Buyer Resources

Whether you're a first-time homebuyer or a seasoned investor, one essential step to take before you start seriously house hunting is to get a home loan pre-approval. This crucial process offers numerous benefits that can simplify your home-buying journey. In this article, we'll explore ten compelling reasons why getting a home loan pre-approval should be at the top of your priority list.

What is a Home Loan Pre-Approval?

A home loan pre-approval, also known as conditional approval, is a formal indication from a lender that you are eligible to borrow a certain amount of money to purchase a property. It provides you with a clear budget and allows you to confidently search for properties within your price range. While pre-approval is not a guarantee of finance, it gives you a significant advantage in the home-buying process.

Not all pre-approvals are equal

There is a vast difference in the power and relevance of a system-generated pre-approval and a fully assessed pre-approval by an actual loan officer. Chat with your Buyers Agent or Mortgage Broker about the difference between these two. System-generated pre-approvals are practically useless and shouldn’t be relied upon, especially if finances are tight. 

The Benefits of Home Loan Pre-Approval

1. Know your financial boundaries:
   Knowing what you can afford is crucial when it comes to buying a home. With a home loan pre-approval, you'll have a clear understanding of your financial boundaries. A lender will evaluate your income, debts, credit history, and assets, giving you a realistic budget. No more wasting time on homes that don't fit your budget – it's all about finding the perfect match.
2. Understand exactly how your deposit will be spent:
   Let’s say you’re targeting an 80% loan-to-value ratio, so that you avoid paying lenders mortgage insurance. Did you know that you actually need 20% of the property price, plus 100% of the money required to pay all other closing costs, such as stamp duty, transfer fees and your conveyancer. For example, on a $1,000,000 purchase price, a 20% deposit would be $200,000, but then you’ll need an extra $60,000 minimum to pay closing costs.
3. Rise above the competition:
   In a competitive real estate market like Adelaide, having a home loan pre-approval can make you a more attractive buyer. Real estate agents and sellers view pre-approved buyers as serious and financially capable. No more delaying offers while you scramble to gather financial documents – you're one step ahead of the competition. This advantage allows you to move quickly and get ahead of other potential buyers who haven't taken this step.
4. Negotiate with confidence:
   You'll have the confidence to negotiate from a position of strength, understanding your exact financial capabilities. Pre-approval isn't just another piece of paper – it's a ticket to a smoother negotiation process.
5. Simplified loan processing:
   Let's be honest; the loan application process can feel overwhelming at times. In a fast-paced real estate market, time is of the essence. Having a home loan pre-approval means that your financial situation has already been assessed by a lender. This can significantly shorten the time it takes to finalise the purchase process. Since your lender has already reviewed your credit history and financial situation, you'll face fewer obstacles during the loan processing stage.
6. Plan your finances with clarity:
   Wouldn't it be nice to plan your finances with confidence and accuracy? You'll receive an estimate of your monthly mortgage payments, including principal, interest, taxes, and insurance. Armed with this information, you can align your financial goals and responsibilities, to ensure that you can actually afford a particular property. This is especially important if you’re stretching your budget for your dream home.
7. Identifying credit issues:
   A home loan pre-approval involves a thorough review of your credit history. This gives you the opportunity to identify any potential issues that could affect your chances of securing a loan. If there are any concerns, you'll have time to address them before you start house hunting. Think of it as a financial wellness check-up that keeps you on the right track toward homeownership.
8. Avoid surprises:
   A pre-approval acts as a financial safeguard, protecting you from making costly mistakes. Whether you make an offer on a property, bid at an auction, or purchase off-the-plan, pre-approval ensures that you have the necessary finance to complete the purchase. It helps you avoid the disappointment of paying a deposit but being unable to secure the remaining funds. When you get a home loan pre-approval, you gain a comprehensive understanding of the costs involved in the home-buying process. This includes down payment requirements, closing costs, and estimated interest rates.
9. Expert guidance:
   Navigating the complexities of the home loan process can be overwhelming. That's where a knowledgeable mortgage broker can help. Mortgage brokers have access to a wide range of lenders and can compare options to find a loan that suits your needs. They can guide you through the pre-approval process and assist you in securing the best possible loan terms. It’s best to start working them well before you’re making offers on property.
10. Submit offer or bid at auction with peace of mind:
    Last but certainly not least, home loan pre-approval gives you the confidence to navigate the home buying process. Armed with your pre-approval letter, you can confidently make accurate, informed offers.

In summary, obtaining a home loan pre-approval is a wise and strategic move for anyone looking to buy a property. It empowers you with crucial information about your budget, allows you to negotiate more effectively, and saves you time and energy throughout the home-buying process. Additionally, it can help you secure a better interest rate, make informed decisions about your financing, and ultimately lead to a smoother, less stressful home-buying experience.

