Author Topic: Purchasing a home in Australia  (Read 5037 times)

Planner

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Purchasing a home in Australia
« on: October 11, 2014, 06:05:30 PM »
Hello Australian Mustachian friends,

We are considering buying a home in Northern Sydney and would love some additional perspective from those a bit more experienced. The whole variable rate when acquiring a mortgage freaks me out as we are used to the fixed 30 year mortgages of the US. I guess my question is two fold: In your personal opinion-
1. What is reasonable for planning and budgeting purchases in regards to interest rates- I know the current variable rate is now around 5% and that this is very low. Should we plan for 8%? 10%? 15%? Obviously no one knows what will happen with certainty but what is reasonable?
2. Is there a maximum amount the interest rate can go up in a certain time frame?

I'm sure there's a few more questions but that's a good start. Thanks ahead of time!
« Last Edit: October 11, 2014, 08:46:32 PM by Planner »

deborah

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Re: Purchasing a home in Australia
« Reply #1 on: October 11, 2014, 06:43:33 PM »
Looking at the graph in http://www.loansense.com.au/historical-rates.html you will notice that rates were

1960s 5% - 6%
1970s 7% - 10%
1980s 10.5% - 17%
1990s 6.5% - 17%
2000s 5% - 9.5%
2010s 5.5% - 7.5%

Of course, this is wrong, as I have a piece of paper which says my mortgage started at 18%. Maybe because I was a women, and women had it tough getting loans, although I recall other people who got loans at around the same time quoting 18.5% to me.

1. 10% sounds like a reasonable budget estimate to me, but you can go through those figures and decide what sounds reasonable to you. It really depends on how quickly you intend to pay it off, as 30 years is a nominal figure.

2. Not really. Look at the figures - things seem to go up relatively slowly and come down more quickly.

agent_clone

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Re: Purchasing a home in Australia
« Reply #2 on: October 12, 2014, 03:00:40 AM »
1. When calculating if I could afford the loan I used 10%.  I also figure that by the time it gets there I should hopefully be earning more.  The banks will calculate whether you can afford it based on 7%.

2. No there is no timeframe.  However in saying that, I doubt that at this time the RBA would be increasing interest rates quickly due to the amount of people who have large mortgages that they have gotten on low interest rates.

Edit: Deborah I think thee interest rates are the average.  So like people have interest rates between about 4.5% and 6.5% now, there would be variations in the late 80's/early 90's.
« Last Edit: October 12, 2014, 03:02:41 AM by agent_clone »

deborah

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Re: Purchasing a home in Australia
« Reply #3 on: October 12, 2014, 03:14:01 AM »
Edit: Deborah I think thee interest rates are the average.  So like people have interest rates between about 4.5% and 6.5% now, there would be variations in the late 80's/early 90's.
Not sure whether they are average or the minimum or something else - I just wanted OP not to think that the rates were what people actually got.

marty998

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Re: Purchasing a home in Australia
« Reply #4 on: October 12, 2014, 03:18:49 AM »
1. When calculating if I could afford the loan I used 10%.  I also figure that by the time it gets there I should hopefully be earning more.  The banks will calculate whether you can afford it based on 7%.

Always thought most banks use an assessment rate of current standard variable rate + 2%, which is up around 7.7% - 7.9% at the moment.

2. No there is no timeframe.  However in saying that, I doubt that at this time the RBA would be increasing interest rates quickly due to the amount of people who have large mortgages that they have gotten on low interest rates.

Edit: Deborah I think thee interest rates are the average.  So like people have interest rates between about 4.5% and 6.5% now, there would be variations in the late 80's/early 90's.

Yep no maximum, but rates don't need to rise too much before becoming a major economic drag given the amount of credit washing through the housing sector these days. I feel that we will not see more than a 1% rise for at least the next 2 years.


marty998

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Re: Purchasing a home in Australia
« Reply #5 on: October 12, 2014, 03:22:55 AM »
Hello Australian Mustachian friends,

We are considering buying a home in Northern Sydney and would love some additional perspective from those a bit more experienced. The whole variable rate when acquiring a mortgage freaks me out as we are used to the fixed 30 year mortgages of the US. I guess my question is two fold: In your personal opinion-
1. What is reasonable for planning and budgeting purchases in regards to interest rates- I know the current variable rate is now around 5% and that this is very low. Should we plan for 8%? 10%? 15%? Obviously no one knows what will happen with certainty but what is reasonable?
2. Is there a maximum amount the interest rate can go up in a certain time frame?

