There are so many vested interests in promoting the positives of property investment that it’s increasingly hard to differentiate between data that is realistic or promotional.
But there does seem to be a string of recent signals indicating property price drops have at least stabilised on the back of last year’s interest rate cuts, lack of new development and increased migration.
Many are ringing the bell for the bottom of the market. We’re not so sure about that, but if you are being tempted back into property, here are seven questions to ask yourself before taking the leap.
1. Can I put down at least a 20 per cent deposit?
Gone are the days when money was cheap, easy and property buyers could borrow 110 per cent of the asset’s value. The global financial crisis has forced financiers to tighten credit rules and be more selective in who they lend too.
Even when money was cheap and easy, our view was always that a minimum 20 per cent deposit was a good personal litmus test on whether you could afford the loan and had the financial discipline to cope with a mortgage. If you can’t save enough for a 20 per cent deposit, how are you going to have the discipline to pay down that home loan early?
2. Who will lend me enough money?
Having finance organised early is an enormous negotiating weapon when you’ve found that dream home.
Sellers are under pressure, buyers are scarce so the ability to go in and do a deal quickly is worth real money to a vendor.
And it presents a great opportunity to squeeze a better price. Look outside the big four banks for a potential funder. Mortgage originators, credit unions and brokers offer a huge range of options with tailored terms and interest rates. They are all regulated by the same authority that oversees banks.
3. Have I targeted a price, type and location?
Knowledge will save money. Having a definite shopping list of the type of property you want, the desired area and price range is essential.
Then do your homework. Today there is an enormous amount of data available covering everything from recent sales in a particular area or street through to how a neighbourhood’s demographic is changing.
The sale history of an individual house is also easily found.
To find out more details, go to any of the major real estate websites and read their reports.
4. Do I have a reliable income?
Buying a house with a mortgage can be a massive financial commitment. Every month that home loan has to be fed and financiers get narky if repayments are missed.
Make sure you have one very reliable income that can be trusted to continue or alternatively downscale your borrowing expectations and purchase price range.
5. Is there an adequate safety net?
The best-laid plans can come unstuck through an unexpected emergency. It could be an unexpected pregnancy or injury through to a car accident or theft. You have to have a buffer to cope with the unexpected. Make sure you have adequate life, income and home insurance.
Add an emergency stash of three-to-six months salary as an extra safeguard.
6. Am I happy to settle down for 5-7 years?
Renting gives flexibility to move at reasonably short notice but no guaranteed security of tenure.
Ownership is the opposite. Because the transaction costs involved in buying a property (stamp duty, legal fees, mortgage establishment costs) are so high, it can take up to 5-7 years before the home’s value rises to a level where you’re back in front. You must be prepared to settle down in a house for at least that period.
7. Do I understand the running costs?
Many first-home buyers (and also those trading up) are stunned at the amount they have to pay out on a regular basis to just maintain their home.
Not just the council, water and electricity bills but also the costs of maintaining the property to the standard (or better) at which it was bought.
Maintaining or improving the garden, the paintwork, the pool, flooring … the list is extensive and expensive.
Make sure you understand the amount of these expenses and have budgeted for them.
LEAVING A HOUSE
MANY elderly Aussies keep their will secret, almost as a tool to maintain their power within the family by dangling the potential of a financial windfall.
The more people talk about their wills, the less the heartache.
There is nothing worse than a close family being torn apart by siblings bickering about a parent’s estate. But keeping a will secret can cause grief.
For instance, if your will says your home should be sold and the money distributed to loved ones, be wary of capital gains tax.
If the trustee sells the home, your estate could be subject to capital gains tax on the profit.
If, on the other hand, the property is passed on to your relatives (not the cash gained from the sale) and they sell it, tax is calculated differently and delayed.
Bear in mind CGT is only applicable to houses bought after September 1985.
If you are making a will and your property falls within the CGT net, it may be worth seeking professional advice.