If you're considering purchasing a home, don't underestimate the importance of a home loan pre-approval. It's a proactive step that will not only simplify the process but also provide you with a sense of control and confidence as you embark on your journey to homeownership.

We help all types of Adelaide home buyers through their property purchase journey. It's a good idea to consider the services of an Adelaide Buyers Agent such as Navigate Buyers Agency, when you're in the initial phases of planning your purchase.

Purchasing a home is a big deal, and it can be a bit overwhelming. The last thing you want is to make costly mistakes that can haunt you in the future.

As Buyer’s Agents, it’s our job to help our clients avoid mistakes on their homebuying journey.

Mistakes buyers make when purchasing

Here’s a list of 25 avoidable mistakes that buyers can make:

1. Ignoring the Budget Basics: One big mistake is not setting a budget. If you don't know how much you can spend, you can waste months house-hunting in a price range you can’t actually afford. Getting a fully-assessed pre-approval is the best way to understand your actual borrowing capacity.
2. Skipping Pre-Approval: Before you even start looking at homes, get yourself pre-approved for a mortgage. It’s best to understand what you can afford before you start shopping around for a home. Keep in mind that homes often sell for above their advertised price, and closing costs can add another 5-10% on that figure! Your deposit needs to cover your portion of the purchase price to get the LVR to where you want it to be, but then also is needed to pay 100% of closing costs.
3. Revealing too much to Sales Agents. A Sales Agent (real estate agent) represents the seller, not the buyer. They have a fiduciary duty to obtain the highest possible price from the buyer. Buyers often reveal too much to the Sales Agent, placing them at a disadvantage during negotiation. The agent needs to know you’re interested, but don’t tell them you’ve been looking for 6 months, are in love with the home, and your best friend lives around the corner!
4. Not researching the Neighbourhood: Don't just focus on the house; pay attention to the neighbourhood too. Check out the streetscape, schools, and whether there's a decent coffee shop nearby. Your location can make or break not only your happiness, but the future value of the property. With a suburb, each street can have wildly different values. Train, road and aircraft noise, local traffic congestion and the quality of neighbouring homes all have a dramatic impact on property prices. A large portion of the value of a property is in the land, not the actual house.
5. Not building the right team: Picking the right “purchasing team” is crucial to avoiding unnecessary expenses and disappointment. A buyer typically needs at minimum a mortgage broker and a conveyancer. It’s becoming very common to engage an independent Buyers Agent too. Take advice from educated, recommended and qualified property professionals to avoid making mistakes that can cost you dearly, either now or down the track.
6. Skipping the home inspection: The home and pest inspection report is your backstage pass to see what's really going on with the property. Skipping it or ignoring its findings is like buying a mystery box; you never know what you're getting into. Proper due diligence from a Buyers Agent is also highly recommended, as it investigates totally different things compared to a building and pest report.  
7. Short-Term Thinking: You really do need to think about the long-term! If you're planning to start a family or work from home, a studio apartment might not cut it. Fixed purchase and sale costs mean you’re probably better of renting if you need to sell a property within 5-8 years of owning it. Plan for the future; don't just buy what suits you right now.
8. Rushing the Decision: Buying a home is not like grabbing a candy bar at the grocery store checkout. Don't rush into it. Take your time to explore different properties and weigh the pros and cons. It can often take several months to find a suitable home. Settle in for the journey and take your time with this important decision. When hiring a Buyers Agent, be sure they’re willing to work at your pace.
9. Offering too much and overpaying: It can be difficult to know much how to offer during a private negotiation. Often there is no advertised price, or that price isn’t very accurate of the market demand anyway. It’s best to seek professional advice from a Buyers Agent to understand the likely market price of the property, and have a strategy for how to secure it at Auction or during a private sale. It’s very easy to unknowingly offer $30,000 above the next closest buyer. Over a 30 year mortgage, that’s actually more like $60,000 when you factor in interest. For you to have $60,000 in your pocket, with normal tax rates, you probably need to earn $80,000 before tax. An experienced sales agent can easily draw another $30,000 out of an inexperienced negotiator, and that simple error can cost you $80,000 of earnings when you actually do the sums!
10. Underestimating the Costs: Owning a home is not just about the mortgage. There are taxes, insurance, maintenance, and surprise expenses. Be prepared for the whole shebang, and understand your financial situation before you make big decisions. Ownership is commonly much more expensive than rent.
11. Weak Negotiation Game: If you're not a good negotiator, it's time to learn or hire a Buyers Agent. Negotiating effectively means you have a chance of winning the property and paying a fair price. Poor negotiation means you won’t secure your dream home, or you’ll end up paying well above a fair price. Sales Agents are well-paid, highly experienced negotiators that are legally required by a duty to the seller to extract every single dollar out of a buyer.
12. Ignoring the Fine Print: Reading contracts and loan terms can be about as fun as watching paint dry, but it's essential. You need to understand all the nitty-gritty details; otherwise, you might get caught in a tangled web of obligations or expenses.
