Home Loan Process & Information
From contract to settlement:
Congratulations, you have purchased a new home! Now you can prepare for the big move. But besides packing, what else needs to be done between signing the contract and settlement?
Most contracts will specify that the buyer is responsible for the property within this time, so you should immediately organize building insurance to cover the purchased property.
Next, you will need to contact your bank or financial institution to arrange the finance detailed in your contract. You will also need to pay the deposit to the agent's Trust Account after the Ôcooling off' period has expired.
Also, choose a conveyancer, a professional who can complete all the legal paperwork for transacting the property. Give your real estate agent the details of your conveyancer and immediately notify your conveyancer when you have met the conditions of your contract.
About a week before settlement, you will receive a settlement statement from your conveyancer detailing the purchase price, deposit paid, rates and tax adjustments. By the last working day before settlement, ensure you have paid the amount detailed on your settlement statement so that settlement is not delayed.
Also within this last week, arrange for gas, electricity and telephone utilities to be activated for your purchased property. You can also request final readings for the premises that you are vacating whilst organising this.
By then, you should have packed and cleaned your old place and be ready to move into the new one. Your agent will contact you once settlement has been finalized to give you the keys to your new home.
What is Positive Gearing:
This is simply borrowing to buy a property or shares or any investment product, where the returns (eg rent for a property or dividends from shares) outweigh the costs. Low priced properties still can command pretty high rents. People who own these properties don't have tax benefits but have income and can expect capital gains over the years but ican be smaller because they're often in less sought after areas. However, with a positive income position, you can go out and borrow for another property.
I know people who collect what are called "penny dreadfuls", which over time can come good. Landlords in inner-city precints in Sydney and Melbourne over the past 20 years could support this story.
Positive Cashflow Properties:
Some properties on first glance are negatively geared but after ALL the tax deductions are taken into account, the property gives the owner a positive cash flow. By using someone called a Quantity Surveyor, a landlord can be surprised about the tax deductions related to depreciating fixtures, fittings, furniture, etc, that might be in a rental property.These are called on-paper deductions. Generally speaking, properties built after 1985 can give the greatest number of dedutions but whether you can make it ultimately cash flow positive will also rest on your marginal tax rate, and what rent you can extract out of your property.
The experts who play this game often go to quantity surveyors who run their eyes over the properties and give a list of things that can be depreciated. I'm not talking about only new assets in the rented property. All assets have an effective life for the tax office and this determines what you can claim.
These vary with the assets. For example, blinds 'live' for 20 years while an electric heater has only half that at 10 years. Washing machines live for 6.66 years but a refrigerator can double that at 13.33 years.
The tax office can play hardball and have knocked back things such as built-in cupboards, roller door shutters and security doors.
There are some items in rented homes, especially holiday rented homes, such as crockery, cutlery and bedding which if under $300 can be clamed in the first year, in total.
For more information
If this has whetted your appetite then you must realise that this is a rewarding play you have to do in company with the tax office. Go to www.ato.gov.au and you can access a document, predictably called Rental Properties, which answers many of the questions you should ask when thinking about being a landlord or property investor, which I think sounds nice!
Smart debt/dumb debt:
The old Scottish warning: "Neither a borrower nor a lender be" needs to be critically analysed in the modern context.
- Buying a first home at a good price and paying it off quickly and not having to pay capital gains tax is smart debt and smart borrowing
- Excessive use of a credit card and always being late with repayments is dumb debt
- Buying an investment property, which is positively geared, is smart debt
- Buying an investment property or shares negatively geared CAN be smart debt
Borrowing for your principle property:
Your home where you live is not targeted for capital gains tax and so money experts suggest- Paying off your home quickly by making bigger payments
- Paying off home off quicker by making weekly payments
- Parking your wage in your home loan account, with freedom to withdraw money as you need it
The simple plan:
Many people have a simple retirement plan to pay off the house, build up the super and purchase an investment property. It might not suit everyone but its not a bad plan. The investment property is often bought using negative gearing.What is negative gearing?
