Finding the money to purchase a house

29 Jan

Written By For Good Digital

Most people buy a house with money from one or more of the following:
- personal savings;
- proceeds from the sale of a house;
- a mortgage;
- vendor finance;
- a loan or gift from a family member; and/or
- government assistance.
A best place to keep your savings is with the financial institution that you intend to apply to for a home loan. Otherwise, you may need to transfer the money into your legal representative’s trust account before settlement.
Selling first and buying second is sensible: your financial position is clearer, and there is no rush to find a new home. The proceeds of the sale should be kept in an accessible, interest-earning investment in the interim.
Alternatively, you can have the sale and purchase settlements occur simultaneously so the sale proceeds can be used immediately for the purchase settlement. However, if the sale settlement is delayed, the purchase settlement will also be delayed.
If you buy before you sell, or the sale and purchase settlement dates are close to each other (i.e. within a month), the buyer could consider bridging finance to ensure they have funds to settle the purchase.
Overview of home loans
When comparing loans, obtain information about:
- the cost of establishing the loan, including the valuation fee, the lender’s solicitor’s fee, mortgage establishment fee, and any up-front charges;
- when and how repayments are to be made;
- any administration charges, including the fee for debiting an account or sending a periodic bill;
- interest rates;
- whether the interest rate is fixed, variable or mixed and, if variable, the past practice and future intentions of the lender for varying the rate;
- whether interest payments are in advance or in arrears;
- whether the loan can be fully repaid at any time and the penalty for early repayment;
- whether instalments of the principal can be paid without penalty during the loan;
- the lender’s policy about late instalment payments;
- other services available with the loan, such as an offset account; and
- whether lender’s mortgage insurance is required based on the borrower’s equity share in the property, and the premium payable.
You should get detailed information from multiple lenders and compare the costs. One way to do this is through a mortgage broker.
Many lenders use a low interest rate for a short initial period to attract borrowers. However, make sure a loan is cost-effective for the whole term. Use the average annual per centage rate over five to seven years to compare the real cost of each loan. The lender can quote this rate.
The loan amount is based on a valuation, not the purchase price, of the property. If a buyer needs to borrow money to complete settlement, it is best to sign a contract with a finance clause. This generally ensures the return of the buyer’s deposit if the buyer can prove that they promptly applied for a loan but were refused.
You should make sure that this finance clause gives your bank long enough to complete a valuation of the property and to process your application.
A finance clause can only be negotiated where the sale is not at auction. Auction contracts do not contain any extra clauses that protect the buyer. A successful sale at auction generally results in an unconditional contract.
Types of home loans
Mortgages provide finance for a borrower in exchange for security over a property. If the borrower defaults in repaying the mortgage, the lender can sell the property. If the proceeds of the sale are less than the debt and expenses, the borrower must pay the difference. The terms of home loans vary considerably.
Variable rate mortgage
This is the typical home loan. With a variable rate mortgage, the lender can change the interest rate (and repayments) as the market rates change. Instalments are calculated to pay off the loan in an agreed period (usually 15 to 30 years).
Fixed rate mortgage
With a fixed rate mortgage, the lender charges a fixed interest rate for a set period (usually one to five years). If a borrower wants the loan to continue, they must re-negotiate the terms of the loan. If a borrower wants to repay the loan in full during the fixed rate period, the lender negotiates the terms of the payout and charges a penalty.
Second mortgage
Second mortgages are available from lenders such as finance companies and credit unions. They are usually short term with very high interest rates. The first mortgage lender must facilitate the lodgment of the second mortgage by making the title available. This may incur additional legal and administration fees to allow the first mortgage lender to complete their due diligence.
Reverse mortgage
A reverse mortgage is where a lender advances money to a person who is retired or elderly. A reverse mortgage allows a home owner to borrow a limited per centage of their property’s value (15–25 per cent). Repayment of the mortgage is deferred until the house is sold or the home owner dies or goes into care.
