The First Home Buyer who (almost) couldn’t
While every client we sit in front of is truly unique, there are similarities we see in their situations.
In this example, we were working with a client who was a young professional in her late 20’s with her scenario as follows.
- Paying rent of $450 per week, living near the city
- Earning a healthy income of $90,000 p.a
- Has an active social life, which involves brunches on the weekend with friends and a few dinners out during the week
…but she was struggling to save towards a deposit. She was stuck in the ‘rental trap’.
Many of her friends were starting to buy their own homes, while some were getting into the market by purchasing an investment property… but she was being left behind.
- How to save for a deposit while still renting?
- Rising prices in the Sydney market
- Will a home loan compromise her lifestyle and mean cutting back on having an enjoyable time with friends?
- Set a budget in place: we measured what was coming in (i.e. her income) and what was going out (i.e. expenses)
- A monthly budget check-in was agreed upon and she now became accountable for her savings target
- As for her home loan options, we worked out how much she could borrow, how much she could purchase for, and budgeted for all the additional costs (such as stamp duty and legal costs).
- We then discussed options to fast-track her purchase, which included:
- A cash gift from her parents; or
- A security guarantee using her parents’ property; or
- A servicing guarantee which eliminated the need for Lenders Mortgage Insurance; or
- Using her rental payments as genuine savings
Once she was educated on her options, this gave her the confidence to start looking at properties within her price range and to start negotiating with real estate agents
- Within six months, the client had gone from being stuck in the rental trap to now owning her own property and learning how to pay this debt down
- She has also learnt the importance of keeping to her budget, using an offset account, and becoming empowered with her finances
When it comes to buying your first home, you have two options:
- Purchase your own home: buy your first property and you have a mortgage
- Purchase as a ‘rentvestor’: you continue to rent where you are and purchase an investment property in an affordable area.
The term ‘rentvestor’ was coined and trademarked by LJ Hooker as one of the key trends for millennials (i.e. under 30’s) for the buyer who loves their lifestyle of renting close work or the city and doesn’t want to relocate – but knows the importance of getting into the property market. Given they are priced out of their local area or the suburb they want to live in, an entry point into the investment property market is to buy within their budget.
This particular client was aged 25 and was renting near Cronulla and knew he needed to get into the market, but was priced out of this area.
- Wanted to buy in the area by his 30th birthday.
- Moderate income of $55,000
- Paying rent of $250 per week
- Savings of $30,000
- We put his budget under a microscope and looked at ways he could add a bit more to his savings
- We then worked out a strategy for him to invest using an investment property Buyers Agent. This focussed on two key goals:
- Cash flow: how does he purchase a property which is neutrally or positively geared?
- Capital growth: by trusting a Buyers Agent to identify an area which was going to increase over the next five-year period, he would ensure he would have equity to draw out for his own purchase.
- Apart from becoming a confident property investor, he has now also educated his friends on how they can get their foot in the door and not be intimidated about buying investment properties.
- Within two months, he had gone from simply ‘renting without a plan’ to having his first investment property under his belt
- He contributes regularly to his offset account, which is building his deposit for his first home purchase when he turns 30
- His budget provides ‘play money’, which is his allocation for holidays, personal expenses, and weekend socialising
- He has a strategy in place that will enable him to keep purchasing an investment property each year until he turns thirty, using the equity he has in his existing investment property/ies.
Why Isn’t Everyone Doing This?
- It takes commitment to achieve returns over the longer term. Some people want short-term gains rather than long-term rewards
- You need to have a strategy: simply saying “I want to buy an investment property” is not a strategy – that’s a goal. How long do you want to hold this for? When you will expect to sell this?
- They don’t trust experts: having an experienced Buyers Agent on your side will ensure you make the right purchase, rather than listening to friends and family who have never purchased investment properties but will happily give advice on where are the ‘hottest’ suburbs to buy.
- They don’t realise how easy it can actually be: they have gone to their bank, which said they don’t qualify for a loan. Now they feel dejected and throw their hands up in the air. It takes being proactive to seek out the answers you want and not giving up until you get the outcome you want.
The Casual Worker who was told they couldn’t get a loan
We come across casual workers who have repeatedly been told that they do not qualify for a loan. Let us show you how we busted this myth with a client who had been causally employed for a number of years.
Our client was employed as a casual teacher:
- With strong demand, she was getting regular work and had been a casual teacher for over a year
- Being casual, it also meant her day rate was higher than if she was permanent.
- She had a great savings balance of $50,000 and was saving extra with her goal to buy her own place
- She was renting and wanted to have her own home.
- We used her previous tax return to confirm the consistency of her casual employment
- We worked out her borrowing capacity and which lenders we could apply to using their casual employment policy. There are a range of lenders and products available for casual workers, and while their policies change occasionally, they will generally look at your income, employment history, and credit file when reviewing your loan application.
- We focused on her budget to ensure she could afford the loan if she worked less hours
- She met with a financial planner to ensure she had sufficient personal protection to cover her mortgage in the event she could not work.
