Buying old vs building new: Which do you choose?

Buying old vs building new: Which do you choose?

The world of real estate is defined by many ‘either-or’ questions: Should I fix my home loan rate or leave it floating? Should I buy an apartment or a detached house? Is it better to invest first or become an owner occupier?

Among these questions is the all-important ‘buying old vs building new’ debate. While your ultimate decision is going to depend on your particular needs, wants and circumstances, each option has pros and cons that may help tilt your decision one way or another. Let’s have a look at how they match up. 

Government support — Advantage: Building a house

All of the state governments provide various types of support for first home buyers. These are all directed at either brand new homes, properties to be constructed or vacant land however. For instance, the New South Wales First Home-New Home scheme offers stamp duty exemptions on new homes that are worth up to $550,000, and concessions for those valued between that and $650,000. They also have a full exemption on vacant land worth up to $350,000. 

Meanwhile, all of the states provide grants generally ranging from $10,000-$15,000 for first home buyers buying a new home. For those looking at the figures on a home loan calculator with trepidation, this can be a useful financial boost. In this area, buying a new home wins out. 

Speed — Advantage: Buying old

If you’re an owner-occupier, when you purchase a new home, you want to move in as quickly as possible. While you might be able to get some useful discounts on the price of a new home, you’ll have to wait for a significant amount of time before you can live in it. According to the Australian Housing and Urban Research Institute, in 2010 , new homes were taking an average of 7.5 months to build. 

By contrast, after settlement — and once the cooling-off period has been observed — you can feel free to move into an established home straight away. 

Customisation — Advantage: Building a house

With a pre-occupied home, short of an astronomically expensive renovation that will push your savings account to the limit, it’s not going to change. It may have been designed for different owners — and for a different time — but you won’t be able to do a whole lot to make it fit your needs. 

A house and land package, however, affords you the opportunity to design a home perfectly suited to who you are. This is a practical matter, too. As Madeline McErlain, marketing manager of 4Land Property Group points out, up-to-date technology like energy efficient appliances and modern cabling can be costly and difficult to install in old houses. It will also save you money down the line. 

Extraneous costs — Advantage: Building a house

Both types of purchases have added costs on top of the property itself. If you buy pre-occupied, you’ll have to carry out a building and pest inspection to make sure the home is of a good quality. According to the Queensland government, this will cost you $400-600 for a standard three-bedroom house. On top of this, the house will have suffered wear and tear, and will likely require maintenance somewhere down the line. 

Buying a new home also comes with potential costs. Building could be delayed by weather, and if you hire an unreliable builder, the process could both be slower and more expensive than you wished. You’ll also have to pay for an inspection of the property at each building stage. However, these are mostly risks that may not necessarily come to fruition, and new homes can save you money in the long run — you won’t need to pay as much for repairs or maintenance.

Choice of location — Draw

With the scarcity of land in Australia’s capitals, if you want to build new you’re generally going to be looking in more outer areas. For instance, in Sydney, much of the new home building activity has taken place in the city’s western regions — 100,000 new homes between 2011 and 2014, according to the NSW government. This is because available land in areas closer to the centre of the city has largely depleted across the capitals.

While in theory that means you’ll have a larger amount of choice with an established home, this may not necessarily be the case. The other reason buyers look to outer areas is because of their lower price entry point. Buyers may find that established homes in more convenient areas are out of their price range, narrowing their options anyway. This may not be the case across the board though — more affordable cities like Brisbane and Adelaide might buck this trend.

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Learn more about home loans

Can I change jobs while I am applying for a home loan?

Whether you’re a new borrower or you’re refinancing your home loan, many lenders require you to be in a permanent job with the same employer for at least 6 months before applying for a home loan. Different lenders have different requirements. 

If your work situation changes for any reason while you’re applying for a mortgage, this could reduce your chances of successfully completing the process. Contacting the lender as soon as you know your employment situation is changing may allow you to work something out. 

What fees are there when buying a house?

Buying a home comes with ‘hidden fees’ that should be factored in when considering how much the total cost of your new home will be. These can include stamp duty, title registration costs, building inspection fees, loan establishment fee, lenders mortgage insurance (LMI), legal fees and bank valuation costs.

Tip: you can calculate your stamp duty costs as well as LMI in Rate City mortgage repayments calculator

Some of these fees can be taken out of the mix, such as LMI, if you have a big enough deposit or by asking your lender to waive establishment fees for your loan. Even so, fees can run into the thousands of dollars on top of the purchase price.

Keep this in mind when deciding if you are ready to make the move in to the property market.

What are the pros and cons of no-deposit home loans?

It’s no longer possible to get a no-deposit home loan in Australia. In some circumstances, you might be able to take out a mortgage with a 5 per cent deposit – but before you do so, it’s important to weigh up the pros and cons.

The big advantage of borrowing 95 per cent (also known as a 95 per cent home loan) is that you get to buy your property sooner. That may be particularly important if you plan to purchase in a rising market, where prices are increasing faster than you can accumulate savings.

But 95 per cent home loans also have disadvantages. First, the 95 per cent home loan market is relatively small, so you’ll have fewer options to choose from. Second, you’ll probably have to pay LMI (lender’s mortgage insurance). Third, you’ll probably be charged a higher interest rate. Fourth, the more you borrow, the more you’ll ultimately have to pay in interest. Fifth, if your property declines in value, your mortgage might end up being worth more than your home.