This can significantly reduce the owner’s equity in the property by the time the loan is repaid as interest accrues and compounds. Home owners should seek legal and financial advice before entering into a reverse mortgage (see Chapter 2.3: Legal services that can help; and Chapter 5.4: Financial counselling services).
Legislation governing lenders
Home loan mortgages and guarantees are covered by the National Consumer Credit Protection Act 2009 (Cth). For more information about national credit laws, see ‘Consumer protections under Australian Credit Law’ in Chapter 5.7: Understanding credit and finance. Mortgage brokers are not lenders but they can consider your situation and recommend a lender. You do not pay a broker to do this as they are paid a commission by the bank you take out a loan with.
The different lenders
Lenders include banks, credit unions, finance companies and solicitors’ trust funds.
Banks
Banks usually lend up to 80 per cent (and more, if the borrower pays for lender’s mortgage insurance, if required) of the bank’s valuation of the property.
Credit unions
Credit unions provide home loans to their members at competitive rates.
Finance companies
Finance companies lend first and second mortgages. A borrower pays a higher interest rate and the loan period is shorter than for home loans from banks.
Solicitors’ trust funds
Very rarely, solicitors’ trust funds are available from some specialist law firms.
Lenders and settlement
The lender attends the settlement of the contract (which usually occurs via an electronic conveyancing platform; however, there are a small number of complex transactions that cannot be settled electronically) and provides the loan money.
That money, and any funds contributed directly by the buyer, is used to pay the vendor, as well as all the expenses of the loan, any mortgage insurance premium, stamp duty, any expenses involved in clearing the vendor’s title, the lender’s solicitor’s fees, and the registration fees on the transfer and mortgage.
The stamp duty is paid automatically to the State Revenue Office (SRO) at settlement. The discharge of mortgage and transfer of title are generally registered automatically with LUV. The sale proceeds are also transferred to the vendor’s account and/or used to pay off the mortgage.
Lender’s mortgage insurance
This insurance protects the lender from loss if the borrower defaults on the loan and the sale of the property returns less than the amount needed to repay the loan and all the lender’s expenses.
Lender’s mortgage insurance does not protect borrowers, but it assists people who have very little money to buy a home and eliminates the need for a second mortgage or a large deposit.
If a loan is over 80 per cent of the property value, the lender usually requires the borrower to take out lender’s mortgage insurance (unless the borrower is using a government scheme to cover the cost of the lender’s mortgage insurance).
A borrower can obtain ‘personal mortgage insurance’, which protects the borrower by paying the instalments if they lose their income.
A vendor terms contract of sale allows the buyer to pay the price of the property over a longer period, usually three to five years. Ownership of the property remains with the vendor until the final payment is made.
Vendor terms contracts are regulated by the Sale of Land Act 1962 (Vic) (‘SL Act’).
Changes to the SL Act prohibit selling, arranging or brokering land under a vendor terms contract for residential land where the price is less than $750 000. Vendors should seek legal advice before entering into a vendor terms contract as it could be void if it’s not in the correct form.
As soon as the contract is signed, the buyer’s solicitor or conveyancer should lodge a caveat on the title to prevent another person claiming the property, and to give notice of the buyer’s interest in the property.
For buyers, there are three disadvantages to vendor terms contracts of sale:
1. the property is difficult to re-sell without completing the terms of the contract;
2. a buyer who defaults loses their investment, because the vendor keeps the deposit and re-sells the property; and
3. the terms generally require the buyer to pay a large amount at the end of the contract. Funds are often difficult to obtain without mortgaging the property.
The SL Act allows vendor terms contract buyers to convert their contract into ownership with a mortgage. This requires paying stamp duty, fees to register the mortgage and transfer the property, and the conveyancing fees. However, a buyer who converts a vendor terms contract becomes the registered owner, and the protection of their investment is increased.
