Homework for Financing Your Home Purchase

Before you do anything...

Before you buy or build a home, find out about your financing options by asking banks and other financial institutions how much you can loan and balance your life style by thinking about how much you can you afford?

Firstly establish:

  • if you are eligible for a loan with several lenders
  • how much you need for a deposit for each lender
  • what commonwealth and state based lending assistance may be available to you
    – Western Australian grants find out if you are eligible and how to apply.
  • if funds are always available, carefully examine the terms and purpose for the assistance, and share your research with your preferred lender, and
  • finally, how much you can borrow.

The size of your loan will usually depend on:

  • your income
  • the interest rate
  • the term of the loan
  • your other commitments, such as credit cards and personal loans
  • whether you have sufficient disposable income to service the loan
  • shown financial commitment and /or have enough to pay a deposit on a property
  • are in dependable /regular employment

Buyers often focus on the purchase rather than the loan and can become disenchanted when their heart becomes emotionally attached to a property and they haven’t done all their homework, as a last minute approval and finance check can stop the best researched property purchase in its tracks.

The most common reason borrowers get into difficulties repaying their mortgage is over commitment to other forms of credit. Often other forms of credit are charged at significantly higher interest rates. Whilst your credit history is generally available to finance institutions, and they will examine your disposal income and ability to service a loan in detail before they approve finance for a real estate purchase, many lenders like to provide more than just a mortgage facility and have a history with the borrower. Other credit facilities can reduce the amount you can borrow and whether you are able to make your home loan repayments.

A housing loan is a long-term commitment and the home may provide you future equity to extend you life choices so don’t jeopardise your life choices by over-committing yourself and numerous other lines of credit. Consider obtaining independent financial advice and consolidate your credit facilities before you apply for a home loan

A great home and serviceable home loan provide an important foundation to your health and wellbeing.

A good place to is by planning you Budget. A budget planner and calculator is one of the best ways to help you break down your expenses and plan a budget and then setting a budget is the best way to help you achieve your savings goal, regardless of how big or small that goal may be. The REIWA budget planner includes tabs for your income, home, living, transport, loans, leisure and any other insurance or super contributions and takes into account most aspects of your personal finances, allowing you to make a more accurate budget. Budget Planner Calculator

Generally, the larger your deposit, the easier it will be to buy a home and you will not need to borrow as much. You can generally nominate the size of the deposit if it hasn’t been stipulated by the agent and the seller. The deposit is usually 10 % but can vary between 5 and 20 % and may depend upon how well prepared you are and other conditions that you agree with the agent such as the settlement date.

On the date that the contracts are signed, the agent will request that you pay the agreed deposit into the agent’s trust account, where it should be held until settlement. It is recommended that you have a solicitor or conveyancer pay this deposit to the real estate agent, and it is very unwise for the purchaser to hand the deposit over directly to the seller on contract signing or to release the deposit to the seller before settlement. Direct deposit should be made to the agent’s trust account and if cheques are requested, they should be made payable to trust account and marked not negotiable.

The operation of trust accounts by agents is controlled by the Real Estate and Business Agents Act 1978 (WA) for real estate agents or the Settlement Agents Act 1981 (WA) for settlement agents. Money paid into trust accounts held by licensed agents is covered by a Fidelity Guarantee Account, which protects consumers against misappropriation of money by an agent or any of their employees.

In Western Australia, there is

  • no cooling-off period for real estate contracts unless you and the agent/seller agree in writing to insert one into the contract, and
  • no mandatory seller disclosure statement when selling property, and caveat emptor applies for real estate purchases, that is “let the buyer beware” which means as the buyer assumes the risk that the property may not be all it appears to be and buyers have little and sometimes no recourse with the seller.

Wish to know more ?

Contact the Western Australia, Department of Commerce, Consumer Protection Division and access there advice ‘Sale by offer and acceptance’ advice, and seek independent legal and conveyance advice.  

