25 home buyer questions, answered

From investors to first-home buyers, buying a property can be an exciting time.

But it can also be riddled with fear and uncertainty, especially in a market like the one right now where there is uncertainty about interest rates and the supply of property is scarce.

Having helped many home buyer clients at Metropole I see certain questions being asked by buyers time and time again, and getting the wrong answer or bad advice can send you down a path of wrong turns and bad decisions.

So here are the top 25 most-asked home buyer questions, answered.

1. How much deposit do I need?

While many say a recommended deposit for home buyers is 20%, every lender is different - some accept as low as a 10% deposit while others (albeit very few) might be happy to accept just a 5% deposit.

If you want to avoid paying lenders mortgage insurance you’ll need to save at least 20%.

If you’re a first home buyer with a parent who is prepared to act as guarantor on your loan, you might not require a deposit at all.

2. What is lender’s mortgage insurance?

When your deposit is less than 20% of the value of the property you're buying, a lender is going to charge you a hefty lender's mortgage insurance (LMI) premium to reduce its risks.

LMI is one of those extra costs that often catches home buyers by surprise, particularly first-home buyers.

It can cost thousands of dollars or even tens of thousands of dollars.

But it's sometimes worth the cost, especially when you have a choice between paying LMI or spending years saving up for a 20% deposit.

But be careful – this insurance is designed to protect the lender if you were to default on your loan, it doesn’t protect you the buyer.

The amount you can expect to pay depends on the property, its location, your work status, whether it's an investment or for owner-occupancy, the amount of deposit and whether it is genuine savings or not.

As an example, a $70,000 deposit (excluding stamp duty and fees) for a $600,000 property would attract an LMI premium of between $10,960-$14,025 depending on your circumstances, according to Helia's LMI calculator.

3. Should I buy now or wait until I have a bigger deposit?

As I just explained, LMI will give buyers the opportunity to get into the market with a smaller deposit ability.

While it might be tempting to wait to accumulate a larger deposit, can you really save at the same rate that property prices increase?

Remember as prices go up so will the amount of deposit you’ll need to stump up.

4. How much can I borrow?

To calculate how much you can borrow, lenders look at the amount you earn, your expenses, and your personal circumstances (number of dependents etc), they add a buffer on top and then they apply the applicable interest rate.

And currently, they add an extra buffer of 3% above the current interest rate, meaning that even if you pay 6.5% interest on your mortgage, you’ll be assessed to ensure you can pay 9.5% interest.

APRA states:

“The buffer provides an important contingency not only for rises in interest rates over the life of the loan but also for any unforeseen changes in a borrower's income or expenses.”

Despite interest rates being at or near their peak APRA’s view is that the current level of serviceability buffer remains appropriate in the current environment.

I would disagree!

5. How much can I afford to repay?

How much you can afford to repay is a different question from how much you can borrow.

You might be able to borrow a certain figure but look at your expenses and work out what you realistically spend.

If you want to go on an annual European holiday you probably can’t afford to borrow at the highest level available - there would be no spending money left to save for the trip.

A very quick way to work out what you can afford to repay is to:

1. Take your annual income.
2. Work out 30% of that figure.
3. Divide by 12 to get a monthly repayment.

For example:

• $50,000 annual gross income at 30% = $1,250 per month.
• $75,000 annual gross income at 30% = $1,875 per month.
• $100,000 annual gross income at 30% = $2,500 per month.

6. How can my family help me?

Your family may be able to give you financial support to help you onto the property ladder sooner by acting as guarantor on your loan, making you avoid paying LMI.

They can also gift you money towards your deposit or other costs associated with buying a home or even jointly buy a property with you to spread the financial burden.

I’ve written about 5 ways parents can help their children into property here.

7. What help can I get from the government?

Both federal and state governments have implemented a whole suite of schemes, incentives, and fee waivers to help eligible Aussies realise their home-ownership dream faster.

