A Beginner's Guide to Navigating the Property Market, Published on The Cusp, December 2017

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The transition from carefree youth to adulthood comes to most of us in a lightning flash moment. It’s the moment when you realize how much priorities have changed for yourself and the friends you roll with. You’ve gone from perpetually sitting at the kids table at Christmas and counting coins at the pub to fork out for a pint, to cooking Christmas dinner ourselves and discussing housing affordability.

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If this sounds like you then you’ve definitely moved up in the world. Welcome to the grown up table. Here, adults talk about the body corporate fees, their land tax payments, and complain about the politics of bin night. Specifically, that one neighbour who is always sneaking trash into every other bin but their own. Congratulations!

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Buying a house can be a complicated process with a lot of information to absorb and terms to understand. The good news is, that by arming yourself with a little knowledge it won’t seem as daunting and you’ll be back on the path of home ownership adventure in no time.

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Here, we’ve put together a beginner’s guide to navigating the property market that includes no mention of smashed avocado. We have outlined all that you need to know when it comes to buying your very first home, whether you intend to live in it yourself, or rent it out as an investment property.

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Metro versus regional

Give me a home among the gum trees, with lots of – wait, no, give me a home within walking distance to the 86 tram. When choosing between a home in the city or in a regional area, it is important to remember that where you buy your property will impact the price tag it comes with.

 

If you plan on living in your property, think about what lifestyle you are looking for. Do you want to commute in and out of the city or are you willing to pay a higher price for the luxury of walking to work?

 

Off the plan versus existing

Deciding whether to buy off the plan or existing is difficult, because each choice has its own merits. Buying an apartment or a house off the plan means that it doesn’t yet exist in a tangible form because it is still a widdle baby blueprint. Contrastingly, buying an existing property means that it does, in fact, exist. You can knock on the walls and everything. A major pro for buying off the plan is that it grants you some extra time to get your ducks in a row; deposits are taken but the balance is paid in full once construction is complete. However, be aware that off the plan properties carry a certain amount of risk ­– like going bankrupt before the project is complete. Although this is of course not always the case, just make sure you have conducted thorough research before putting down a deposit.

 

Buying an existing home in an already established area means that you or your tenants can move in straight away. But of course, older homes often come with the need for repairs and maintenance, which can escalate your outgoing expenses in the long run.

 

Take the time to weigh up the pros and cons of each scenario to help you make a decision that you are comfortable with, best fits your financial situation and fulfills the criteria of what it is you are looking for.

 

Investment versus owner occupied

Investment homes aren’t just for Mr and Mrs Moneybags who already live in a home of their own and have a portfolio of investment properties scattered across the country. An investment property can be a great way to get into the property market at a price that suits your personal circumstances. You can buy a property where you can afford it, and rent it out while you live in a rental house of your own. This option, known as rentvesting, is an increasingly popular choice for people in their 20s and 30s.

 

That said, for a lot of people the desire to buy a house is linked to a desire to live in something they can call their own, without a landlord or a lease. If that’s you, you might be entitled to offset your loan costs with the first home owner grant.

 

The first home owner grant scheme came about in 2000, as the Government’s attempt to offset the GST cost of home ownership. In recent years, the criteria for receiving the grant has shifted towards newly renovated homes or newly built homes in most states, meaning that if you are looking to buy property that has been occupied by people prior to you, you might not be able to receive the funds. The scheme is payable to anyone who matches the eligibility criteria of their state, so make sure you read the fine print carefully for which state you intend to buy in. If you are entitled to the grant you can either lodge your application through a bank or financial institution prior to taking out your loan, or you can lodge the form yourself once you have made a sale.

 

Loans

Taking out a loan is not as simple as showing a statement with your savings and proving that you have stable employment for the foreseeable future. There are a lot of tricky variables associated with loans that can make it feel daunting to choose which is the right one for you.

 

One of the first things that you need to assess when taking out a home loan is how your current situation and investment goals will impact your repayment schedule and interest rates. Make sure that you know a few choice terms in order to get the most bang for your buck and not be caught out paying more than you should. Remember, knowledge is power people.

 

Before you make any major decision, make sure that you thoroughly compare all your options before you settle on a loan. Use a loan calculator to predict your financial impact and what payment rate best suits your income. Then, make sure you are clued up with what kind of loan you think will best suit you (again, knowledge is power peeps) and speak with a financial advisor to clarify your situation and make an informed decision.