13. Emotion-Driven Decisions: Falling in love with a house is fantastic, but don't let those feelings blind you. It's a financial commitment too, so balance the heart with the head.
14. Overlooking the Resale Value: You might not be thinking about selling your new home yet, but you should. Consider how the property's value might change over time. If the home isn’t in a desirable area now, will that change in future? Can fundamental issues be repaired? It’s rare to find a ‘great deal’, or buy ‘under market value’. Does the price seem low? Perhaps there something fundamentally wrong with the house that you’re missing.
15. Inadequate Research: Visit the neighbourhood at different times of day and week to get a true feel for it. Talk to potential neighbours to gather insights. A Buyer’s Agent will provide a comprehensive due diligence report for you that’s completely separate to the Building and Pest Inspection. The more you know, the better.
16. Not Considering Commute Time: The dream home might be far from work, school, or your favourite hangouts. Long commutes are an important factor in your lifestyle.
17. Being Unrealistic: Don't expect to find a perfect home with zero flaws. Be willing to compromise on some aspects, but never compromise on what matters most to you. Small things you don’t like can easily be improved quickly and affordably. Size, number of rooms and good flow to the floor plan is much more critical than floor coverings or paint color.
18. Taking advice from family and friends: Although they mean well, unless they are an active property professional, their advice is likely outdated, misinformed or too unique to their personal experiences. Use professionals such as a Buyer’s Agent to receive educated, factual advice; based on data and current property metrics.
19. Getting too attached to one property: As soon as your dream home comes on the market, hopefully you can secure it quickly and at a reasonable price. However, things might not work that smoothly, so it’s important to enter the property hunt knowing it can be competitive and frustrating. You may miss a few homes, and things might cost more than you first intended.
20. Overlooking age and condition, or undervaluing renovations: Older home usually cost more to maintain, and can have expensive surprise costs appear at any time. The charm and character of these homes is desirable, but it’s important to budget for additional expenses. Additionally, don’t underestimate the value of a completed renovation on a home you’re considering – it likely cost more than you think, and the work is already done for you. If you don’t have to pay for renovations in the future, then you should consider spending more now on a home that’s been recently renovated. If buying a fixer-upper, allow the renovations to cost 20-30% more than you originally estimate, and then compare with a home that’s already renovated.
21. Overconfidence. It’s important to remain humble and level-headed in negotiations. Don’t assume you know more than other people, or overestimate your abilities.
22. Buying before auction. If an agent has suggested you offer before auction, be very careful. Some agents convince buyers to make pre-auction offers when they actually only have a single real buyer. They are in danger of overpaying because there isn’t actually any other competition, but the agent can certainly make it feel like there is!
23. Just offering 5-10% more than the agent's asking price. This approach assumes the agent’s asking price was an accurate and educated opinion on the potential market price of a property. Buyers regularly overpay when they simply take the agents price guide to be gospel, and then offer slightly more. ‘Advertised price’ is tricky in real estate, so it’s best to seek professional guidance from a Buyer’s Agent. Auctions price guides are often underestimated by the Sales Agent to attract more bidders from the market. For Sale advertised prices can be overestimated as a negotiation tactic called Anchoring – you don’t need to offer what the agent is asking. Do you own research, or hire an independent Buyer’s Agent.
24. Fear of missing out. FOMO can set in when you’ve found your dream property, but you start to feel nervous that someone else will take it from you! FOMO causes people to pay more than a fair market price, and Sales Agents are trained professionals at getting the highest possible price from buyers. A Buyer’s Agent is a voice of reason is this situation, and can help you understand a fair price, and how long you might need to wait before another similar property comes to market.
25. Confused by price inconsistencies. Property is all about people. There’s a seller, a buyer and agents – each with their own emotions and price expectations. Add to this, that properties are often difficult to directly compare. It can become complex to estimate a fair market price on a property you love with such dramatic price inconsistencies on previously sold homes. If you’re struggling to understand value, ask for help from a Buyer’s Agent.

So there you have it, a comprehensive guide to avoiding the most common mistakes when buying a home. Remember, it's a journey, not a sprint. Take your time, do your homework, and you'll be on your way to home sweet home!

There are many ways in which the federal and state government incentives for first home buyers have substantial and surprising benefits. There are ways for first home buyers to:

• Receive a cash contribution towards their purchase
• Secure a home with less than a 20% deposit
• Avoid paying lenders mortgage insurance
• Avoid paying stamp duty
• Withdraw voluntary contributions they’ve already made to Super
• Enter into a shared equity arrangement where the government owns part of your home and pays their share of the mortgage

Here are the most relevant assistance programs, and basic details about inclusions, criteria, eligibility and relevance.

