September 9, 2009
Jackie Pearson investigates the dos and don’ts for finding a home loan for an auctioned property.
If you are considering buying a property at auction, there are a few important facts you need to know about home loans.
The first step before you start bidding is to shop around for the best deals to secure a loan as this can save you thousands of dollars. And keeping within your budget will make a big difference to your repayments and the amount of interest you will pay over the life of the loan.
Get your mortgage approved
When you purchase a home at auction it is a cash transaction so you need your loan approved in advance. Speed up the application process by ensuring you meet all the lending criteria.
You will need to have at least 5 percent of the purchase price in genuine savings. Some lenders will also consider the amount of rent you pay.
All lenders will want proof your job is secure and that you could still afford the loan if there was a 1 or 2 percent rate increase.
If you meet the criteria your lender should grant formal approval for 90 days, giving you time to find the perfect property – and one you can afford.
The valuation is critical
Final mortgage approval will be subject to the lender’s valuation. It will indicate whether a home is listed for a fair price. Also check recent listings in the same area and investigate what comparable properties have sold for.
The lender’s valuation does three things: lets you know that the vendor’s price is fair; confirms the property is acceptable loan security (not dilapidated or run down); and determines your loan to valuation ratio or LVR.
For example, let’s say you get approved to borrow up to a maximum of $400,000. If you find a property for $600,000, you will need a $200,000 deposit, giving you an LVR of $400/$600 or 66 percent.
If you find a property for $450,000, you would need a $50,000 deposit. Then the LVR is 400/450 or 88 percent. This would still be acceptable to most lenders but you would need to pay lenders mortgage insurance.
Don’t bid too high
To receive final loan approval ensure the LVR is less than 90 percent and there is no increase to the loan amount. Bidding too high at an auction can get you into trouble. You will need to either come up with the extra cash or find a lender willing to loan you more.
Consider the consequences of bidding over your budget, particularly with interest rates expected to rise. For example, the total cost of your $400,000 loan on a $450,000 property over 25 years with an interest rate of 5.15 percent p.a. would be about $712,035 with about $2,373 of monthly repayments.
Let’s say you couldn’t control yourself and ended up bidding $500,000. Your LVR is now 450/500 or 90 percent.
Your monthly repayments shoot up to about $2,670 which means you would need to find an extra $300 per month and the total cost over 25 years would increase to about $801,040. Your $50,000 over-spend ends up costing an extra $89,000 and you would need to add the cost of LMI and factor in rising interest rates.
It pays to be prepared before you plan to attend auctions. Comparing home loans at RateCity will ensure you get a competitive deal. Have your finances in order before going through the application process and always stick to your budget when bidding.
If you don’t think you have the discipline, appoint someone with a cool head to bid on your behalf.
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