How to Buy a House in Australia

Becoming a homeowner may seem daunting when you take into account everything you need to do to make it a reality. The experience requires discipline and patience, but following a step-by-step guide on how to buy a house should demystify the entire process. You may hopefully even have some fun along the way.

1. Decide to buy

Making a decision to purchase property means you feel ready to take on a major financial commitment, probably for the first time. Home loans in Australia last for periods of between 20 and 30 years, which can seem like an eternity to someone who is younger or who has never taken on long-term debt.

Getting into the property market isn’t a decision you can make in isolation either, because it involves every aspect of your life. If you have a partner, for example, you’ll need to decide whether it’s something you’re both ready to commit to — emotionally and financially.

You’ll also need to consider whether you want to have a family and what effect that may have on your future finances. If you can only rely on one income for a period of time it may affect your ability to make the mortgage payments that you qualified for using two incomes.

Taking on a mortgage may also changing your standard of living, in the short term at least. This is especially true if you’re used to renting in a nice part of the city for a cost far less than your future mortgage repayments.

In the long-term, homeownership offers the potential for financial growth and an expanded lifestyle, you just have to consider whether now is the right time to buy.

2. Get your finances in order

When looking at your financial readiness for homeownership, the first thing you’ll need to check is your potential to withstand the things that could go wrong over the course of a 20-year mortgage, with as much certainty as possible.

Home loans have two major components; the house deposit (a percentage of the property’s cost payable up front) and the remainder of the amount borrowed — or principal — payable over an agreed-upon timeframe with the lender, usually between 20 and 30 years.

Being ready financially means you’ve saved up most or all of the deposit, which is usually 20% of the property’s value, but sometimes less. It also means you feel confident that you’ll be able to make regular repayments over fortnightly or monthly periods for the remainder of the amount.

A checklist of your finances should include:

Your regular income from your principal mode of employment.
Any other income you derive regularly from side projects, casual work or investments.
Your monthly expenses.

Start with monthly income, but remember to only use the after-tax amount. Once you’ve added anything else you may get regularly from investments, assets or other work, you’ll need to determine your expenditure. Though, if you are currently renting, exclude that amount because that’s money that would otherwise be going towards the mortgage repayments.

You should also start a budget to see how much you can afford to pay off when it comes to mortgage repayments and how much this leaves you at the end of every month.

» MORE: Home loan eligibility requirements

3. See how much you can borrow

Once you know how much you can comfortably repay, you’ll want to work out how much you can borrow.

This amount will be different among lenders, all of whom should have online borrowing calculators. So, you can at least get a ballpark figure by typing in a few variables. You could even start off with the bank you already have an account with.

What this example doesn’t take into account is individual credit history, any debt you may have, or rising interest rates. But when you apply to a lender, they will consider these factors.

Talk to a mortgage broker or financial planner to work out the right amount for you to borrow.

» MORE: How to increase your borrowing capacity

4. Make a plan for the deposit and look for grants

Lenders in Australia generally require a 20% deposit, without which you would be liable for lenders mortgage insurance. Once you have an idea of your borrowing capacity, saving for a deposit should be your number one priority.

Saving for a deposit provides would-be lenders with evidence of financial discipline and reduces the amount you have to borrow. But saving up 20% of a home at today’s prices can be extremely hard. Even with a partner it could take years. So, this requirement undoubtedly puts off many would-be homeowners.

Thankfully, there are ways around this. For example, buying a home with friends, finding a guarantor or looking for types of loans that accept smaller deposits.

You can also apply for a range of incentives offered by federal and state governments. For example, the First Home Owners Grant may at least go some way to covering the cost of the deposit. Visit your state government’s official website to see exactly what’s available.

Ask a mortgage broker or a financial adviser about your deposit options. Look at ways to save for a full deposit faster if that remains your only option.

5. Choose the right mortgage for you

Once you know what you can borrow and you’ve got your deposit together, it’s time to find a mortgage lender.

You may have banked with one of the Big Four banks your entire life and have family connections there. So, checking out its offerings is a logical starting point. Still, you shouldn’t feel wedded to your current bank if you can find a better deal elsewhere.

Talking to a mortgage broker may be a good first step. They often represent several lenders and can do research on your behalf. A mortgage broker should also have an opinion of what type of loan best suits your situation. Without the help of experts, it can be overwhelming to decide — especially given the number of different loans available.

When comparing mortgage options, the interest rate is obviously important. Look for a lower interest rate, usually on offer for at least the first 12 months, but often longer. Also check for things such as zero establishment fees and ways to use frequent flyer points, if possible. Consider features such as redraw and offset facilities.

6. Get pre-approval

Once you’ve settled on a lender and found the mortgage that suits you best, you’ll need mortgage pre-approval. This is where you go from guessing how much you can borrow to knowing what a real lender will offer. If you satisfy the lending criteria, this shouldn’t be a problem, and pre-approval lasts usually between 3 to 6 months.

Pre-approval differs between lenders but it typically means you have satisfied the preliminary qualification criteria for borrowing a mortgage. So, you’re good to go ahead and make an offer or bid at an auction up to the approved amount. Full pre-approval usually requires a valuation to ensure the buyer is not overpaying for the property.