I'm sure there's a few more questions but that's a good start. Thanks ahead of time!

What sort of budget are you working on? Do you have 20% deposit for the area that you are looking at, or would you be paying LMI?

Most places in the Northern beaches - you'd be looking at a 20% deposit + stamp duty being 3-400k if you're looking for a house...

Astatine

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Re: Purchasing a home in Australia
« Reply #6 on: October 12, 2014, 04:25:15 AM »
When I bought my place 4 years ago, my interest rate was in the low 6's. Now it's in the low 5's. I ran a whole bunch of scenarios (and built my own mortgage calculator in Excel cos the online ones didn't allow for a scenario of one-off large payment plus fortnightly extra payments). I did do a what-if of the 80s high interest rates but I focused mostly on rates up to about 10 or 11. I figured that it would be unlikely to go above those numbers in the first 5 years of the loan, then inflation starts to make interest rate increases a bit less important.

Don't trust what the mortgage brokers or banks say you can borrow as a good indicator of a sensible mortgage. If I'd bought up to the maximum the banks would have loaned me, it would have left me almost nothing to live on after paying the mortgage, let alone having any buffer for unexpected expenses. So crazy.

happy

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Re: Purchasing a home in Australia
« Reply #7 on: October 12, 2014, 05:03:43 AM »
Quote
Most places in the Northern beaches
He said Northern Sydney, Marty, but it won't be much better.

I agree with everyone else

1. Variable means  just that, variable. Marty's guess is probably more informed than anyone else's since he works in the field. I like Deborah lived through the 17-18% era - when I got my first home loan: bargained the b's down to 16.95% with some coaching on how to do that from my dad. When it finally got down to 12% I thought I was in clover.  I would  do my figures on 10% to be on the safe side.  If variable makes you very nervous, consider a fixed interest loan, you can usually fix for a few years, or their used to be  loan where you could say fix half and variable half. I'm not sure you necessarily get a better deal doing this, just a better sleep at night.

2. Do not under any circumstances borrow as much as the bank say they will lend you at these low rates. I doubt they will go lower. Astatine's right, my banker would have loaned me an amount that made me breathless just thinking about it.

3. View this period of low rates as the opportunity to get ahead on your mortgage payments. I know its popular on this board to say if you can get more investing, then don't pay down the mortgage faster. But with our variable rates thats potentially a bit more risky. Get that sucker down while the rates are low: when/if they go up substantially you will have given yourself breathing space.

Planner

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Re: Purchasing a home in Australia
« Reply #8 on: October 12, 2014, 09:02:34 PM »
Thanks so much everyone! Really really appreciate the insight. We actually ARE on the Northern Beaches and prices here are C.R.A.Z.Y! But...I don't really foresee a huge downtrend (maybe a plateau but not a massive crash/dip) here but again- no one really knows right?! (maybe everyone can chime on that as well! ;)

We are looking to buy something around the 1.1 million dollar range and have 400k to put down- it's more the monthly income that will be the sticky point for us as I am just returning to work after being off for a year of maternity leave and I will only be going back 2 days a week. We will likely consider fixing at least part of the loan as the next 5 years will be the leanest as we consider having another child and I'm only working part time. The plan is to buy something with a granny flat or something that has space/lot size that we could build a granny flat so we can have that income as well.

According to my calculations, we could cover a home loan this size on our current income with the granny flat rent up to 10% but it would be a bit tight if it actually got up that high. I guess fixing part of the loan is one assurance that we would be ok and I could always up my days at work if things got really hectic although I would really prefer not to until the kids were in school. Hummm- any other thoughts? Appreciate the honest feedback.