• The Home Guarantee Scheme (HGS) helps first home buyers onto the property with as little as a 2% deposit by acting as guarantor on the remainder.
• The Help-to-Buy Scheme helps people earning less than $90,000 a year ($120,000 for couples) to purchase a property by stumping up to 30% of the purchase price for existing properties and up to 40% for new builds - that means buyers can purchase a property with as little as 2% deposit.
• The First Home Super Saver (FHSS) scheme is another way of getting assistance for buying a home, using voluntary contributions from your superannuation as your deposit - rather than having to save that amount in a bank account.
• The First Home Owner Grant (FHOG) gives first-home buyers assistance in buying a home by offsetting GST - the local government will give a one-off grant (around $10,00-15,000) to eligible home buyers at the settlement point of their property purchase.
• Stamp Duty Waivers have been applied across most states and territories to reduce or eliminate stamp duty on properties up to a certain threshold.
• The Victorian Homebuyer Fund (VHF) shared equity scheme helps Victorians with a minimum 5% deposit onto the property ladder quicker by contributing up to 25% of the purchase price in exchange for a share in the property.

8. What is stamp duty and when do I need to pay it?

Stamp duty - also known as transfer duty - is a state-based tax that you’ll sometimes be required to pay on purchasing assets such as property, land, cars, shares, business assets or even contracted services such as loans, gifts, and some insurance policies.

It’s essentially a transfer fee paid by the property buyer to transfer the property title from the seller's name into their name.

The amount you have to pay differs vastly depending on the state the property is in, the sale price, and what it is you’re buying.

The buyer is responsible for paying stamp duty within 30 days of signing the contract or settlement… it cannot be added to the mortgage.

9. What other expenses should I budget for?

Outside of the actual purchase price of the property, you’ll also need to budget for the following expenses:

• Stamp duty costs
• Loan application fees
• Mortgage registration transfer fees
• Legal and conveyancing fees
• Lenders mortgage insurance
• Inspection reports
• Moving costs

10. What is ‘rentvesting’?

Rentvesting is essentially an investment strategy where you buy an investment property first (where you can afford to buy) and rent where you want to live (but probably can't afford to).

It’s a tactic that overcomes financial obstacles and exorbitant property prices because you can buy in a location that fits your budget and then rent in a location that suits your lifestyle.

It works because even though you’re renting, the property you buy is an asset that’s growing in value (assuming you choose a smart location) and being (in part) paid off by your tenant.

Not only that, but you’re gaining equity that can launch you into other property purchases down the track, including (when the time is right) a home to call your own.

11. Do I need pre-approval?

A loan pre-approval means that a lender has agreed, in principle, to lend you an amount of money towards the purchase of your home but hasn't proceeded to full or final approval.

It’s not a requirement for buying a property but it is highly recommended because it adds a level of security.

Pre-approval will help to pin down your maximum available funds so you can narrow your search, negotiate with more certainty, and bid with more confidence if you're going to auction.

12. What should I look for in a loan?

While the interest and comparison rate are important considerations when choosing a loan, you also want to look for one that allows flexibility and suitability to your lifestyle.

• Also read:Pre-settlement inspection guide: what to inspect, why and when
• Also read:The offer and acceptance process when buying a property
• Also read:Caveats – The Red Flags of Real Estate
• Also read:How much you need for a house deposit in each Aussie city
• Also read:Guide to Downsizing a House in Australia

A home loan with an offset account and the ability to make extra repayments is also valuable, for example.

13. Should I get a fixed or variable loan?

There isn’t a right or wrong answer here.

You need to consider what interest rates are at now and whether you think they are likely to move up or down.

You also need to take your personal situation into account.

If you decide to go for a fixed loan, make sure you ask about any restrictions around making additional repayments.

You could also split your loan into two where part is fixed and part variable.

14. Do I need to use a mortgage broker?

Buyers can go directly to a lender for a loan and so while mortgage brokers aren’t necessary to facilitate a property purchase, some lenders may only work through mortgage brokers.

Likewise, mortgage brokers will know the best loans and lenders to suit your budget and circumstances.

The best thing - they don’t come with a fee.

15. I want to buy with a friend - what do I need to know?

Buying a property with a friend might be an attractive option right now while rates and property prices are high.