Other fees and expenses to consider

Other home purchase costs vary considerably depending on type of property, location and value of the property. This site provides an indicative guide to some of the costs you will need to pay when you buy a home in Western Australia, the costs are approximate only and are subject to change. This may not be complete list of fees and expenses

You will need to budget for

Conveyancing is the process of transferring the property from the seller to the buyer. Each party will need to engage their own conveyancer or solicitor as their representative, in the settlement process that occurs after the contract for sale has been signed. Whilst conveyancing occurs post contract, it is advisable to engage a representative to quote for the work prior to signing a contract as they can provide valuable guidance and advice and avoid potential issues that can be costly to rectify after a contract has been signed. Moreover, they can formally set out the expected costs for the type of property you are interested in and usually recommend other valuable resources such as buyer agent and inspection services.

There are no set fees charged for conveyancing. You should get a written estimate of the likely costs before engaging the solicitor or conveyancer. Approximate cost: $700 – $2,500

Stamp Duty

What is stamp duty (transfer duty)?

Stamp duty or ‘transfer duty’ is a state tax imposed on the sale of residential properties in Western Australia. The amount of stamp duty you are required to pay on your property purchase is dependent on a number of factors, including price of the property, location and whether or not you are a first home buyer.

Stamp Duty Calculator

Finance fees and loan application fees

This is the fee charged by a bank or other lending body when you apply for a loan.

Approximate cost: $Nil – $800

There may be additional costs preparing and registering the mortgage.

Your lender usually requires a formal valuation of the property you are buying. This fee may be included in the application fee charged by your lender. Depending on the lender that you choose it may be useful to enquire as to there preferred valuation firm, as a pre-purchase valuation may align with the lenders mortgage fit requirement and can lower the cost of a lender independent evaluation. 

Pre-purchase valuation fees Approximate cost: $800 to 1500

Lender independent evaluation Approximate cost: $800 to 1500

Your lender will require you to take out mortgage insurance if you are borrowing more than a set proportion of the property’s valuation. Mortgage insurance protects the lender if you default on the loan and the property is sold for less than the outstanding loan amount. Premiums vary according to the loan amount, property price and the loan-to-value ratio. The mortgage insurance premium is a once-only payment.
Building Inspection

A building inspection checks structural soundness and lists any visible defects and necessary repairs.

Approximate cost: $350–$800

Pest Inspection

A pest inspection checks for any signs of past or present pest infestation.

Approximate cost: $250–$400

Strata Inspection

A strata inspection examines and reports on the written records of the owners’ corporation. It is additional to the certificate that the seller supplies, providing relevant information about strata levies, insurances.

Approximate cost: $250–$400

Property buying cost calculator

Your solicitor/conveyancer will pay for some of these expenses on your behalf during the conveyancing process and provided a settlement statement of the of the disbursement that reflect an equitable allocation of the outstanding utility, council and other costs between the seller and buyer. Council and water rates are shared costs in proportion based upon the date of settlement.

The electricity is usually disconnected when the ownership of the property changes. Telephone Reconnection Telephone lines are usually disconnected when the property changes hands.

Removalist costs will depend on distance, how much furniture you have, and who is doing the packing. Approximate cost: $550 – $3,500

You should arrange home building insurance before completing the purchase. That is building insurance should be in place when you sign the contract for sale. The cost of building insurance will depend on the age, size, location and type of construction of the property. Generally, two types of insurance cover are available.

Replacement cover: to reinstate your property to its former condition. It means, simply, new for old.

Indemnity cover: to repair or reinstate your property considering depreciation on the dwelling.

Approximate cost: $220–$1,500

Some insurance firms will provide a cover note on signing, which should paid along with contents insurance that should be taken out prior to settlement. Most banks will validate that building insurance in in place by settlement.

The following information regarding loans and interest rate is general only and should not be used as a source of financial advice. You should seek independent finance advice from accredited financial advisor and institutions.

Interest is charged to the borrower by the lender for the use of the lender’s money. The interest rate is the annual percentage of a loan amount that is charged as interest. The interest rate can and will fluctuate with changes in economic conditions.

Rates of interest may be fixed or capped for a period, or alternatively may vary during the term of the loan in line with general interest rates.

REIWA mortgage and home loan calculator is a useful way to determine what your loan repayments will be over the period of your home loan. The amortisation tab will determine what your loan balance will be across the period of your loan each year, as well as the interest that has been paid. Home loan repayment calculator

Types of Lenders

There are many different types of home lenders. Each has different interest rates, terms, conditions and lending criteria and most offer integrated financial services (eg. home loans, saving accounts, cheque accounts, credit card access and financial planning and investment services).