These programs have complex conditions and eligibility requirements that you’ll need to check on the relevant websites. Do not rely on this article as a comprehensive and up-to-date source of information on these changing programs.

First Home Guarantee Scheme (Federal)

The First Home Guarantee (FHBG) is part of the Home Guarantee Scheme (HGS), an Australian Government initiative to support eligible home buyers to buy a home sooner. It is administered by Housing Australia on behalf of the Australian Government.

Under the FHBG, part of an eligible home buyer’s home loan from a Participating Lender is guaranteed by Housing Australia. This enables an eligible home buyer to buy a home with as little as 5% deposit without paying Lenders Mortgage Insurance. Effectively, the federal government is ‘taking on the risk’ instead of the lender having to purchase lenders mortgage insurance.

For the FHBG, any Guarantee of a home loan is for up to a maximum amount of 15% of the value of the property (as assessed by the Participating Lender). This Guarantee is not a cash payment or a deposit for a home loan.

From 1 July 2023 – 30 June 2024, 35,000 FHBG places are available. 

To apply for the FHBG, home buyers must be: 

• applying as an individual or 2 joint applicants 
• an Australian citizen(s) or permanent resident(s)* at the time they enter the loan
• at least 18 years of age
• earning up to $125,000 for individuals or $200,000 for joint applicants, as shown on the Notice of Assessment (issued by the Australian Taxation Office)
• intending to be owner-occupiers of the purchased property
• First home buyers or previous homeowners who haven't owned a property in Australia in the past ten years.

Under the HGS, home buyers can buy a residential property, including:

• an existing house, townhouse or apartment
• a house and land package
• land and a separate contract to build a home
• an off-the-plan apartment or townhouse.

There is a price cap of $600,000 for Adelaide and regional centres, and $450,000 for the ‘rest of the state’.

First Home Owner Grant (South Australia)

The $15,000 FHOG in South Australia is only available to first home owners who buy a new home. You can choose from a house, apartment, townhouse or villa.

You will only be able to claim the FHOG SA if you pay below the following amounts for your home:

• Before 14 June 2023: $575,000
• After 15 June 2023: $650,000

The FHOG SA is not available if you buy an established home.

There are no limits on how you spend the FHOG SA, and it can used to form part of your first home deposit.

Eligibility is not based upon income, but conditions include:

• an Australian citizen or permanent resident. New Zealand citizens permanently residing in Australia who hold Special Category Visas may also apply. Only one applicant must meet this eligibility requirement.
• at least 18 years of age.
• a natural person.

In addition, you or your spouse/domestic partner must not have:

• held a relevant interest in an Australian residential property prior to 1 July 2000.
• occupied an Australian residential property in which you had a relevant interest on or after 1 July 2000 for 6 months or longer.
• previously received a first home owner grant in any state or territory of Australia. If a grant was received but later paid back together with any penalty you may be entitled to reapply for the grant.

Each applicant must reside in the home as their principal place of residence for a continuous period of at least six months commencing within 12 months of date of settlement for contracts to purchase, or the date construction is completed for owner builders or contracts to build.          

First Home Stamp Duty Relief (South Australia)

If you are a first home buyer you may be eligible for a stamp duty relief on the transfer of land, if you are buying:

• a new home* (including a house, flat, unit, townhouse or apartment);
• an off-the-plan apartment; or
• a house and land package (contract to build - comprehensive building contract);
• vacant land to build your new home on;

in South Australia and that home will be your principal place of residence.

The stamp duty relief is available on a transfer of land when the contract to purchase a new home or vacant land is entered into on or after 15 June 2023.

New home

• An eligible home with a dutiable value of $650,000 or less will receive full stamp duty relief equal to the stamp duty applicable on the transfer.
• An eligible home with a dutiable value between $650,001 and $700,000 will receive partial stamp duty relief and will still require a payment of stamp duty.

Vacant land

• Vacant land with a dutiable value of $400,000 or less will receive full stamp duty relief equal to the stamp duty applicable on the transfer.
• Vacant land with a dutiable value between $400,001 and $450,000 will receive partial stamp duty relief and will still require a payment of stamp duty.

You may be eligible for the relief if you are:

• an Australian citizen or permanent resident. New Zealand citizens permanently residing in Australia who hold Special Category Visas may also apply. Only one applicant must meet this eligibility requirement.
• at least 18 years of age.
• a natural person.

In addition, you or your spouse/domestic partner must not have:

• occupied an Australian residential property in which you had a relevant interest on or after 1 July 2000 for 6 months or longer; or
• previously received a stamp duty relief for eligible first home buyers (or equivalent) in any state or territory of Australia. If relief was received but later paid back together with any penalty you may be entitled to reapply for relief.

