The secret to successful real estate investing (your owner occupied property is an investment) is to purchase below market value. Many people think that they can buy at market value and sell above market value. Wrong! You need to buy wholesale and sell retail!
There are many strategies to negotiating a lower price with a vendor. One of the most powerful is to have your finance pre-approved. A vendor is far more likely to accept a lower offer from a buyer with their finance already approved than from someone who hasn't already applied for finance, especially if that seller has already had a couple of contracts fall over due to failed finance. Of course, cash is king, but pre-approvals are the next best thing.
Advantages of Pre-Approvals
Free of charge.
You are not obliged to accept the finance.
Finance is subject only to the valuation of the property being purchased.
Valid for around 3 months (easily extended)
Enables you to negotiate a much lower price than someone without finance approval.
Enables you to go shopping for a home with confidence.
Final unconditional finance approval is much faster as the only thing that needs to be done is to value your property.
Allows you to swoop quickly if you come across a bargain.
Suitable Loans for First Home Buyers:
95/5 loans: If you have 5% deposit, and it needs to be genuine savings over a period of 6 months. You must demonstrate that you have made regular contributions to it.
90/10 loans: You require a 10% deposit but will not be required to show genuine savings
80/20 loans: Once you have 20% deposit no mortgage insurance is required at all.
Family Equity Loans: If you have a family member willing to put up their own property as security then Family Equity Loans are great. For example, you parents own their own home. Your parents only need to give the lender a limited guarantee for 20% of your purchase price plus fees. They are only responsible for 20% of the debt and as your equity increases with time, they can be released from their guarantee. In effect, you are borrowing 100% but there is no mortgage insurance- a great deal!
Before you go shopping for your first home, you really should have your finance preapproved. Real Estate agents can spot a first homebuyer from a thousand paces. Unscrupulous ones will try to exploit your inexperience. The most common strategy they will use is to try to pressure you into making an offer by telling you: You better be quick. I've got two other couples very interested in this property".
Do not fall in love with a property. Find at least four properties that you like and armed with your pre-approval, start making ridiculous offers on each of them. At least one of the sellers will be more desperate than the others. The secret to real estate is to buy right. Your preapproval
will help you do this.
Variable Interest Rate Home Loans
Variable loans are ones where the interest rate varies with time. Variable loans can be repaid either interest only where the principal remains the same or principal and interest, where the outstanding balance reduces as the loan is repaid.
There are three types of variable loans:
1. Standard Variable: This is your "normal " home loan with a variety of features depending on the lender. They tend to have a lot of options available such as credit cards, ability to make extra payments or withdrawals, B Pay, etc. A standard variable loan can be considered to be "fully optioned". Several lenders offer "Professional Packs" which provide significant interest rate discounts and lower or no application
fees. These discounts usually apply for loans over a minimum size, e.g $150,000.
2. Basic Variable: Basically this a "no frills" version of the standard variable and tends to be at least 0.5 % cheaper. A good choice for those wanting to get rid of their mortgage as quickly as possible.
3. Discount Variable: This is a variety of standard variable that has an introductory or "honeymoon" rate for an initial period of the loan. After this initial period the "honeymoon " rate reverts to the standard variable
Lo Doc, No Doc
These loans are intended for borrowers (both PAYG and self employed) who for whatever reason are unable to provide full financial statements to the lenders.
Low Documentation (Lo Doc): This type of loan requires the borrower to sign a statement declaring their ability to meet the repayments without undue hardship. Income is self certified and we are now able to provide lo doc finance up to 80% LVR. There are also professional packages available for Lo Doc loans up to 80% LVR
No Documentation (No Doc): This type of loan requires no financial documentation
whatsoever, and is a straight asset lend. The maximum Loan to Valuation Ratio (LVR) is now 60%.
Fixed Interest Rate Home Loans
Fixed loans have their interest rate locked in for a fixed length of time. At this time in
Australia, you can fix your loan for periods from 1 - 15 years. Generally, the longer the fixed period, the higher the rate of interest. However, this is not always the case, as lenders tend to discount some rates more than others do. Fixing a loan is a bit of a gamble because the borrower is taking a punt on the direction of interest rates.
There are a few disadvantages for fixed rate loans. Firstly, if you break the term of the fixed rate, there are economic costs, which will be charged by the lender. Secondly, most lenders will not allow redraws. Thirdly, majority of lenders will not allow you to pay off more than $10,000 per year in additional payments. This however is not the case with most credit unions and building societies who are member owned rather than shareholder driven.
Some lenders offer "capped" rates. With capped rates you can have the best of both worlds: The interest rate can never go above the "capped rate, but if rates go down, your capped rate will drop as well, unlike fixed rates which stay at the same level even if rates go down.
If the rate goes up, you are in front, but if rates drop then you have lost. However if the thought of interest rates rising keeps you awake at night, then fixed rates might be for you.
Line of Credit
A line of credit loan can be likened to a giant credit card. For example, if your home is worth $300,000 dollars and you borrowed 80% of it's value you would have a loan of $240,000.
As you repay the loan, you are able to access any equity available. For example if your loan balance was down to $180,000 you could immediately access up to $60,000 without applying to the lender.
Line of Credit or Equity loans have been promoted as being effective in paying off your mortgage more quickly but this happens only if you are very disciplined in your spending habits. For many people the temptation to keep the loan up to it's limit is too great and for them, and an equity loan is not the best choice.
Line of credit loans work very well for the disciplined borrower, and for investors who need instant access to cash to take advantage of any bargains that come across their way.