Getting mortgage pre-approval does not commit you to a particular loan — but it gives you a reasonable price range to work with.

If you struggle to find a suitable property in the pre-approval period, you can contact your lender for an extension. This should not be a problem if your circumstances haven’t changed, so you won’t have to re-apply for the loan.

» MORE: Types of mortgage lenders in Australia

7. Start shopping for a house

Once you’re pre-approved, it’s time to get out there and start looking. At this stage you’ll probably have a list of prerequisites regarding features and location. Knowing what you want is important. Just remember, it’s unlikely you’ll get everything you want in a single home — particularly if it’s your first.

Compile a must-have list for things such as size, layout, and the extent of renovation required. Consider features you can live without, such as nice fittings and outdoor areas.

Once you’ve settled on a location, start looking to get an idea of what’s in your price range. Check listings online and in local newspapers, and visit local real estate agent websites.

You can then go to open inspections or ask agents to show you properties while minding your borrowing capacity. Don’t waste your time looking at $500,000 properties if you’ve only been pre-approved for a $400,000 loan.

8. Schedule a building and pest inspection

Once you’ve found a property that ticks your boxes, you may need an appraisal and a building and pest inspection. Whether or not you need one depends on a range of factors. For example, when the last time one was conducted on the property and how up-to-date it is. There may already be a report contained in the title search, but not always, so check with your solicitor first.

Buying an apartment is generally easier. There should be regular strata report about the building’s condition and what repairs are required. For example, the common areas may require $5000 from every unit owner for things such as painting. You can factor these costs into negotiations with the seller.

If you bid at auction, you can find information on the state of the property. It should be readily available, often for a search fee.

There are times, however, when getting an inspection is essential for peace-of-mind. If it uncovers issues with structure, wiring, or rising damp, for example, it may save you a fortune down the track. It is also worth getting a pest inspection to for termite or other insect activity. These pests could cause costly, long-term damage to the walls or ceilings.

If an inspection uncovers anything likely to cost you a lot to fix, you can always negotiate with the seller. Or, just look for another place if it isn’t worth the money, time, and aggravation to fix.

9. Make an offer or attend an auction

Once you’re satisfied with the property and your finances are in order, it’s time to make an offer or attend an auction.

When negotiating, you need to know exactly what your spending limit. This will both help you avoid any potential embarrassment and allow you to be flexible so you don’t lose the property you want.

As a home buyer, you can make a conditional offer subject to bank valuation, financial approval and inspections. Or, an unconditional one, where the above prerequisites have been met. As a first home buyer, however, it is recommended that you get the above points taken care of first.

If you’re bidding at auction, it might be worth attending a few beforehand. This will help you get familiar with the process, and avoid getting swept up in the excitement and going over your limit. Prior to auction, you should have checked out the property on, hopefully, a few occasions. But you also need to be wary of the price expectations given by agents. These quotes are often much lower than the real value just to entice more would-be bidders. Check out the prices of recent sales to make sure you don’t waste your time bidding for something out of your price range.

Auctions do not have a cooling off period. This is unlike private treaties, where you can usually get out of your contract if something unforeseen happens and you’ll get most of your deposit back. So, you need to be sure that you want the property and know exactly how much you can bid beforehand. Otherwise, you could lose your deposit if you have a change of heart.

Expect to pay between 5-10% of the winning bid as a deposit at the conclusion of the auction. Though, this shouldn’t be an issue because your lender will have given you pre-approval to bid up to a certain amount so you’re armed with a deposit bond.

10. Exchange contracts and pay the deposit

Once you’ve agreed on a price with the seller or successfully bid at auction, you’re tantalisingly close to obtaining your property.

The final step before buying is to get a copy of the contract. You’ll want to confirm there are no hidden surprises to address before you exchange. So, have your solicitor to check it to ensure everything is as agreed.

Once the contract looks fine, you can now go ahead with the conveyancing, where the property title is transferred from the seller to you. Your solicitor should be well acquainted with the procedure so no legal complications arise regarding who actually owns the property and whether there is any debt associated. Your solicitor will also advise you of the stamp duty payable on the property, which becomes due on the exchange of contracts.

You can then sign the contract of sale with the seller and pay your deposit. Then, wait until the agreed-upon settlement date, usually six weeks after contracts are exchanged, but it varies depending on what you agree on.

Finally, it is a good idea to have your home insurance in place at the time of exchange. Some lenders may require this as a prerequisite to lending you the money in the first place.

11. Settle on the contract and move in

Settlement on the property is the date in which you’ll officially take ownership. At this stage, the title is transferred into your name, the remainder of the agreed-upon price is transferred from your solicitor to the seller, and keys are handed over.

You are now the proud owner of your property and your mortgage repayments begin.

» MORE: How long will it take to pay off my mortgage?

12. Re-evaluate your mortgage on a regular basis

You may not be able to do much with your mortgage for the first 12 months — but your journey is just beginning. Your contract is for 20 to 30 years, and you can always look for products that give you a financial advantage.

The market is always full of new deals for both new and existing mortgages. There is no need to feel wedded to your existing lender, even if your parents or even grandparents used them. Instead, you should be as alert as possible to better offers and refinancing deals when they become available.