If a borrower is late making a repayment on a home loan, the lender can charge default interest. Any costs and expenses incurred by the lender because of the default are added to the debt and incur interest, so defaults can be very expensive to correct.
If you cannot pay your loan instalments, contact your lender and explain the problem. Lenders provide advice for borrowers who find themselves in difficult financial positions. You and your lender can develop a strategy that keeps losses to a minimum.
First Home Owner Grant
The First Home Owner Grant (FHOG) is $10 000 and is limited to buyers who are purchasing or building new houses for $750 000 or less.
Eligibility for the FHOG is based on an applicant or the applicant’s spouse or partner:
- being a natural person, not a company, and over 18 years of age;
- being an Australian citizen or permanent resident;
- not having owned a home in Australia, either jointly or separately;
- living in the home as a principal place of residence (PPR) for at least 12 continuous months, commencing within 12 months of settlement or the completion of construction*; and
- not having previously received the FHOG.
*Australian Defence Force personnel are exempt from the residency requirement. This includes current members of the Australian army, air force or navy who are enrolled to vote in Victorian elections and who are on duty or on leave. This exemption does not apply to reservists or Australian public service staff.
The FHOG is administered in Victoria by the SRO. For the most recent updates on the FHOG, visit the SRO’s website (www.sro.vic.gov.au).
Usually, the buyer’s lender will apply for the FHOG for them. However, if the buyer is not applying for a home loan, they can apply for the FHOG via the form available at www.sro.vic.gov.au/fhogapply and supply the required supporting evidence. Where the buyer or their solicitor or conveyancer is applying for the FHOG, this will be paid as a refund after settlement, which may affect what funds are available at settlement.
First-home buyers may also be eligible for other duty exemptions or concessions, as set out below.
Stamp duty concessions
The purchase of property triggers a land transfer duty (stamp duty) liability that is payable to the SRO. The amount of duty payable depends on the property’s ‘total dutiable value’, which is usually the purchase price.
Depending on the buyer’s circumstances, there may be exemptions and concessions available on the amount of stamp duty payable (or surcharges for trusts, foreign buyers, etc.). For a full list of stamp duty concessions and exemptions, visit www.sro.vic.gov.au/land-transfer-duty.
The most common stamp duty concessions and exemptions are the:
- PPR concession;
- first-home buyer duty exemption or concession;
- off-the-plan sales concession; and
- pensioner exemption or concession.
If the SRO finds out you claimed a concession that you were not entitled to (for example, if you do not live in the property for 12 months), you will need to pay it back, sometimes with significant penalties.
Principal place of residence concession
A PPR stamp duty concession is available if all the below criteria are met:
- the property value is less than $550 000;
- the buyer intends to move into the property within 12 months of settlement; and
- the buyer intends to live at the property as a primary home for at least 12 months.
The concession rate depends on the property’s value.
First-home buyer duty exemption or concession
The first-home buyer duty exemption or concession is available for a first-home buyer if the buyer and their spouse or partner satisfy the eligibility requirements for the FHOG (see ‘First Home Owner Grant’, above) other than the purchase of a new dwelling.
If the buyer meets the above criteria and the total dutiable value of the property is:
- $600 000 or less, the duty exemption applies; or
- more than $600 000 but less than $750 000, the duty concession applies.
You can calculate the concession using the ‘land transfer (stamp) duty calculator’ on the SRO website (www.sro.vic.gov.au/calculators/land-transfer-calculator).
Off-the-plan sales concession
The off-the-plan sales concession applies to purchases where construction or refurbishment of the property is not complete at the time of signing the contract of sale and the buyer intends to use the property as their PPR.
This allows a buyer to deduct the cost of construction after the contract date from the contract purchase price, and that figures becomes the new ‘dutiable value’ on which stamp duty is calculated.
The dutiable value determines whether the first-home duty exemption or concession applies (however, it is the contract price that determines whether the FHOG is available).