- She successfully purchased her own home and has been paying this down regularly
- She has since purchased an investment property using the equity in her home and plans to buy her second investment property.
The Self-Employed Borrowers
Our self-employed and contractor clients seem to get the run around from their banks when they are trying to get a loan to buy their own home. Quite often, they get bounced around from bank to bank only to be told ‘no’ – or they need to go down the low doc path, which involves higher rates and fees.
There is a distinction between a contractor and being self-employed, so this is reviewed on a case-by-case basis.
This example looks at a couple who runs their own successful café, but had to jump through hoops when they went to the bank they already do all their business banking with.
They have been running a thriving café in the suburbs for the last three years and were now ready to buy their own home. The business was performing well and they felt confident to now take on a mortgage.
- We contacted their accountant and worked together to discuss the business’s financials. It helped that their financial information was up-to-date and had been lodged with the Australian Tax Office
- We explained to the clients how they would be assessed by the banks for their borrowing capacity, given some lenders are stronger in this space then others
- We worked through their ‘add backs’:
- Interest expenses
- Excess superannuation contributions
- Relevant allowances
- Non recurring expenses
- Non cash expenses
- We ensured their cash flow could weather any storms with their business and they were not over-committing themselves.
- Working collaboratively with their accountant ensured the clients were in the right loan structure
- They reviewed their business expenses, which uncovered additional savings
- They bought their own home and could not have been more thrilled.
- In the case of self-employed clients we have encountered, they may have business loans, unpaid tax debts with the ATO, or poor repayment performance on their existing home loan. There is no reason why any of these issues should hold a client back from reviewing their situation and in fact these are the cases where intervention and consolidation are most needed. We understand that business owners are sometimes focused on running their day-to-day business operations rather than having the time to review all their finances
- We can help business owners streamline their finances by having an accountant take an in-depth review of the business’s financial performance to see how we can improve or continue to build the success of their business.
Refinancing to save
Many clients experience the excitement of buying their own home and then get into the habit of simply paying their mortgage down monthly. There is nothing wrong with this, but the mentality of ‘set and forget’ is where banks tend to make money from complacent customers. When was the last time your bank called to let you know you could actually pay down your home loan faster, or that you were entitled to a lower interest rate?
This example looks at clients who were guilty of ‘setting and forgetting’ their mortgage.
- The couple with their two children moved into their dream family home four years ago
- They had their 20% deposit and went back to the bank they had used for the last 8 years
- Since buying their home, they made their monthly repayments while continuing to maintain a balanced lifestyle of regular holidays, paying school fees, and a recent new car purchase.
- After a chance conversation with a colleague at work, the client realised their interest rate was 0.75% higher than the colleague’s rate
- On their $600,000 home loan, this meant the difference was $265 per month between their current repayment and the lower interest rate
- The client also realised they were paying an annual fee and monthly fees for their transaction accounts as well as a credit card fee.
- Not only did the client and her husband switch to a more competitive home loan, they received a sharper interest rate as well
- They now saved over $300 per month, which works out to be $3,600 for the first year alone
- We structured their home loan to use the benefits of an offset account more effectively, which in turn saves even more interest in repayments per month
- We changed their repayments to fortnightly and increased each repayment to assist them pay down their mortgage faster
- With an estimated saving of $3,600 they are on track to pay down their home loan in 20 years rather than the standard 30-year term, which will significantly save on interest paid over the life of the loan.
To learn how you could save more each month by having the right structure in place for your home loan, please get in touch. We would be happy to help you.
Using Equity in their Home to Invest in Property
The concept of using equity to purchase an investment property can enable clients to launch their plans to build a successful property portfolio – whether it’s to buy one additional property or purchase several more.
We have taken a number of clients on this journey and now they all have thriving investment property portfolios which will lead to financial freedom in the long term.
Darren and Ashley were great clients who had the right idea – pay down their mortgage as fast as possible. In doing so, they had equity in their home to assist with purchasing their first investment property. They realised they wanted to build a portfolio, which would assist with their retirement in twenty years’ time and also build wealth along the way.
The Example of Using Equity
- Their home is worth $850,000
- Their current home loan balance is $350,000
As investors, they accessed up to 80% of the equity in their home, less their existing loan, to assist with purchasing an investment property. Therefore 80% of $850,000 = $650,000
Total available equity = $650,000 – $350,000 = $300,000
They purchased an investment property for $400,000 and also needed to budget $20,000 for additional costs such as stamp duty, legal fees and disbursements. Their total costs are now $420,000.
Using the equity in their home, they funded the 20% deposit and costs which was $100,000 (i.e. 20% of $400,000 and $20,000 for costs).
They also had a separate loan for the 80% lend against the investment property, which was $320,000.
The rental income for this investment property serviced the 80% loan of $320,000 and the loan of $100,000.
As Darren and Ashley gained confidence, they repeated the process and have now purchased four investment properties – all funded from the equity in their own home. Importantly, they have also protected themselves from over leveraging their properties’ equity by continuing to pay down their primary mortgage.
If you would like to know more about using the available equity in your own home or in your investment property/ies to build an investment property portfolio, let us show you how this is achievable.