New podcast episode
Getting on the property ladder with Grace Bowe
Getting on the property ladder with Grace Bowe
On today’s episode we have the wonderful Grace Bowe joining us. Grace is a mortgage broker and she takes us through what you need to do to get onto that property ladder!
Grace is passionate about educating and empowering Australians to improve their financial literacy and their financial well-being. We have that in common!
So many women ask me if it’s even possible to get on the property ladder?! Grace is here to step us through why it is NOT impossible!
One of the reasons that buying a house can feel so out of reach is that 20% deposit! Grace steps us through some different ways around the 20% deposit hurdle and what exactly Lenders Mortgage Insurance (LMI) is.
Grace steps us through some of the common mistakes that people make buying property, including not using a mortgage broker, credit limits and the loyalty tax. And no, that first tip is not a shameless plug. Mortgage brokers can make the stress and overwhelm of home loans so much more simple. They’re essentially like a personal shopper for your home loan! We also bust some myths around mortgage brokers and how they are paid!
So next. How do we work out the price limit for your new home? Grace explains that knowing what your borrowing capacity is is the most important first step! She also steps us through about what makes a good home loan application and what banks look for when they’re considering lending to you.
Then, how do you actually go about buying a house?! Grace explains what a pre-approval and why it makes such a big difference when you’re putting an offer in.
Grace also takes us what to do if we’re struggling with a deposit. She talks us through the government scheme called First Home Guarantee Scheme, how some professions have the LMI waived and what the guarantor scheme is.
What about your credit score? We bust myths around why you don’t need a credit card and how to make sure yours is up to scratch.
Grace also steps us through some topics you may of heard of but are not quite sure why they actually are! The different interest rates, offset accounts, building and pest checks, why you need a solicitor / conveyancer and what we should look for in a home.
Finally, Grace gives us some hot tips on how we can pay our home off quicker. These are so easy and make a big difference!
Ladies, if you’ve been thinking about property but have zero idea where to begin, this episode will be a game changer for you!
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Molly Benjamin 00:00
Grace, thank you so much for joining us on the show today.
Grace Bowe 00:04
Thanks so much for having me. Molly. Thanks for the very idea of a podcast. I love talking about money. So thanks for bringing it to all of us.
Molly Benjamin 00:11
Well, we have that in common. And so today we're gonna be talking about, as I mentioned in the intro, getting on the property ladder, but I just wanted to start with like, as a single female, I talk to a lot of women and I hear that they just go well, what's even the point? It's so expensive, especially in like, I'm in Sydney, some of them are in Melbourne. And they're like, is it even possible for me to get on the property ladder?
Grace Bowe 00:36
It's not impossible that I agree, it can really feel that way. House prices in Australia are insane. Even with the headlines we're seeing about the current softening property market. I think often the reason that women all of us can feel like it is impossible is that 20% deposit number that we often told that we need that to buy a house. And like let's say someone wants to buy an $800,000 apartment at 20% deposit is $160,000, which is so much money to save. And the reason we're told we need a 20% deposit is because if you don't have that saved, you need to pay lenders mortgage insurance as an additional cost of borrowing. But what I'm hoping to talk through on today's podcast is a few different ways around that deposit hurdle, some of which are government initiatives, some other ways to have that lenders mortgage insurance waiver. And then finally, well, not for everyone. But there's another option, which is sometimes just sucking up lenders mortgage insurance as a cost of borrowing. It does mean you can enter that property market sooner.
Molly Benjamin 01:36
And I know in today's podcasts, we might even refer to that as LMI. Because I know I see it written as lenders mortgage insurance. And I guess it's well, like, you know, we've got to really believe that we can buy a house, I always think the mindset piece is the biggest where I was speaking to a lady in when I was living in the UK. And she was in HR, she was on a really good wage, but we were talking about property, she was just like, I'll never buy a property, I'll just never be able to afford it. And I was like, not with that attitude. You're worried. But then like a couple of years later, I saw her and she had really come across like no, I can buy, I can buy a house. So she met with a mortgage broker, she started getting her ducks in a row. And she did buy a house. But it was really she had to go through that mindset shift to actually go No, I actually do now really believe that I can buy property. So I thought maybe I do like to know like, what are some of the mistakes you're seeing when it comes to people buying properties?
