Planning on buying a property? This video discusses 5 issues to consider when getting your deposit ready and organising finance before entering a contract to purchase property in NSW. Follow this link to hear more: https://youtu.be/fEm2FeIIqFI
TRANSCRIPT
For many Australians, buying a property is often the biggest financial transaction you will make in your life. Today I’m going to talk about issues to consider when getting your deposit ready and organising finance before entering a contract to purchase property in NSW. Remember that, in Australia, the laws around property purchases are state-specific so if you are interested in buying a property located in NSW, this video is for you! This is the one of a series of videos I will be presenting on this topic setting out small-ish chunks of the legal process involved, which is also known as “conveyancing”.
The first point to note is that this video series deals with residential property – not commercial property. So that’s property you intend to live in or that you’re purchasing as an investment, such as a house, unit, or a block of land to build on.
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A quick disclaimer that my videos are general and informational in nature only. They are not intended as legal advice, nor should you rely upon the content as legal advice. Please see the full disclaimer in the description box below.
Now, that said, lets dive right in:
- Do you have a deposit ready?
Considering the average house price in Sydney at the time of recording this video is around $1.1 million and a median of $1.3 million, merely saving enough for a deposit is no small feat. Usually, you will need to hand over or transfer a deposit of 10% of the purchase price at the time you sign the contract to buy the property. It’s normally held by the real estate agent (or more rarely, by the vendor’s solicitor) as a depositholder for safekeeping and may be invested to earn interest in the time between you entering into the contract and the purchase being finalised (which is called completion or settlement). There are exceptions to this, of course, but that is a topic for an upcoming video!
Another thing to bear in mind is that if you are obtaining external finance to purchase the property – most Australians would require a home loan to finance the purchase, usually from a bank or similar financial institution – is that your lender will normally require you to have at least 10% of the purchase price ready for a deposit before they will lend you the rest of the money. Depending on your lender, sometimes they may even require 20% in order to approve your loan if you don’t have any other suitable collateral and you don’t want to spend extra money on mortgage insurance. Oftentimes, if you only have a 10% deposit saved and no other collateral to offer the lender to secure your loan against, they will require you to take out mortgage insurance, which can add thousands of dollars to your overall spend. This is not to be confused with mortgage protection insurance – lenders mortgage insurance is designed to protect the lender, not you. Ultimately, the bigger the deposit, the better.
- Bonds & Bank Guarantees
In some cases instead of expecting you to have the 10% deposit, the lender may sell you a deposit bond or bank guarantee or to pay the 10% deposit on exchange of contracts or an auction bond if you need to bid at an auction. This will depend on your circumstances at the time and the lender’s policies. Deposit or Auction Bonds and Bank Guarantees are certificates that can be used instead of a monetary deposit at the time of exchange of contracts. They act as a guarantee of the deposit payment. At settlement you will be required to pay the full purchase price (instead of the full purchase price less the 10% deposit as is the usual practice). Be aware though that it is up to the vendor whether or not they will accept a bond or bank guarantee from you or if they require you to come up with a cash deposit.
- Organise your finance
Do you need a home loan to finance your property purchase? If you do need a home loan, it is always best to get your loan approval in writing from your lender before you start looking for a property. One thing to remember though is that the written loan approval is usually conditional on your lender’s valuation of the property you would like to buy and your lender may also impose other conditions that you’ll need to satisfy for the loan to be approved.
Bank valuations are used to determine the Loan To Value Ratio (or LVR) in a home loan application and will impact the amount that a bank is willing to lend to you.
Although it is not a legal requirement for you to have written loan approval before you purchase a property, if you do enter into a contract to purchase a property, but then can’t proceed with the purchase because you actually can’t get enough finance you will probably be considered in breach of the contract. The consequences of this may be that you lose the deposit you paid the seller (who is known as the vendor) when you entered into the contract (which is called exchanging contracts) and you may possibly even be sued for damages, depending on the circumstances.
Examples of this happening are when the bank’s valuation of the property ends up being less than the price that you have agreed to pay for it. This may lead to a lender declining to fund a loan for the full amount that you need to proceed with the purchase, leaving you with a shortfall. Other circumstances are if your home loan application is denied for other factors, such as the inability to service a loan of that amount or if you lose your job before settlement.
So, get your loan approval in writing first and make sure you don’t sign a contract to purchase a property until you are sure that your lender will lend you the amount of finance that you need. Remember to also budget for stamp duty or transfer duty which is a tax you will need to pay on top of the purchase price and varies depending on the purchase price of the property or any GST if applicable – look out for my upcoming video on transfer duty if you’d like more information on this topic.
- Holding Deposits
Another point to note on deposits involves what’s known as a ‘holding deposit’ or “expression of interest payment”. In private treaty sales, the real estate agent may sometimes ask you to pay a ‘holding deposit’ to secure the property, so the vendor does not sell it to anyone else. However, a holding deposit does not secure the property for you. The purpose of a holding deposit is to simply show the vendor that you are serious about buying the property – but it doesn’t mean you have entered into a contract with them… At the end of the day, a holding deposit will be returned to you if you don’t proceed to enter into a contract or if the vendor decides to sell the property to anyone else.
The crucial thing to remember is that you must enter into a written contract (that is, exchange contracts) to “secure” and buy the property and in this case you can’t do that with handshakes, verbal promises or paying holding deposits.
- Government assistance
Keep in mind that if you are buying a property for the first time you may be eligible for some form of government assistance under a first home owner’s type scheme or grant or concessions on stamp duty, etc. if there are any available at the time. So remember to look into this option yourself or bring this to the attention of your lawyer when you engage them.
One last point is that if you are in the situation where you are both buying a new property and selling an existing property – please check out my video specifically on this topic.
So I’ll wrap it up here – remember to please “SUBSCRIBE” and hit the “Like” button if you liked this video, please share it if you know anyone who is thinking of buying their dream home in NSW and doesn’t know where to begin!
If you’d like to make an appointment to engage my services, please follow the link in the description box to contact me AND if you have any topics you’d like me to address in future videos, please leave a comment in the comment section as I’d love to hear from you. I hope you found this video helpful and thank you for watching!