How can I get a home loan with bad credit?

If you want to get a home loan with bad credit, you need to convince a lender that your problems are behind you and that you will, indeed, be able to repay a mortgage.

One step you might want to take is to visit a mortgage broker who specialises in bad credit home loans (also known as ‘non-conforming home loans’ or ‘sub-prime home loans’). An experienced broker will know which lenders to approach, and how to plead your case with each of them.

Two points to bear in mind are:

  • Many home loan lenders don’t provide bad credit mortgages
  • Each lender has its own policies, and therefore favours different things

If you’d prefer to directly approach the lender yourself, you’re more likely to find success with smaller non-bank lenders that specialise in bad credit home loans (as opposed to bigger banks that prefer ‘vanilla’ mortgages). That’s because these smaller lenders are more likely to treat you as a unique individual rather than judge you according to a one-size-fits-all policy.

Lenders try to minimise their risk, so if you want to get a home loan with bad credit, you need to do everything you can to convince lenders that you’re safer than your credit history might suggest. If possible, provide paperwork that shows:

  • You have a secure job
  • You have a steady income
  • You’ve been reducing your debts
  • You’ve been increasing your savings

How do I refinance my home loan?

Refinancing your home loan can involve a bit of paperwork but if you are moving on to a lower rate, it can save you thousands of dollars in the long-run. The first step is finding another loan on the market that you think will save you money over time or offer features that your current loan does not have. Once you have selected a couple of loans you are interested in, compare them with your current loan to see if you will save money in the long term on interest rates and fees. Remember to factor in any break fees and set up fees when assessing the cost of switching.

Once you have decided on a new loan it is simply a matter of contacting your existing and future lender to get the new loan set up. Beware that some lenders will revert your loan back to a 25 or 30 year term when you refinance which may mean initial lower repayments but may cost you more in the long run.

Are bad credit home loans dangerous?

Bad credit home loans can be dangerous if the borrower signs up for a loan they’ll struggle to repay. This might occur if the borrower takes out a mortgage at the limit of their financial capacity, especially if they have some combination of a low income, an insecure job and poor savings habits.

Bad credit home loans can also be dangerous if the borrower buys a home in a stagnant or falling market – because if the home has to be sold, they might be left with ‘negative equity’ (where the home is worth less than the mortgage).

That said, bad credit home loans can work out well if the borrower is able to repay the mortgage – for example, if they borrow conservatively, have a decent income, a secure job and good savings habits. Another good sign is if the borrower buys a property in a market that is likely to rise over the long term.

How much is the first home buyer's grant?

The first home buyer grant amount will vary depending on what state you’re in and the value of the property that you are purchasing. In general, they start around $10,000 but it is advisable to check your eligibility for the grant as well as how much you are entitled to with your state or territory’s revenue office.

Does Australia have no cost refinancing?

No Cost Refinancing is an option available in the US where the lender or broker covers your switching costs, such as appraisal fees and settlement costs. Unfortunately, no cost refinancing isn’t available in Australia.

Can I get a home loan if I am on an employment contract?

Some lenders will allow you to apply for a mortgage if you are a contractor or freelancer. However, many lenders prefer you to be in a permanent, ongoing role, because a more stable income means you’re more likely to keep up with your repayments.

If you’re a contractor, freelancer, or are otherwise self-employed, it may still be possible to apply for a low-doc home loan, as these mortgages require less specific proof of income.

Will I have to pay lenders' mortgage insurance twice if I refinance?

If your deposit was less than 20 per cent of your property’s value when you took out your original loan, you may have paid lenders’ mortgage insurance (LMI) to cover the lender against the risk that you may default on your repayments. 

If you refinance to a new home loan, but still don’t have enough deposit and/or equity to provide 20 per cent security, you’ll need to pay for the lender’s LMI a second time. This could potentially add thousands or tens of thousands of dollars in upfront costs to your mortgage, so it’s important to consider whether the financial benefits of refinancing may be worth these costs.

Is there a limit to how many times I can refinance?

There is no set limit to how many times you are allowed to refinance. Some surveyed RateCity users have refinanced up to three times.

However, if you refinance several times in short succession, it could affect your credit score. Lenders assess your credit score when you apply for new loans, so if you end up with bad credit, you may not be able to refinance if and when you really need to.

Before refinancing multiple times, consider getting a copy of your credit report and ensure your credit history is in good shape for future refinances.

I have a poor credit rating. Am I still able to get a mortgage?

Some lenders still allow you to apply for a home loan if you have impaired credit. However, you may pay a slightly higher interest rate and/or higher fees. This is to help offset the higher risk that you may default on your repayments.

I can't pick a loan. Should I apply to multiple lenders?

Applying for home loans with multiple lenders at once can affect your credit history, as multiple loan applications in short succession can make you look like a risky borrower. Comparing home loans from different lenders, assessing their features and benefits, and making one application to a preferred lender may help to improve your chances of success

Will I be paying two mortgages at once when I refinance?

No, given the way the loan and title transfer works, you will not have to pay two mortgages at the one time. You will make your last monthly repayment on loan number one and then the following month you will start paying off loan number two.