At least one applicant must reside in the home as their principal place of residence for a continuous period of at least six months commencing within 12 months of date of settlement for contracts to purchase, or the date construction is completed for owner builders or contracts to build.

First Home Super Save Scheme (Federal)

The FHSS scheme allows you to save money for your first home in your super fund.

The scheme allows you to make voluntary contributions (both before-tax concessional and after-tax non-concessional) into your super fund to save for your first home. If you meet the eligibility requirements, you can have these voluntary contributions released, up to a limit, (along with associated earnings) to help you purchase your first home.

You can apply to have a maximum of $15,000 of your voluntary contributions from any one financial year included in your eligible contributions to be released under the FHSS scheme, up to a total of $50,000 contributions across all years.

Contributions released under the FHSS scheme can be used to buy a new or existing home in Australia.

HomeSeeker Shared Equity (South Australia)

Shared equity’ can cover the gap between what you can afford and the cost of a property, so you can boost your borrowing power and buy your own home sooner.

For example, with shared equity you may only need to make repayments on 75 per cent of the loan, with the remainder being held by a lender.

Shared equity has a significant impact on affordability because homebuyers only needed to afford repayments on the portion of a home’s purchase price not covered by shared equity, typically 75 per cent (but it can be a higher or lower percentage).

At the South Australian Government’s housing financing company, HomeStart Finance, the Shared Equity Option allows people to partner with HomeStart to get into the housing market, with HomeStart contributing up to 25% of the purchase price.

Repayments are based on borrowings for the remaining 75% of the purchase price and not the shared equity component.

HomeStart acts as a silent partner which will share in the profit or loss when the house is sold.

HomeStart Finance (South Australia)

Established in 1989, HomeStart is a State Government organisation that is 100% focused on providing home loans for South Australians.

They are an independent, profitable organisation with social goals.

Over the past 33 years, HomeStart has helped more than 81,000 South Australians into home ownership. HomeStart has been writing shared equity loans since 2007 and is one of Australia’s most experienced shared equity providers, providing a boost for thousands of South Australians so they can buy the right home, when they need it.

They also offer low deposit loans with no lenders mortgage insurance fee, and no need to participate on their Shared Equity program.

You can work directly with HomeStart, and some mortgage brokers can also set you up with HomeStart home loans. 

Thinking of Buying at Auction?

Auction is a method of selling a property where interested buyers gather at a specified time and place to openly bid on the property. During an auction, a licensed auctioneer oversees the proceedings and facilitates the bidding process. The property is advertised in advance, and potential buyers are provided with relevant information, such as property details and necessary documentation. The auction itself can take place on-site at the property or in a designated auction venue, and is subject to specific terms and conditions set by the seller.

Bidders in a real estate auction make increasingly higher offers until the highest bid is reached, so long as it exceeds a predetermined reserve price. The highest bidder is then legally obligated to purchase the property, and required to sign a contract of sale and provide a deposit. Once a bid is beyond the reserve price, the seller must proceed with the sale.

Real estate auctions are known for their transparency and can result in a fair market price as buyers openly compete to secure the property. However, they also involve certain risks to buyers.

Why are they so common? 

Auctions are a popular method for selling property in Australia for several reasons. Both sellers and the Sales Agent might prefer an auction because:

• The overall sales process can be faster and simpler
• The sale is unconditional, so buyers can’t exit the deal
• The seller is protected by a reserve price, which does not need to be disclosed
• Price is determined by competitive bidding, which can go well above the seller or Sales Agent expectations. The free-market determines the final selling price
• The Sales Agent can operate a fair and transparent sales process, and avoid complex “back and forth” with multiple buyers
• Buyers can get competitive and emotional at auctions, so the seller can achieve an above-market price

Pros of an Auction for Buyers

Fair and transparent

The bidding process is straight forward, and the property is sold to the highest bidder. You see what everyone else is bidding and there's no negotiations happening privately behind closed doors.

The market is there, and a new market value is set for everyone to see.

When you’re negotiating privately with an agent for a non-auction property, you never quite know if there are other buyers, how much they’ve actually offered and what their offer is subject to. All buyers are ‘flying blind’, and the agent isn’t able to tell them much.

No risk of being gazumped

Gazumping occurs when a seller accepts an offer on the property from one potential buyer, but then accepts a different offer from someone else before the contract is signed.

Auctions are legally binding on the seller, so once the hammer falls, if you’re the highest bidder the place is yours. It does not matter if the Sales Agent finds someone else willing to pay more the next day.

In a Private Treaty sale, unless you have a signed contract of sale, you can be gazumped anytime.

Fast

Auctions are substantially quicker than a long-drawn negotiation process that usually takes weeks.

You’re not nervously waiting for the agent to tell you if the seller has accepted your offer.