The complexity of these calculations – which rely on information that isn’t available until shortly before settlement – means that a buyer’s eligibility for this concession and the exact stamp duty payable can’t be reliably estimated at the time of signing the contract.
Pensioner exemption or concession
A buyer who has an eligible pension card can receive a one-off duty exemption or concession when they purchase a home as follows:
- an exemption from duty – when you buy a home valued at $600 000 or less; or
- a concession from duty – when you buy a home valued from $600 001 to $750 000.
The thresholds for the pensioner and concession card duty reduction apply to the total value of the home. This means that if you buy a share in the home, the thresholds are assessed against the total value of the home, not the value of any share you buy. A buyer is eligible for this exemption or concession if they:
- hold a valid concession card* on the settlement date;
- have never received a pensioner exemption or concession in Victoria;
- are buying the property for market value; and
- intend to use the property as their PPR.
*For a list of eligible concession cards, visit www.sro.vic.gov.au/node/1398.
To calculate the pensioner concession, use the calculator at www.sro.vic.gov.au/calculators/pensioner-exemption-or-concession-calculator.
This exemption or concession is also available where there are multiple buyers who are purchasing a property together and only one buyer has an eligible pension card, provided the pensioner is acquiring at least 25 per cent of the property.
Other grants
There are several federal and state government schemes to assist first home buyers to get a home loan and purchase their first property. Generally, these schemes are administered by the SRO.
First Home Super Saver Scheme
The First Home Super Saver Scheme (FHSSS) allows you to save money for your first home inside your super fund. The FHSSS helps first-home buyers save for a home faster with the concessional tax treatment of superannuation.
You can apply to have a maximum of $15 000 of your voluntary contributions released in any one financial year, and up to a total of $50 000 across all years. You will also receive an amount of earnings that relate to the contributions.
You must apply for and receive a FHSSS determination before signing a contract for your first home and before applying for contributions to be released.
More information about the FHSSS is available on the ATO’s website at www.ato.gov.au/individuals/super/withdrawing-and-using-your-super/first-home-super-saver-scheme.
First Home Guarantee (and Regional First Home Guarantee)
The First Home Guarantee allows first-home buyers to purchase a property with a five per cent deposit without needing to pay lender’s mortgage insurance. Under this scheme, Housing Australia will guarantee up to 15 per cent of the value of the property. The scheme has strict requirements and limits on the number of places and income thresholds.
For more information about this scheme, visit www.housingaustralia.gov.au/support-buy-home/first-home-guarantee.
Family Home Guarantee
The Family Home Guarantee (FHG) allows single parents and guardians to purchase an existing home with a deposit as little as two per cent without needing to pay lender’s mortgage insurance. This scheme is available to all single parents – regardless of whether they are a first-home buyer or have owned property before. Buyers need to apply for the FHG directly through their lender. Approval is subject to the buyer’s ability to pay off the loan, as well as income caps.
For more information about the FHG, visit www.nhfic.gov.au/support-buy-home/family-home-guarantee.
Victorian Homebuyer Fund
The Victorian Government provides eligible participants with a contribution of up to 25 per cent of the purchase price. Participants need to contribute a minimum of five per cent of the purchase price and cover all other costs, such as stamp duty and conveyancing costs. The remaining amount is to be secured through a home loan from a partner lender who will register a first mortgage, and the Victorian Government Solicitor’s Office will register a second mortgage. Participants are required to buy back the government’s share in their property over time through refinancing, using accumulated savings, or upon sale of the property. The Victorian Government does not charge interest on its investment in participants’ homes, but shares in any capital gains or losses proportionate to its share in the property. For more information, see www.sro.vic.gov.au/homebuyer.
NOTE: The criteria for grants and concessions are regularly varied at both state and federal levels. Contact the SRO (see ‘Contacts’ at the end of this chapter) or the relevant government body to confirm your entitlements.