Six rules to capitalise in a slow property market

Six rules to capitalise in a slow property market

Buying property does not automatically guarantee financial success.

But make a sound purchase and a buyer stands to gain tens of thousands of dollars, even in a slow property market.

Getting advice can be helpful, but be sure to take the advice from someone who has been successful. The truth about property can often be hard to find as most of the “advice” comes from people trying to sell you property.

But it’s pretty simple, says finance guru Paul Clitheroe.

“If you live somewhere where the population is growing and there is a shortage of land and housing, start thinking about buying a property,” he told Money magazine.

“If you can add employment, schools, health services, leisure facilities, a decent coffee and good public transport, then I think that with a long-term view you would be silly not to buy in that area.”

Location, location, location

There’s a lot to be said for buying the worst house in the best street, or a rundown house in a great suburb, according to real estate expert Andrew Winter, host of Foxtel’s Selling Houses Australia.

“It’s harder to overcapitalise and even the smallest renovation will add value,” he said.

Go for growth

Do your research, listen to the experts and find an area with a bright future.

“Good roads and public transport push prices sky high. But you’ll have to take a punt to make it big; there’s no use buying when construction has already started. You need to buy in the planning phase and hope that road or rail links actually get built,” said Winter.

Find an ugly duckling

But you must be prepared to do the renovation work yourself, he adds: “The price of a “renovator” is set according to how much it will cost for a professional to do the job so if you can do some or all of the work you’re bound to come out in front.”

Take advantage

It’s all about knowing a good deal when you see it and taking advantage.

“One person’s loss is another person’s gain. Look for vendors who need a quick sale like repossession, divorce or deals that have fallen through,” said Winter.

“Keep your ear to the ground and be ready to grab a bargain.”

Limited supply

Buy a property with a restricted supply. An amazing view is always a good bet because we can’t make more beaches and rivers. The same rule applies for fine period architecture, said Melissa Opie, author of property guide, Find the Right Property, Buy at the Right Price.

“Buy properties in line with the dominant architectural style of their location. Period properties hold their value better than newer ones,” she writes.

It is more expensive to follow this rule, but it is low risk with stable long term growth, adds Winter. 

Get the right finance

One of the easiest ways to capitalise on your property over the long run is to limit the amount of interest paid on your home loan.  

For instance, for a home loan of $400,000 repaid over 25 years at a rate of 6 percent a borrower would have to fork out a whopping $373,000 in interest – and that’s after repaying the principal.

By choosing a home loan carefully a borrower could significantly reduce that amount, according to RateCity spokeswoman Michelle Hutchison.

“Just a few basis points difference between rates could add up to tens of thousands of dollars over the long term, so it’s worth comparing your mortgage,” she said.

“There is heaps of competition in the mortgage market at the moment and lenders are eager for your business so borrowers should be using this to their advantage to find long term savings.”

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Learn more about home loans

What is bridging finance?

A loan of shorter duration taken to buy a new property before a borrower sells an existing property, usually taken to cover the financial gap that occurs while buying a new property without first selling an older one.

Usually, these loans have higher interest rates and a shorter repayment duration.

What is a line of credit?

A line of credit, also known as a home equity loan, is a type of mortgage that allows you to borrow money using the equity in your property.

Equity is the value of your property, less any outstanding debt against it. For example, if you have a $500,000 property and a $300,000 mortgage against the property, then you have $200,000 equity. This is the portion of the property that you actually own.

This type of loan is a flexible mortgage that allows you to draw on funds when you need them, similar to a credit card.

What is equity? How can I use equity in my home loan?

Equity refers to the difference between what your property is worth and how much you owe on it. Essentially, it is the amount you have repaid on your home loan to date, although if your property has gone up in value it can sometimes be a lot more.

You can use the equity in your home loan to finance renovations on your existing property or as a deposit on an investment property. It can also be accessed for other investment opportunities or smaller purchases, such as a car or holiday, using a redraw facility.

Once you are over 65 you can even use the equity in your home loan as a source of income by taking out a reverse mortgage. This will let you access the equity in your loan in the form of regular payments which will be paid back to the bank following your death by selling your property. But like all financial products, it’s best to seek professional advice before you sign on the dotted line.

Mortgage Calculator, Property Value

An estimate of how much your desired property is worth. 

What is a loan-to-value ratio (LVR)?

A loan-to-value ratio (otherwise known as a Loan to Valuation Ratio or LVR), is a calculation lenders make to work out the value of your loan versus the value of your property, expressed as a percentage.   Lenders use this calculation to help assess your suitability for a home loan, and whether you need to pay lender’s mortgage insurance (LMI). As a general rule, most banks will require you to pay LMI if your loan-to-value ratio is 80 per cent or more.   LVR is worked out by dividing the loan amount by the value of the property. If you are looking for a quick ball-park estimate of LVR, the size of your deposit is a good indicator as it is directly proportionate to your LVR. For instance, a loan with an LVR of 80 per cent requires a deposit of 20 per cent, while a 90 per cent LVR requires 10 per cent down payment. 

LOAN AMOUNT / PROPERTY VALUE = LVR%

While this all sounds simple enough, it is worth doing a more accurate calculation of LVR before you commit to buying a place as there are some traps to be aware of. Firstly, the ‘loan amount’ is the price you paid for the property plus additional costs such as stamp duty and legal fees, minus your deposit amount. Secondly, the ‘property value’ is determined by your lender’s valuation of the property, not the price you paid for it, and sometimes these can differ so where possible, try and get your bank to evaluate the property before you put in an offer.

What is equity and home equity?

The percentage of a property effectively ‘owned’ by the borrower, equity is calculated by subtracting the amount currently owing on a mortgage from the property’s current value. As you pay back your mortgage’s principal, your home equity increases. Equity can be affected by changes in market value or improvements to your property.

What does pre-approval' mean?

Pre-approval for a home loan is an agreement between you and your lender that, subject to certain conditions, you will be able to borrow a set amount when you find the property you want to buy. This approach is useful if you are in the early stages of surveying the property market and need to know how much money you can spend to help guide your search.

It is also useful when you are heading into an auction and want to be able to bid with confidence. Once you have found the property you want to buy you will need to receive formal approval from your bank.

What is appraised value?

An estimation of a property’s value before beginning the mortgage approval process. An appraiser (or valuer) is an expert who estimates the value of a property. The lender generally selects the appraiser or valuer before sanctioning the loan.

What is an investment loan?

An investment loan is a home loan that is taken out to purchase a property purely for investment purposes. This means that the purchaser will not be living in the property but will instead rent it out or simply retain it for purposes of capital growth.

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 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.

How do I take out a low-deposit home loan?

If you want to take out a low-deposit home loan, it might be a good idea to consult a mortgage broker who can give you professional financial advice and organise the mortgage for you.

Another way to take out a low-deposit home loan is to do your own research with a comparison website like RateCity. Once you’ve identified your preferred mortgage, you can apply through RateCity or go direct to the lender.

Mortgage Calculator, Loan Term

How long you wish to take to pay off your loan. 

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.