Market-determined price

Buying at auction gives you comfort for the future that you paid fair market value and weren't ripped off. At auction, the highest bidder pays just above the second highest bidder to secure the property. 

Buyers' remorse can occur when you offered a record-breaking high price when negotiating privately with the Sales Agent because you’re not sure what the second highest offer was.

At auction, the market tells the seller the price, instead of the Sales Agent setting an arbitrary price during a ‘for sale’ campaign. The seller is protected by the reserve price, however the Sales Agent will manage the sellers expectation to ensure the reserve price is relatively reflective of market sentiment.

Negotiation continues if Auction is ‘held over’

If the reserve price is not met, the Auction is either ‘held over’, or ‘passed in’.

Sales Agents may or may not decide to continue further negotiations with potential buyers. If the auction is ‘held over’ and a deal is reached before midnight the same day as the auction, the contract is the same as if you bought it during the auction – ‘under auction conditions’.

You might get a reasonable deal

Since many buyers are hesitant to bid at auction, there can sometimes be fewer active buyers. When you’re up against less people, the final price of the property can be lower.

The seller is protected by the reserve price they choose, but if it’s not reached during the auction, immediately afterwards, and even until midnight that day, buyers can enter into negotiations with the Sales Agent, under auction conditions. Sales Agents will use the low market demand, and relisting marketing costs to suggest the seller lowers their price, which might result in a reasonable deal for you.

Cons of an Auction for Buyers:

No Cooling-Off period

With a regular non-auction property sale (Private Treaty etc), as a standard consumer protection in South Australia, the buyer has a 2-business day cooling off period.

This right is forfeited for auctions, and the highest bidder when the hammer falls must proceed with the purchase.

There is no ability to change your mind, and there is significant legal complexity if you can’t proceed with the purchase for some reason.

Unconditional: no contract termination clauses or rights

At auction, you can access to the contract of sale and Form 1 before the Auction day. Clauses or terms that buyers might often include can’t usually be added, such as:

• Subject to finance
• Subject to building and pest inspection

Effectively, you are buying the property ‘as is’, and if you win the auction, there is no ability to terminate the contract if you’re subsequently unable to obtain finance.

If there are any issues you’re unsatisfied with, after auction there’s nothing you can do. It’s critical you work closely with your Buyer’s Agent, building inspector and conveyancer prior to auction in order to:

• Review the contract of sale and other documentation
• Complete very thorough due diligence
• Properly inspect the property
• Understand the value of the property to ensure finance won’t be an issue

Some Auctions can attract competitive bidding

In the ‘heat of the moment’, the following types of buyers can get carried away at auctions and pay unusually high prices:

• Inexperienced buyers that don’t understand the market value and will overpay
• Frustrated buyers who have been looking for 6+ months and just want to end the property hunt
• Emotional buyers that are in love with that specific home
• Buyers with deep pockets that become competitive in auction conditions

It’s important to attend an auction with a walk-away price, which is determined by data from a real estate professional, and grounded in your personal financial capacity.

The Auctioneer and Sales Agent might employ high-pressure tactics

The entire purpose of an auction is to draw out the highest possible price from the market. Auctioneers and Sales Agents work for the seller, not for the buyer, and its their job and fiduciary responsibility to get the best price from you.

Always stick to your pre-determined walk-away price.

Your finance has to be dependable

When the hammer comes down at Auction, if you’re the highest bidder, you’ve bought the property and there’s no backing out.

If you are borrowing money to pay for the property, it’s critical that before you go to Auction, you’ve worked very closely with your mortgage broker or lender to be prepared. Ideally, you have a fully assessed pre-approval.

People buying at auction that rely on finance need to be particular careful if:

• They don’t have a fully assessed pre-approval
• They have a low deposit (under 20%)
• They are unusual visa status, or working arrangements
• They don’t have access to extra cash if the lender valuation comes in low

Learn more in our article about Pre-Approval.

You may pay for Building and Pest Inspections a few times

When you’re bidding at Auction, there’s certainly no guarantee you will be the highest bidder. However, you should be prepared to be the winning bidder, which means paying for a Building and Pest inspection prior to Auction. At $500-$800 per property, this can potentially cost you thousands before you win at an Auction.

The property can sell prior to Auction

You might have fully prepared for the Auction, having paid for a Building and Pest Inspection and spent hours evaluating the property. The agent then informs you the property has sold before Auction, just days prior to the scheduled time. This can be highly frustrating and does happen occasionally. It’s important you’re communicating with the Sales Agent regularly.

The deposit must be paid on auction day

If you win the auction, you must transfer the deposit stated in the contract of sale the day of the auction. You need access and facility to transfer that full amount in a single day.

Conclusion

Auctions can seem overwhelming and complex, but with the right team supporting you, Auctions are actually a transparent method of purchasing your next property. You’ll need to be more researched and prepared than submitting conditional offers during a Private Treaty negotiation, but you might actually face less competition at Auction, since they can scare off some buyers.