P.S. I admire those of you who were able to afford something when the interest rates were up around the 18% mark- yikes!!! So crazy!!!

deborah

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Re: Purchasing a home in Australia
« Reply #9 on: October 12, 2014, 09:41:03 PM »
Thanks so much everyone! Really really appreciate the insight. We actually ARE on the Northern Beaches and prices here are C.R.A.Z.Y! But...I don't really foresee a huge downtrend (maybe a plateau but not a massive crash/dip) here but again- no one really knows right?! (maybe everyone can chime on that as well! ;)
Hopefully there won't be

According to my calculations, we could cover a home loan this size on our current income with the granny flat rent up to 10% but it would be a bit tight if it actually got up that high. I guess fixing part of the loan is one assurance that we would be ok and I could always up my days at work if things got really hectic although I would really prefer not to until the kids were in school. Hummm- any other thoughts? Appreciate the honest feedback.
Interest rates are not that far from 10% now, so I would definitely not be counting on renting the granny flat to meet the possible 10%

P.S. I admire those of you who were able to afford something when the interest rates were up around the 18% mark- yikes!!! So crazy!!!
Well, inflation was very high as well, so wages kept on going up. Although houses were expensive (not crazy, but expensive), it was a lot cheaper to be in the market than out of it. In the three months until settlement, my house went up by about 1/7 its price, and in a couple of years the price I paid looked really cheap. Unfortunately a lot of people lost their houses during this time.

marty998

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Re: Purchasing a home in Australia
« Reply #10 on: October 13, 2014, 01:17:11 AM »
Ok lets do some maths.

Purchase price $1,100,000 - if it has a granny flat or is a big enough parcel of land add $400-$600k to that LOL. It sounds like a made up silly number but hey thats Sydney Real Estate haha.
Stamp duty ~$45,000
Conveyancer, Building/Pest, loan app & settlement fees say $4,000 (should be well less than that).
Deposit: $350,000

Loan required: $750,000

1st year interest ~$37,500 (assuming 5%)
Council rates ~$1,500 - $2,500
Water ~$1,000 - $1,500
Building & contents insurance ~$2,000 - $3,000

So you're looking at around $40,000 - $45,000 for the first year before you even turn on a light, eat a grain of cereal or pay off a dollar of principle off your loan.

Scary isn't it?


deborah

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Re: Purchasing a home in Australia
« Reply #11 on: October 13, 2014, 01:58:37 AM »
Wait a minute Marty998 - isn't it you who has just purchased something in the same area? Although it was probably a bit smaller.

Primm

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Re: Purchasing a home in Australia
« Reply #12 on: October 13, 2014, 03:56:36 AM »
Ok lets do some maths.

Purchase price $1,100,000 - if it has a granny flat or is a big enough parcel of land add $400-$600k to that LOL. It sounds like a made up silly number but hey thats Sydney Real Estate haha.
Stamp duty ~$45,000
Conveyancer, Building/Pest, loan app & settlement fees say $4,000 (should be well less than that).
Deposit: $350,000

Loan required: $750,000

1st year interest ~$37,500 (assuming 5%)
Council rates ~$1,500 - $2,500
Water ~$1,000 - $1,500
Building & contents insurance ~$2,000 - $3,000

So you're looking at around $40,000 - $45,000 for the first year before you even turn on a light, eat a grain of cereal or pay off a dollar of principle off your loan.

Scary isn't it?

Very. I'm really glad I don't live in Sydney.

marty998

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Re: Purchasing a home in Australia
« Reply #13 on: October 13, 2014, 04:02:03 AM »
Wait a minute Marty998 - isn't it you who has just purchased something in the same area? Although it was probably a bit smaller.

I'm on the southern side of the bridge Deb, and I've never paid that much!!!

I bought a unit 4 years ago for $385k and I've paid a grand total of $45k interest all up over the 4 years.

Bought a rental in the same area recently for $450k. Not as fussed about interest paid on this one as obviously have the rent to cover it.

Still find it extraordinary the sort of very large mortgages taken out by people. Very ballsy.

happy

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Re: Purchasing a home in Australia
« Reply #14 on: October 13, 2014, 05:46:09 AM »
"Very ballsy" indeed. You've invited comment Planner, so as gently as I can, IMHO I think buying a 1.1m house with a 750k mortgage is not really a mustachian move, Sydney prices or not. 
You don't have to post the answers, but here are some questions to reflect on:
 - Do you HAVE to live in the Northern beaches? Commuting from the peninsula can be horrendous and public transport is   useless.
 - Do you HAVE to buy so much house? Could you manage with something smaller and trade up if you really need to
 - Look for value suburbs e.g. Forestville, and there are probably other niches e.g. North Balgowlah used to be lot cheaper than its surrounding burbs..but that area is unnecessarily expensive.
 