Grace Bowe 02:31
Not using a mortgage broker? Seriously, no, that's not just a shameless plug. Our very job is to make what can be a really stressful and overwhelming process as simplified and as stress free as possible. And it's not just a mortgage mortgage brokers job to get you approved for a home loan, but to really find the best loan for you. Other mistakes generally, that I see people making are being loyal to their bank. So I cringe when I hear people say with pride, you know, I've been a loyal customer of XYZ bank for 20 years, because in industry that's known as you'd be paying what's known as a loyalty tax. So banks roll out their very best rates to woo new customers, and they kind of take their existing or old customers for granted. In fact, recent analysis published just last month showed that the major four banks in Australia, I've been found to be giving markedly lower rates to the new customers. In fact, the difference like between the worst offender was 1.09%. And that when you think how that translates to monthly mortgage repayments, that's a huge difference. So that's a mistake, I would say don't sort of be loyal to your bank always be shopping around for the best rate for you. Another mistake I see. And it's certainly something that when people first come to see me, that lady that you sort of cited if she was coming to me and saying I can't do this, one of the things I asked people to do is to look at their credit card limit and not their balance. So the banks always assume the worst of people. So you might just have $500 a month that you spend and pay off immediately on your credit card. But if you have a $10,000 limit, the bank is assuming the very worst and they are that could cost you up to $50,000 in borrowing power. So reducing credit card limits that you aren't spending.
Molly Benjamin 04:13
Okay, great. And someone wants to describe a mortgage broker as a stylist like a personal shopper. So they'll go out they know what's in fashion, they know and they'll come to you with all like the best deals like the best designs and be like, Okay, what's going to fit, you know, your body shape what's going to fit your circumstances the best. And I love that analogy. Because before that I never quite got it. I was like oh, so they find me the best deal. And I know and I thought maybe we could just add to it really now because we always get this question when we do these sessions. How do mortgage brokers get paid?
Grace Bowe 04:46
Can I just say I love the stylist analogy. Oh my gosh, I'm gonna take that to myself. I sometimes describe myself as a matchmaker. I always wanted to like match make friends in love. And I've not been successful in that yet but I do love matching people to the best loan for them to get them their dream home. So Same same just to..
Molly Benjamin 05:02
You can be my matchmaker, I need all the help.
Grace Bowe 05:06
So to answer your question of how mortgage brokers get paid by, for example, don't charge for my services. And people can sort of be suspicious, you know, we're always told there's no such thing as a free lunch. So it's like, no, how's this working? We are paid by the bank were paid commission for putting people into a loan. So sometimes when people see that commission figure, they can also ask Is that like an extra cost to them? It's not at all we're simply sort of doing the bank's admin in a way for them. And the commission that most banks pay is like, very much the same or like such an insignificant difference that there's no, you know, we're not incentivized to put people with a particular lender, we're genuinely just trying to see which is the best product for them. And if I can just expand on like the stylist matchmaking, for example, someone might walk into a branch off the main street, and they might ask for a loan, and they might be self employed. And they might be told, Oh, we don't lend to self employed applicants, and then that person can walk away feeling so despondent that they're never going to get a home loan. But our job as a mortgage broker is to know, oh, well, that bank doesn't like self employed applicants, this bank happens to like, love them. Well, same thing, someone might have just taken a new job and be told that, you know, banks don't lend to people still on probation period, that, again, it's our job to say, I know this little bank in my back pocket, you know, they're really happy to give loans to people still on probation period. So it's just that kind of the matchmaking slash styling.
Molly Benjamin 06:28
Yeah, I was having a conversation with a friend. And the exact same thing happened, they walked into a bank, and you know, they were offered that one rate, whereas if they'd gone to a mortgage broker, they would have had like, literally maybe 20 rates to choose from. So I think we're just busted a big myth there that yeah, mortgage brokers actually paid by the bank. So you know, it's not a cost to you. And yeah, it can actually save you like hundreds of 1000s of dollars over a period of a loan by using a mortgage broker. So it's totally worth 200%. Right, thank you. So we kind of chatted about what mortgage brokers do. So what is the first thing we need to prep when we're going to buy a property? Because sometimes people are already looking for their dream home. But I'm like, oh, there's still quite a bit of admin you need to do before you actually are ready, because how do you even know like, what is your price limit? So what's the first kind of things we should be doing?