When it comes to buying a home, saving a deposit can be difficult and it can take a long time. Adding a Guarantor to your home loan, means you can buy with a small deposit, or in some cases, no deposit at all.

Lenders have two key requirements for you to meet:

• Borrowing capacity (ability to make repayments based upon income and expenses)
• Deposit (cash paid upfront so you’re not borrowing the full value of the property)

Summary

• A Guarantor is a person(s) who provides additional security for your home loan, and is usually a close relative
• The purpose is to avoid paying Lenders Mortgage Insurance (LMI). With a 5% deposit on a $800,000 property, LMI costs more than $41,000
• If you have a deposit less than 20%, a Guarantor can help you buy a home sooner
• The Guarantor does not need to provide cash, only a security – such as equity in their own home. No money changes hands with a guarantee.

Everything you need to know about Guarantor Home Loans

What is a Guarantor, and what types of Guarantor loans are there?

A person, or people, that provide a guarantee to assist applicant(s) in security for a home loan.

Lenders currently offer Guarantor home loans with a Security Guarantee.

What is a home loan deposit? How much do I need?

Lenders seek a 20% deposit, so that your Loan to Value Ratio (LVR) is 80% or less. The 20% deposit reduces the risk and ‘exposure’ to the lender, if applicants fail to make repayments, and the lender needs to sell the property to close the loan. When the bank is forced to sell the property, there are costs associated with the sale (real estate agent etc), and the market price for the property may have fallen since it was purchased. The 20% deposit, covers any potential shortfall and protects the bank from a loss.

If you have a LVR above 80%, the lender will require you to pay the one-off premium for a Lenders Mortgage Insurance policy which protects the lender from you defaulting. There are online calculators that allow you to estimate the price of LMI, which ranges depending on lender and the LVR.

Can I get a home loan with a small or no deposit?

Yes, there are several ways to purchase a property with little, or no deposit.

• Guarantor offers a Security Guarantee, or
• Pay Lenders Mortgage Insurance (LMI), or
• Be eligible for a government guarantee such as First Home Guarantee, or
• Work with a lender that specialises in low deposit loans, but does not charge or discounts LMI, such as HomeStart

Keep in mind, closing costs on a property often add 7-11% on the sales price, and must be factored into total borrowing and deposit calculations.

What is a Security Guarantee?

A security is an asset of value, that the Guarantor promises to make available to the lender, should the loan applicant fail to meet their obligations to repay the loan.

The security is usually property or cash, and replaces or minimises the need for the loan applicant to provide a deposit.

How does the Security Guarantee work?

Most commonly, parents are a Guarantor to their children who are first-home buyers. 

A Guarantor is not on the loan application, but assists by offering a ‘security’ in helping the loan applicant(s) get finance.

Let’s say you wanted to buy an $800,000 house, but only had a 5% deposit of $40,000, this means you would have a 95% LVR. A lender would require you to pay Lenders Mortgage Insurance (LMI) which would be a one-off cost of about $41,000. LMI can be added onto your loan amount, but it’s a huge cost considering that in this example, it’s about equal to your entire deposit savings!

To get the LVR down to 80% (where LMI is no longer required by the lender), you would need an additional $120,000 deposit, which brings the total 20% deposit to $160,000. If your parents aren’t willing to gift you $120,000, then they can become a Guarantor on the loan.

If they’ve paid off, or close to paying off their own house, your parents would easily have $120,000 of equity in their home. Equity is the difference between the market value of their home, and any outstanding loan.

Your parents don’t transfer any cash, or help you pay the loan, but are providing a ‘security’ (their own home), for the amount of deposit that you lack, to get you down to an 80% LVR.

Note, that the Security Guarantee is not decreasing the loan amount, because the $120,000 is not a deposit against your loan - it’s an asset that is elsewhere.

You will be making home loan repayments on $760,000, as your $40,000 is a deposit.

What types of Security can be used?

Note, the guarantor can offer different forms of security, such as:

• Their personal owner-occupier home (assuming it has equity)
• Their investment property (assuming it has equity)
• Cash

The Guarantor doesn’t need to liquidate (sell) these assets to create a security. You can think of the guarantee as being “on paper only”.

With property, there needs to be sufficient equity (the difference between the market value and any remaining loan) to cover the security. If there is finance on the parents property still, a ‘second mortgage’ will be added.

The Guarantor may also be financially assessed to ensure you’re not placing them in a highly risky position.

How long does the Security need to be maintained?

The guarantee is in place for the duration of the home loan, which is typically 30 years.

This means that any form of security the guarantor has provided must stay in their possession until the lender agrees to remove the guarantor condition. For example, the parents place of resident or their investment property couldn’t be sold until the guarantee is removed.