Before you do so, make sure you get a legal co-ownership agreement setting out the legal rights and obligations of both parties, also covering what would happen if one of you were to exit the agreement.

Although you own only a share of the property, when it comes to the loan all parties are jointly and severally liable for it should anyone default.

16. What is the difference between joint tenant and tenants in common?

A joint tenant arrangement, usually by married or de facto couples, is where the property is held in equal shares.

If one of the joint tenants dies their interest automatically passes to the other owner.

Tenancy in common is the most common way for friends or 2 or 3 people who aren’t married to buy - it allows the property to be split in any particular way and left to the person of your choosing if you were to die.

17. Should I buy off the plan?

Many buyers and investors are tempted to buy off-the-plan properties, enticed by the advertising hype of stamp duty savings, depreciation allowances and so-called “cheap” prices.

But it is one of the riskiest strategies in the current market and one to be avoided.

While there are already major risks associated with this type of investment due to a number of factors, including the changes to our attitudes toward how we want to live post-COVID-19 with fewer people keen to live squashed in with hundreds of other residents in poor-quality apartments in LegoLand Towers.

This includes both owner-occupiers and tenants.

Also, the lack of scarcity and higher body corporate fees are a poor recipe for rental and capital growth.

Add to this the recent concerns about the well-publicised structural integrity issues in Opal Towers and many other buildings which have dampened investor confidence in the new apartment market and falling apartment values and you can start to see what I'm getting at.

In short, buying off the plan does not make good financial sense, whether you’re buying as an owner-occupier or an investor.

18. Should I buy a unit or a house?

The house vs unit debate is a tricky question to answer… because it depends.

It depends on the location of the apartment, what type of apartment it is, its size and a myriad of other factors.

Generally, apartments offer a more affordable way to access the property market, but houses far outperform in terms of their capital growth.

There are pros and cons for either.

Family-friendly apartments in small boutique complexes offer great alternatives to houses located a long way from things like employment hubs, public transport, schools and entertainment precincts.

19. Who is responsible for arranging the building and pest inspections?

The buyer is responsible for arranging all building and pest inspections on the property they want to purchase.

These inspections aren’t essential but are strongly recommended as part of the due diligence process so that you know exactly what you’re getting yourself into.

20. Do I need a conveyancer or solicitor?

A conveyancer (or solicitor) covers and organises all the legal aspects of a property purchase, including transferring the property out of the vendor's name and into yours, amending or drawing up contracts, obtaining a title search and a lot of other tasks.

Unless you have some rock-solid legal credentials, you should hire an expert to do it for you.

21. How do I put in an offer?

If you’re buying a property via private treaty (rather than via auction) making a formal offer on a house needs to be done in writing and submitted to the selling agent, who will then inform the vendor.

A verbal offer can be made either in person or over the phone, but it's not taken as seriously as a written offer.

22. Can I retract my offer if I want to?

A buyer can withdraw their offer at any time before it is accepted, without reason.

After this point, an offer can only be retracted if special conditions written into the offer haven’t been met.

23. When does a contract of sale become binding?

The buyer or seller isn’t legally bound until signed copies of the contract are exchanged.

Buyers then usually have a cooling off period of around five working days following the exchange of contracts during which they can withdraw from the sale and forfeit their deposit.

24. Is a pre-settlement inspection necessary?

It is strongly recommended that a buyer conducts a pre-settlement inspection within a reasonable time before the settlement date.

This way, if anything is amiss, you can negotiate with the vendor for remedial actions to be completed ahead of settlement.

25. What insurance do I need?

Once you’ve purchased your property, you need to insure it.

There are two elements here: building insurance (the structure of the building) and contents insurance.

Your lender will likely require you to take out building insurance but you can get the insurance with any provider.

A final note…

Whatever stage of your property-buying journey you’re at, the most important thing is getting good advice from experienced people.

Build a great team around you - a good mortgage broker, a conveyancer and even a buyer's agent or wealth advisor - and your property purchase is more likely to be a successful one.