inspection could save you thousands in the long run and even give you a bargaining chip when it comes to negotiations. 

If you are buying an apartment then you should also have a strata search done, which gives you an insight into the Owners' Corporation’s finances. You should also research the complex more thoroughly from a lifestyle point of view. What is the demographic of the residents? What is the proportion of renters to owners? What are noise levels like? Is there any nearby development earmarked for the future? These can make a significant impact on the quality of apartment living.

If all these checks come back clear and you're satisfied that the property is sound, you are ready to make an offer. 

Make an offer, exchange contracts and settle

Your legal representative—a conveyancer or solicitor—will make a written offer to the seller and help you negotiate a fair price. They will also help review the contract of sale and ensure it covers everything you have agreed to. 

If the seller accepts your offer, you will have to pay a deposit, usually 10 per cent, to secure the property. You then exchange contracts and move to settlement, which is around 6 weeks long depending on where you live. Settlement is when all of the relevant sale documentation is processed and confirmed. Settlement day brings the sale process to a close, where you exchange all the legal documents with the seller and pay the balance of the sale price. Your name is now transferred to the title of the property and you will receive the keys to the property. 

Other considerations: are you buying and selling at the same time?

While this guide addresses each step of the buying process, you may also be looking to buy and sell at the same time. Needless to say, that complicates things. 

One of the biggest questions people wrestle with when buying and selling at the same time is whether to buy or sell first. Typically, if you sell first and buy second, you'll likely be under serious pressure to find the right property before settlement, and that's not a time limit anybody wants to be under. 

But if you're looking to buy your next dream home first and sell later, you'll either need enough cash saved up or have a lot of equity built up in your property to pay for the deposit, settlement costs and stamp duty on the new property, and that's not something most people have at their fingertips. Bridging loans are available to help with this situation, but they tend to be quite expensive and difficult to get approval for. 

Thankfully, there are some new companies looking to solve this problem, like Doorsteps. We are launching a suite of innovative finance products in 2022. Stay tuned.

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