Most home loans are underwritten by banks, building and credit societies and cooperative housing societies who provide loan both directly and through third parties.

Mortgage brokers act as agents between borrowers and prospective lenders. The task of the mortgage broker is to find and arrange the most suitable loan for the borrower. They do not lend money or manage loans.

Mortgage managers organise funding for homebuyers from a variety of funding sources. The owner of the mortgage is not the mortgage manager but the provider of the funds, who operates through a trustee.

Sometimes the vendor (the seller) is prepared to lend part of the purchase funds to the buyer, usually over a two-or three-year term. Interest only is paid, meaning the amount borrowed is not reduced. At the end of the term, finance has to be obtained from another source.

Types of Loans

Standard variable interest rate loan is the most popular type of home loan that provides a variable interest rate that can go up or down throughout the term of the loan. Features, such as added flexibility in making repayments and a redraw facility, are often included in this type of loan.

Repayments are usually monthly and remain the same throughout the term of the loan, changing only with the rise and fall of interest rates. Normally, in the early years of the loan, each repayment is mostly paying interest charges and less of the loan principal. In later years, the opposite occurs.

This type of loan offers a lower interest rate and repayment than a standard variable interest rate loan but has fewer or none of the features of standard variable loans.

This type of loan offers a fixed interest rate for a specific period (eg. six months to five years). At the end of the fixed rate period, the loan is renegotiated for a further fixed term or reverts to the variable interest rate current at that time. It may not be possible to pay extra amounts off the principal without paying a penalty. A penalty usually applies if the borrower wishes to refinance the loan during the fixed interest rate period.

An all-in-one loan is usually a variable interest rate loan, which permits the borrower to place all their income into the one account, reducing the loan balance and the interest paid. The borrower can access the account to meet day-to-day expenses. Additional payments are permitted without attracting penalties. Due to its flexibility, there may be greater costs (eg. higher interest rate and/or higher monthly fees).

A home equity loan allows a borrower to use the equity in the home (the portion of the property the borrower owns) to gain access to an immediate source of funds. There are two types of home equity loans. Under the first type of home equity loan a borrower may borrow an additional lump sum amount which acts like a second mortgage.

The second type is an equity overdraft or line of credit. A line of credit is like an overdraft secured by the equity in the borrower’s home. The interest

rate on a line of credit is usually higher than for other home loans but less than the interest rate on a personal loan or credit card.

A consolidated loan permits the borrower to combine several loans, such as a home loan, credit card debt and personal loan into a single variable or fixed rate loan. This can result in a lower overall repayment and interest rate for the borrower.

An interest only loan requires the interest to be paid during the loan term with the amount borrowed becoming due at the end of the loan. These loans are usually for one to five years and are often used by people buying investment properties.

A bridging loan is often used to buy a property while waiting for the sale of your existing property. A bridging loan is a short-term housing loan where repayments meet the interest only. The amount borrowed becomes due at the end of the loan term. As higher interest rates are usually charged for bridging loans, it is best to keep the term as short as possible.

Other Loan Features

You can save money by making fortnightly rather than monthly repayments. This is done by dividing your monthly repayments in half and making these once a fortnight. This means that you will make one extra repayment a year. This is because there are 26 fortnights (or 13 sets of four weeks) in a year, and only 12 months. Making repayments fortnightly can reduce the term of your loan and save you a lot of money on interest repayments.

Most variable and some fixed rate loans allow the borrower to make additional or lump sum repayments without penalty. If you can afford it, regularly adding a little bit extra to your repayments can significantly reduce the amount you end up paying over the term of the loan. If you can make a lump sum payment into your home loan account, this will also reduce the term of the loan and the total amount you repay.

A mortgage offset account is a savings account combined with a home loan but as two separate accounts. Any interest earned on the savings account is applied to reduce the interest payable on the home loan.

A redraw facility allows you to withdraw additional repayments, which have previously been made. Usually there is:

  • a minimum redraw amount
  • a maximum redraw amount
  • a fee per redraw and
  • an allowable number of redraws each year.