You DO have a choice where you live: in the same way MMM chose Longmont Colorado over NYC.

Gockie

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Re: Purchasing a home in Australia
« Reply #15 on: October 14, 2014, 04:07:40 AM »
Hello! Well I'm in Northern Sydney - you know the booming Epping market - gone up 30% in the last 12 months...  We bought well before this last boom so we are sitting pretty.

Anyway this is my tip. If you want something that will give you less mortgage I'd look North of Hornsby but still on the train line. More accessible than the Northern Beaches. And you can buy a house from around the 750+ mark.

When they build the missing link between M2 and M1/F3 then Pennant Hills Road and Pacific Highway on the North Shore will become a lot better - no trucks and the far North past Hornsby will become a lot more accessible.
Or you could try Thornleigh/Pennant Hills/Westleigh/Normanhurst - possible to buy under 1 million.

In regards to interest rates, I can't see them ever going North of 8%, and even @ 8% I would consider that interest rate to be unlikely within the next 4 years or so. The days of double digit interest rates are well and truly over. The voters wouldn't have a bar of it.

Anyway, somersoft.com is what I read for all Australian property talk. Lots of experienced people on that forum!
Cheers
« Last Edit: October 14, 2014, 04:10:24 AM by Gockie »

Gockie

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Re: Purchasing a home in Australia
« Reply #16 on: October 14, 2014, 04:25:00 AM »
You could also check out Baulkham Hills and North Rocks if you are willing to go west a bit further. They are a little bit off people's radar with everybody's focus set on the new hills train line going through Cherrybrook and Castle Hill, but these suburbs still benefit from the M2 bus services to the city. You will have to check out the bus schedules and routes before figuring out where you would want to buy specifically.
Good luck, but feel free to ask me questions. I've lived in Northern Sydney (Dundas Valley, Carlingford, Chatswood West, West Ryde, & now somewhere with Epping in the name)... my whole life

Melody

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Re: Purchasing a home in Australia
« Reply #17 on: October 16, 2014, 06:44:09 AM »
Check out beyond bank, its a credit union and they offer the option to fix for 5 years at 5% while still letting you pay 25 additonal priciple. So that way you dont need to worry abiut rate raises for 5 years and if your disciplined you will owe $150k less in that time so any rate rise will be less of a drama

Sunnymo

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Re: Purchasing a home in Australia
« Reply #18 on: October 23, 2014, 02:20:00 AM »

Always thought most banks use an assessment rate of current standard variable rate + 2%, which is up around 7.7% - 7.9% at the moment.


Hi, former banker here...

1. The assessment will have a margin of up to + 3% over variable rate regardless of how you wish to structure your loan (all fixed/all variable/split).

2. Generally aim for about 30% of income in loan repayments but certainly no more than 50%. As others have said just because a bank says you can borrow $XXX,XXX only borrow what you need. It must pass the 'sleep at night test' (if the loan amount has you staring at the ceiling in the middle of the night you have borrowed too much).

3. You should be able to get to get a package deal; one annual fee covering accounts, loan(s) and credit card.

4. With the package and the intended loan amount you should be able to get at least 1% discounted from advertised rates particularly off the variable loan. There may be less wriggle room on any fixed portion but get a discount there as well. These discounts aren't usually factored in at the assessment process.

5. Set up an offset account linked to the variable loan and check out the extra payment rules on any fixed portion (I can pay up to $499.99 each moth on my fixed loan without penalty, but incur costs as soon as I pay $500.00 or more in the month.

Check the(probably local council) rules around renting out the granny flat - in some areas it MUST be occupied by a family member. If it was me I would base my calculations on no income from the granny flat. Then treat anything you get as a bonus. Generally for a new rental situation a bank may only look at 70% of the rent for inclusion in the loan assessment. This allows for vacancy, particularly in getting the first tenant, utilities etc. Unless it is separately metered you may not be able to charge a tenant for utilities so you will need to allow for this as well.

Sunnymo


« Last Edit: October 23, 2014, 02:22:15 AM by Sunnymo »