This is where a loan is used to buy a property or shares. The cost of the loan (your repayments) and other costs, such as real estate agent fees etc, can be more than the income received from rental property or the income from the shares.The difference between, say the rent and the interest costs and other costs might be called the 'loss' on the deal.'
Why would I want a loss?
Well, you mightn't want it but if there is a loss, then the loss can be subtracted from your usual income, which then reduces the tax you have to pay. You can talk to your paymaster and have your weekly or fortnightly tax bill reduced, or you can get a fat tax refund at the end of the financial year.So I do this to reduce my tax?
Not just that. The tax benefit still leaves you out of pocket but you're sweating on the value of the property to increase in value. You're hoping that, say, if you kept a property for 10 years, it would increase in value substantially. But there is a capital gains tax to be paid when the property is sold. Even so, you usually come out in front.Shares & Negative Gearing:
You can use this same method of funding and pocketing tax savings for buying shares. If you borrow money from say a bank, lenders put some restrictions on you in relation to what shares can be bought. If you've paid off some of the mortgage on your house, however, you could redraw from your home loan account and have no such restrictions.I could lose the lot and have a debt, couldn't I?
Yes, but your house could burn down and you might not have insurance! Its more risky than buying property but it can be done with some real safety built in. One thing I'd emphasise is that negative gearing magnifies your chances of big stock market gains but also magnifies losses. That said, lots of people using negative gearing wiseley do well out of the stratgey.The Role of a Conveyancer:
When buying or selling property, it is necessary for a lot of paperwork to be completed and all agreed conditions fulfilled in the contract of the sale. Such work is generally completed by a conveyancer and these real estate professionals play an important role in the sale of a property.Licensed conveyancers are specialists in property law are required to have specific qualifications. This ensures that they are aware of the legal responsibilities and obligations associated with the transfer or property.
Although it is not against the law to do your own conveyancing work, this is not recommended due to the technical nature of these tasks. Buying or selling a home is an important financial transaction and REISA strongly recommend that you engage the services of a properly qualified professional to assist you through the process and ensure that no nasty surprises ruin the exciting process of buying and selling real estate.
Tasks that conveyancers complete for the purchaser or seller include:
- Completing and lodging documents with the Department of Land Services to ensure that the ownership transfer occurs smoothly.
- Searching the certificate of title.
- Searching government departments and local authorities for anything that may affect the property such as encumbrances or caveats.
- Making necessary enquiries about zoning, titles and rates (council and water).
- Adjusting rates and taxes on your behalf.
- Ensuring that all special conditions in the contract are fulfilled before settlement takes place.
- Requesting funds to proceed to settlement by liaising with financial institution.
- Preparing the settlement statement.
- Attending settlement on your behalf
The Australian Institute of Conveyancers (AIC) is the national peak professional body for conveyancers. The SA Division represents over 330 registered conveyancers located across the state. For more information regarding the conveyancing process, go to the AIC website at www.aisc.com.au
The difference between a valuation and an appraisal:
Real estate professionals are often asked whether there is a difference between a valuation and appraisal. There is a difference and it is important to know when a formal valuation is required as opposed to obtaining an appraisal.A formal valuation can only be conducted by a qualified valuer who has undertaken prescribed education and training in this field to ensure that they take into account all features and issues relating to a particular property. Valuing is a complex task and will take some time to complete. A formal valuation will take into account things such as:
- The location of the property
- The building structure and its condition
- Building/structural faults
- Features of the home
- Caveats or encumbrances on the property
- Local Council zoning
- Additional features of the property (particularly relevant in rural areas)
Valuations are required when a definitive value is needed. Reasons for this include a property settlement, obtaining finance from a lending institution or establishing the value of a deceased estate. A Court may also order that a valuation be obtained as part of the process of resolving a dispute.
Appraisals are only intended as a guide to pricing and can be requested from real estate salespeople. Appraisals are estimated by knowledge of the local area and recent sale prices and should only ever be used as an estimate of price. They are not definitive and have no legal standing. It is rare to charge a fee for appraisals and they are generally only requested by potential vendors to get a Ôfeel' for the local market.
If you do require the best indication of price, engage the services of a qualified valuer so that you can be sure of the true value of your property.