10 Tips for First Time Property Buyers

Buying a property for the first time can be scary, but as with anything else in life, the right preparation brings about good results. Remember, the right property for you is one you want and can afford.

Tips 1: Ask yourself if you’re ready?

Possession of a property is long term commitment; you need to decide whether you’re financially ready to buy a property. I suggest first-time buyers ask themselves some simple questions:

• Do you have a steady job and income?
• Do you plan on remaining in the same area for the next few years?
• Do you have enough money set aside for your down payment and closing costs?
• Do you have an emergency fund? Do you live within your means, avoiding credit card and other debt?

Another consideration is whether you’re mentally prepared for the responsibility?

A first-time property buyer is mostly for own used, they’ve got to get used to budgeting a little differently in terms of monthly repayment as compared to rental property. They also need to considered whether the property is a new property (from developer) or a sub sale (from previous owner), there are big different between this, experienced property owners know this. First time buyers don’t. For instance, new property which is under construction normally will take longer time for vacant possession compared to sub sale. During the waiting period, if you have already taken mortgage loan to finance your purchased, you need to budge some fund for monthly mortgage interest repayment.

Tips 2: Find out what you can afford.

To be a property owner is the right mind set, but you need to determine how much the cost of property you can afford. Probably the best way to do that is to get pre-qualified for a mortgage loan. In fact, financial company won’t entertain someone who is not pre-qualified for the mortgage loan.

On normal circumstances, your monthly mortgage repayment should not exceed 1/3 of your monthly gross income; some financial company does grant your monthly repayment 40% out of your gross monthly income depends on package and tenure of your mortgage loan.

Remember, the bigger the down payment, the less you’re borrowing and shorten your loan tenure, and the less expensive your mortgage will be in the long run.

Tips 3: Find out what’s available.

Now it’s time to decide where you want to live and research what types of property are available – single storey, double storey, apartment, condos, town house, etc. You can get an idea by looking at classified ads in news paper or online web listing. Do some researches before you call a real estate agent. In searching for an agent, find one who makes you feel comfortable and more importantly, one who trustable and listens to you.

Tips 4: Define your property and find it.

Now, you can narrow down the features you want in a property. Do you want an energy-efficient model? Do you want two stories, big master room, attached bathroom or a large back yard? You may not find a unit with every feature that you want, but this will help you to define what’s most important for you.When you’ve found a house that has your most important features, is in the right neighborhood and is affordable, you’re ready to buy.

Tips 5: Choose a neighborhood.

Once you have researched and identified your needs, you can look at specific neighborhoods. Cruise by at night time or weekend to see whether you get a “vibe” that it’s a safe neighborhood. If you have children, you’ll want to check out whether any schools nearby and its quality? You may want to check out what types of facilities and amenities are nearby, e.g. Banks, Clinics, Shops & Petrol Station. You can do much of this independently, but you can also ask your agent to help you find sources of information about such things.

Tips 6: Do a property inspection.

I would recommend that an offer should be contingent on a property inspection. As a new property buyer, you might lack of experience on this, if possible, try bring someone who known this better. If you’re unsatisfied with the inspection results, you may ask the seller to pay for certain repairs or to lower down the price or you may decide to walk away from the deal.

A property inspection should uncover defects that could become very costly to repair after (buyers) assume ownership. It will also uncover safety issues, sewerage issues, roof problems, flood problem, terminate, etc.

Tips 7: Negotiation.

Once you’ve found the property you wanted, you should make an offer that’s lower than the seller’s asking price. The seller expects this and will likely make a counter-offer. You have to decide before you start negotiating what your make or break point is, and stick to it. Just be reasonable. Don’t expect the seller to give you a 50 percent discount on a good property.

Tips 8: Closing.

After closing the deal, it is necessary for each party to have legislation documentation for the sale and purchase. Each party must be present at the legislation signing. It’s a good idea to engage your own solicitor to review the documents to be sure that your best interests are represented in the transaction. You’ll foot the bill for your own solicitor.

Tips 9: Shop around for property owners insurance.

Your mortgage lender will require you to carry property owners insurance. Standard property owners insurance comes with basic coverage such as fire, storm, earth quake and etc. It’s a good idea to search for a policy that meets your needs for protection and safety.

Tips 10: Move in.

You’ve done all the homework and bought a great property. Enjoy it.

Types of Mortgage

When you're choosing a home loan, there are two big decisions you need to make:

• Whether to take a fixed interest rate, a floating rate, or a mix of both.
• How you want to make repayments: through a table mortgage, revolving credit mortgage, reducing mortgage or an interest-only loan.