 

Interest only, or principal and interest

There are two main options to consider for paying off your home loan – interest only; and principal and interest.

 

Interest only covers – you guessed it – the interest owing on the loan, but you don’t pay off the money borrowed. The interest charged is set at a higher rate, but because you’re not paying off the principal your repayment costs are lower in the short term. You can only request interest only payments for a fixed period – usually about five years. After that, you pay off the principal and interest.

 

A principal and interest loan means you’re paying off both the interest and the money that’s been loaned. That means larger payments than if you were just paying off the interest, but you’ll build equity and own your home outright sooner. Both options have their pros and cons.

 

Taxes

These are the big and necessary taxes and will potentially hit your savings account the hardest if you aren’t prepared for them. So make sure you put a little extra aside knowing that you will have extra taxes and costs to cover the three big ones:

 

Capital Gains Tax (CGT)

Poor tax, it never gets given a fun name. Take heed, the Capital Gains Tax is not as terrifying as it sounds.

 

CGT is basically the taxable portion of the income that you have earned from the sale of assets for a profit.. In a real estate context, this doesn’t apply to your main residence that you own and occupy, however is applicable to vacant land, investment rentals, and hobby farms, which is interesting.

 

Goods and Services Tax (GST)

You will probably be familiar with GST because it is added on to pretty much everything in our lives. No surprise here, GST is also applied to the cost of a new house or block of land. Check the contract early on to read if this is applicable to your sale – GST regulations differ from state to state and will vary depending on your situation. Make sure that you ask your real estate agent if you are unsure and have a read of the Australia Taxation Office’s GST property tool to be #smart and #informed.

 

Land Tax

You won’t have to pay land tax on property that you own and occupy, however if you own investment property that is on land you might be subject to paying land tax. This includes vacant land, land where a property stands (a house or apartments), industrial units, car spaces, or commercial properties.

 

Details vary from state to state so make sure you have a read of your state government webpage to see if your new purchase meets their criteria. You need to register for land tax (yay) before 31 March of the financial year and at this point, the local government will be in touch to tell you how much you have to pay.

 

Negative Gearing

Negative gearing is a tax break for investment property owners. In short, if your investment income – the rent that your tenants pay to you – is less than the cost of the mortgage and maintenance on your property, you qualify for negative gearing. That could put you in a lower tax bracket.

 

One-off Government costs

In Australia, there are a couple of other fees that you will have to pay upfront when you purchase your home. Be prepared to pay Stamp Duty, which is another form of tax levied by states and territories. As always, the exact total you have to pay depends on what you are buying and where you buy it. The total cost of your stamp duty needs to be paid. The timing will differ depending on the state you are buying.

 

You will also be asked to cough up a Land Title registration fee that is an official record of your ownership that, again, is administered according to your state or territory. Buying in New South Wales or Victoria? First home buyers in these states are eligible for stamp duty concessions.

 

Conveyancing fees

This is basically just a fancy term for all the associated legal costs of purchasing a home. Although you are welcome to manage the legal process yourself, most people like to have a conveyer or solicitor on board because the red tape can get a little tricky. A conveyor or solicitors job is to review the contract, draw up a transfer of land if you require it, and transfer the property title to your name.

 

Inspections

Although you may feel as though you are bleeding money at this stage, it is no time to be stingy when it comes to arrange a pre-purchase inspection for your new home. Not only will an inspection point out any structural flaws in your new property, it will also help you to budget for future repairs, and to check for un-safe areas that may not be ready to move into straight away.

 

And don’t forget your body corporate fees

If you are buying an apartment that sits within a condominium complex or body of flats, it is likely that you will be asked to pay quarterly body corporate fees in addition to your council rates. You might also hear these costs being referred to as strata fees (they are the same thing). Confusing stuff at first but easy to deal with once you have wrapped your head around it.

 

Fees will vary according to where you buy, but usually the costs cover maintenance and upkeep of shared spaces like a pool and gym, as well as communal areas like the garden and car park. And of course, insurance. Read up about strata costs in the area you intend to buy in so you have a good idea of what to expect to pay for luxuries like an elevator or a 24-hour concierge.

 

So there you have it, all the costs that you need to cover for your new home. Once you have a grip around what costs you need to cover you will be better prepared to set up your budget and track your savings so you can stop stressing about the red tape and start living your best life in your new home.

 

Ready to take the leap into the property market? Now that you’re armed with knowledge, it’s time to get a loan. Chat to Westpac about their home loans today.