Typically, the lender will require that a cash security be transferred into a term deposit in the lenders control. That term deposit would need to remain active until the guarantee is removed.

What is an Income Guarantee? Can a Guarantor help borrowing capacity?

Lenders typically no longer offer Guarantor Income Guarantees.

Borrowing capacity is about the applicant’s ability to make repayments based upon their personal income and expenses. The lender does not want applicants to have loans they’re unable to repay. There are laws in Australia that control how lenders assess borrows, so that they’re not offered ‘too much’ debt. 

For your understanding, the purpose was to inflate the borrowing capacity of the applicant, by the guarantor agreeing to help the applicant make regular payments on the home loan.

For example, first-home buyers could ask their parents to actively help them pay for the home loan. Essentially, the bank would assess the parents spare cashflow and increase the amount the first home buyers could borrow, based on this guarantee.

In practice, parents wouldn’t actually help make the payments, so borrowers would be paying too much and failing to make repayments.

Common questions about Guarantor home loans

Should I use a Guarantor?

For many applicants, especially first-home buyers, a Guarantor is a brilliant way of entering into the property market sooner.

• With such high property prices, it can be difficult to save up a 20% cash deposit
• Lenders Mortgage Insurance is an expensive and frustrating cost
• Not all buyers qualify for government programs that assist in higher LVR loans which avoid LMI

If you are confident in your capacity to repay the loan, the Guarantor isn’t taking on too much risk, and it can benefit the applicant immensely.

When can the Guarantor be released?

In practice, most applicants are able to discharge (remove) the guarantor in 5-7 years. This is highly dependant on a number of personal and macro-economic factors. Here’s a few common ways to remove the Guarantor:

• Refinance and add cash you’ve saved to reduce the LVR to under 80%
• Refinance with a higher property valuation, to reduce the LVR to under 80%
• Pay down the loan over time, to reduce the LVR to under 80%

When the LVR is 80% of less, there is no need for the Guarantor. You will pay no LMI, and will probably also enjoy a lower interest rate.

The Guarantor should get their own independent legal advice.

What is a limited guarantee?

Often, the lender does not expect the Guarantor to guarantee the entire loan, only a certain portion. For example:

• $1,000,000 loan
• $800,000 security against the purchased property
• $200,000 security against the Guarantor

The loan applicant is liable for their $800,000 share, and the guarantor only their $200,000 share. The Guarantor isn’t ‘on the hook’ for the entire loan in this scenario, which might make them more likely to become a Guarantor. In other words, the most the bank can ‘come after’ the Guarantor for, is $200,000.  

There may be a small buffer added to the Guarantor’s requirement, so check this.

Can anyone be my Guarantor?

Typically, lenders will want it to be a parent. Sometimes they will allow a sibling or aunty or uncle.

How much can I borrow with a Guarantor Mortgage?

Borrowing capacity is based upon the applicant’s ability to pay back the loan. This is determined by their applicant(s) income, expenses, and interest rates.

Having a Guarantor on the mortgage does not affect (increase or decrease) borrowing capacity. A Guarantor is only helpful in reducing the cash deposit requirements from the applicant.

Speak with a mortgage broker or lender to understand how much you can borrow.

What are the risks to being a Guarantor?

Becoming a Guarantor for your loved ones can be a wonderful gift, however you should fully understand the risks.

The Guarantor is liable to make payments on the home loan is the applicant fails to do so.

If the applicant continues not pay mortgage payments, the lender would eventually foreclose (sell) the property that the loan is against. Through the sale, if the lender is unable to receive enough funds to repay the entire loan amount, the lender will require the Guarantor to pay the shortfall.

Typically, the Guarantor is given the option to simply pay, but they’re unable to provide these funds in a worst-case scenario, the lender has the legal power to sell the Guarantor’s asset (property etc) to recoup the shortfall. This would be a long, complex process with lawyers involved.

Additionally, the Guarantors ability to borrow money will often be reduced because their equity or asset is now tied to a lender.

Does a home loan with Guarantor cost more?

Guarantor home loans are common and most lenders offer them without additional fees, or higher interest rates.

Use a mortgage broker to compare different Guarantor home loans among many lenders, and compare the fees and interest rates you have access to.

What situations can’t I use a Guarantor?  

Typically, lenders limit the use of a Guarantor to first-homes. They do not like to use this process for:

• Second homes
• Investment properties (as a means of building wealth through property)

Conclusion

Using a Guarantor may seem complex, however it’s a very common practice and is highly recommended to people with a low deposit.

On a $1,000,000 property, a buyer with a $50,000 deposit (5% deposit = 95% LVR), the Lenders Mortgage Insurance would cost approximately $39,000.

A Guarantor would save this buyer $39,000, so you can see why that might be of interest!