Choice of interest rates

Multi Tier Fixed Interest Rate Loans

The interest rate you pay is fixed for a period from six months to five years or even more depends on the package of multi-tier you select. At the end of the term, a fixed interest loan automatically moves to a floating rate unless you negotiate another fixed term.

Pros:

• You know exactly how much each repayment will be over the term.
• Rates are often lower than floating rates, as lenders compete with fixed rate “specials”. A one percentage point difference in interest rates can save you thousands of dollars over just a year or two.
• You can lock in lower rates if market interest rates are rising.

Cons:

• Fixed rates often have limits on how much you can lift repayments or make lump sum payments without paying charges.
• If you take a long term, there is a risk floating rates may drop below your fixed rate.

Capped rates are a variation where the interest rate cannot rise, but will drop if floating rates drop below the capped rate. Capped Rates normally defined by central bank.

Floating Rate (sometimes called variable rate)

Lenders of floating rate loans will lift or lower the interest rate as interest rates in the wider market change. This means your repayments may go up or down.

Pros:

• You can usually lift your repayments or make lump sum repayments without penalty.
• It is easier to consolidate other costlier debt into floating rate loans by borrowing more.

Cons:

• Floating rates might higher than fixed rates if floating rate increase.
• When rates go up the repayments also go up, putting a squeeze on your budget.

A Mix of both

It is possible to split a loan between fixed and floating rates. This lets you make extra repayments without charge on the floating rate portion while you get lower rates on the fixed portion.

How you split your loan is important and can be worked out by considering the total extra cash you’re likely to get – from work bonuses or the like – over the period you’ve set the fixed rate for. This is the amount you could put on a floating rate.

When the fixed rate part of your loan comes up for renewal, if you’ve paid off some or all of the floating part, you’ll need to repeat the exercise for the next year or two.

Ways of Making Repayments

Term Loan

This is the most common type of home loan. You can choose a term up to 30 years with most lenders. Most of your early repayments go to pay interest, while most of the later payments go to pay off the principal (the lump sum you borrowed). You can take a table loan with a fixed rate of interest or a floating rate.

Application fees for term loans range from nothing to over $1,000. Most lenders which do have a fee, charge around $200 to $400. This is often negotiable.

Pros:

• Term loans provide the discipline of regular payments and a set date when they will be paid off.
• They provide the certainty of knowing what payments will be (unless you have a floating rate, in which case repayment amounts can change).

Cons:

• Fixed regular payments might be difficult to make for people with irregular income.

Revolving Credit Loan (sometimes called line of credit)

Revolving credit loans work like a large overdraft. Your pay goes straight into the account. Bills are paid out of the account only when they are due. By keeping the loan as low as you can at any time, you pay less interest because lenders calculate interest daily.

You can make lump sum repayments and re-draw money up to your limit. Some revolving credit mortgages gradually reduce the credit limit to help you pay off the mortgage.

Application fees on revolving credit home loans can be up to $500. There can be a fee for the day-to-day banking transactions you do through the account.

Pros:

• If you’re well organised, you can pay off the mortgage faster.
• This suits people with uneven income since there are no fixed repayments.
• Putting surplus funds into this account rather than a separate savings account will give bigger interest savings and also avoids the tax on the savings account interest.

Cons:

• You need discipline. It can be tempting to spend up to your credit limit and stay in debt longer.

Reducing loan

Reducing or “straight line” mortgages repay the same amount of principal with each repayment, but a reducing amount of interest each time. These are relatively rare in New Zealand. Payments start high, but reduce (in a straight line) over time. Fees are similar to table loans.

Pros:

• You pay less interest overall than with a table loan because early payments include a higher repayment of principal.
• These may suit borrowers who expect their income to drop – for example, if one partner plans to give up work in a few years’ time.

Cons:

• If you can afford higher payments, you would be better to take a table loan with payments high for the whole term, thus paying less interest.

Interest-only

You don’t repay the money you’ve borrowed until an agreed time. Some borrowers take an interest-only loan for a year or two and then switch to a table loan; the normal table loan application fees apply.

Pros:

• You have more cash for other purposes, such as renovations.

Cons:

• You still owe the full amount at the end of the term.

Partial Prepayment Of The Outstanding Loan

Many borrowers find it useful to shorten the loan tenure by making partial prepayments with surplus savings or annual bonus. Partial prepayments can be in any amount. However, some financial institutions may impose restrictions on the amount to be pre-paid while others may impose a penalty. It is extremely effective in reducing the interest charges you would have to pay if prepayments are made during the early years.

Partial Prepayment

Everyone who has signup the mortgage loan for their house or property would definitely want to settle or finish off their repayment as soon as possible. They can shorten the repayment period and save a lot of mortgage interest of the total payments by making Partial Prepayment on the principal. However, if the Partial Prepayment are done correctly, then you can save the mortgage interest and shorten your repayment period depends on how much of Partial Prepayment you have done. If you have done the Partial Prepayment wrongly, you can only save some of your mortgage interest and only cut short some repayment period. For worse case, you will never save a single cent of your mortgage interest and never cut short any of your repayment periods. Please refer to the samples illustrated below for better understanding of wrongly done Partial Prepayment.

Scenario 1

Assumed that Mr. John Chong has signed up a mortgage loan for an amount of RM100,000.00 for 25 years repayment with 7% interest rate monthly compounding, the monthly payment is RM706.78. Mr. John Chong has deposited RM20,000.00 as Partial Prepayment together with his first repayment. Most of us assumed that the extra RM20,000.00 deposited will be as Partial Prepayment for principal reduction. In fact, it never happen such way, the extra RM20,000.00 will be treated as Advance Payment for the monthly repayment by the bank or mortgage lender if Mr. John Chong never provide any Partial Prepayment notice to the bank or mortgage lender upon the deposited of the RM20,000.00. Any amount that "park in" as Advance Payment will have no effect to the principal and never save a single cent nor shorten any repayment period.

The Advance Payment of RM20,000.00 will "park" there until repayment No 271 where his Advance Payment has enough to covered the rest of repayment. If efficient, bank will noticed Mr. John Chong that he can stop serving the repayment as his Advance Payment has enough to serve the rest of repayment.

Table A below illustrated on why Mr. John Chong never benefit from the Partial Prepayment that he has done.

Summary, Mr. John Chong are never save single cent of interest on this case as his deposited RM20,000.00 will be used as monthly repayment start from repayment No 271 until the end of loan tenure.

Scenario 2

If Mr. John Chong has provided a Partial Prepayment notice to the bank or mortgage lender upon deposited of his RM20,000.00, there will be a Partial Prepayment on the principal and save some mortgage interest and shorten some of his repayment period.

Table B below illustrated on how much of interest and loan tenure that Mr. John Chong has save if compared to case happened in Scenario 1.

* Mr John Chong has notified the bank for the RM20,000.00 Partial Prepayment and it has reduced the principal. ** By default, the extra amount will accumulated as Advance Payment and will never deduct from principal if Mr. John Chong never notified the bank for Partial Prepayment. The Advance Payment will keep on accumulated until enough to covered the rest of repayment where similar to Scenario 1.Summary, Mr. John Chong will save around 20% of mortgage interest and loan tenure along serving his loan by notified the bank of his deposited of RM20,000.00 as Partial Prepayment.

Scenario 3

To effectively and correctly perform the Partial Prepayment with maximum save around 55% on the mortgage interest and shorten the repayment period. Mr. John Chong need to request to the bank or mortgage lender to revised his monthly repayment amount after he has deposited the RM20,000.00. As refer to Table 2, Mr. John Chong monthly repayment is RM706.78. After deposited the RM20,000.00 as Partial Prepayment, Mr. John Chong monthly repayment should be reduced to RM565.25, a surplus of RM141.53 from the current repayment. Some of us might assume that the surplus amount is for Partial Prepayment to the principal amount. The answer is NO, the surplus will (again) treat as Advance Payment by the bank or mortgage lender and will be "park in" without any effect to the principal amount. For this case, Mr. John Chong can either keep the surplus amount into his saving account or noticed the bank or mortgage lender that the surplus amount is for Partial Prepayment. Check with the bank or mortgage lender for the condition apply as some bank may have some term and condition for Partial Prepayment, such as minimum of a thousand and its multiply of thousand on the subsequence.

Table C below illustrated on the different of monthly repayment that Mr. John Chong has save if compared to case happened in Scenario 2.Mr. John Chong has notified the bank for the RM20,000.00 Partial Prepayment and it has reduced the principal.

** New monthly repayment after Mr. John Chong requested the bank to revised the repayment.
Summary, as referred to Table C, the different between payment No 1 and No 2 is RM141.53, if permitted by bank without any term and condition, this amount must directly deposited as Partial Prepayment and notified the bank to reduced the loan principal. If the routine are done every month, the maximum saving of mortgage interest and loan tenure will be achieved.

** TIP ** My personal experience, in order for your Partial Prepayment to work 100% effectively, I would suggest you to write in to your bank or mortgage lender to request for revised of your monthly repayment every time when you deposited an amount of money that equivalent to 10% of your principal amount. Made it as a habit, don't spend the balance of month repayment that save from the revised, used it to top up as Partial Prepayment to your monthly repayment, it will be finishing your mortgage loan faster beyond what you have expected. Check with your bank and try out!!