Grace Bowe 07:19
Great question. And you basically answered it yourself, which is, I always say the most important first step is to know what your borrowing capacity is, especially when you mentioned like they're looking for that dream property, you would never walk into a designer store for clothes, if you knew that your budget couldn't extend to that for clothes. And yet, when people start their house hunting, you know, they might be looking in their favorite suburbs to only realize later down the track that that's so out of their price limit. So I'd say the first step is to know what your borrowing capacity is what the banks are going to be willing to lend to you. So that then you can sort of know that limit when you're house hunting. And you can do that by meeting with a mortgage broker, there's calculators online that can help you sort of work out what that borrowing capacity is, I think, then the next step is looking backwards. So knowing in a bank's eyes, what makes a good application for a home loan, and then again, making sure that you are fitting that. So for example, it's often a shock to people that when they're applying for a home loan, a bank will ask for your most recent three to six months of savings, they don't just need that, you know, statement from the date before applying. And they really go over it with a fine tooth comb. So you want the bank to see that you've got those good savings habits there that you are having extra aside, at the end of each paycheck that you're not living paycheck to paycheck, banks really aren't fans of the Buy Now pay later scheme. So anyone looking to apply for a home loan, really steer clear if your zip pays your after pays. And as mentioned earlier, really important to look at your credit card limit, not just what your balances, but really reducing the credit card limits if you're not using them, as well as it's so important to be on time with payments. So like your monthly phone bills, your rent, you don't want to ever have that black mark against your name,
Molly Benjamin 09:01
Because I guess the bank just wants to know if you're going to be responsible. And really, if they're going to get their money back, that's probably their biggest priority. Perfect summary. Okay, great. So let's go through the process of buying. So let's use me as an example. I'm looking for a place to buy. I'm smart. So I just go straight to a mortgage broker, and we work out what my capacity to borrow is. And I get what's called a pre approval.
Grace Bowe 09:27
Yes. And pre approval lasts for 90 days. So it's important because sometimes people will, they might, you know, come to a mortgage broker at the start of the year, and have that amount in mind. And then they might, you know, put it off for a few months and then come back and be like, Hey, I found the house. But your borrowing capacity can change. I mean, we've come out of a period of incredibly low interest rates where they didn't change and so that borrowing capacity stayed the same. But each time the rate rises go up that is eating into your borrowing power. So it's just important to sort of keep that in mind and be checking back in with your mortgage broker. About your pre approval is still valid.
Molly Benjamin 10:02
Yeah. And just on that with the pre approval, what would I need to supply to you to kind of get that?
Grace Bowe 10:08
Pre-approval is basically the same as getting approved, or the paperwork that I'd be asking for your pay slips. I'd be asking for the bank accounts that we just mentioned, both savings and everyday transactional, you'd be asked for ID it's always a lot of paperwork. I always apologize to people upfront about how much paperwork it is, we're just asking for what the bank asks for. And banks really like to dot their i's and cross their T's. Let's just put it that way.
Molly Benjamin 10:35
And then of course, yeah, they're lending you a lot of money.
Grace Bowe 10:38
So then, in going for a pre approval, it's literally like putting you in for a home loan, we put you forward to the bank. And we make the case that you are a great potential future client of the bank and wait for your pre approval to go shopping with.
Molly Benjamin 10:52
Okay, great. So pre approval done. And I imagine as well, like if you're talking to a real estate agent, and there's two of you interested in a property, one has a pre approval one doesn't, they're going to be like focused on you with a pre approval.
Grace Bowe 11:05
I sadly have these conversations with people every single day. I don't want to sort of speak terribly. I'm whole industry. But it's important to remember real estate agents are just interested in getting that sale for the person they're selling for. And so same to I've lost count of how many times people have come to me and said, Oh, my gosh, I said to the real estate agent, please keep me updated, you know of any movements. I'm interested unless you're actively bidding on that property and bidding can be done not just at auction. So unless you are making an offer, to real estate agents not really compelled to call you unless you're like actively purchasing that property.
Molly Benjamin 11:42
Interesting, because I also was talking to a friend who's a real estate agent, and they were saying as well, I said, I do you like working with mortgage brokers. He's like, my preference is mortgage brokers, because they know the process, we get things done a lot faster. He's like, I tell everyone to go through a mortgage broker, which I was like up makes sense. Thanks, my friend. Yes. Okay. So we've got the pre approval. I know what my range is, if I'm struggling with that with the deposit, what are some ways out there that I can get on the property ladder? Maybe a little bit earlier?
Grace Bowe 12:15
Yes. So one of the first ways and this is for first homebuyers is the government scheme, which is known as first deposit guarantee scheme. And that's where if you only have a 5% deposit saved, the government will waiver that lenders mortgage insurance as a way of getting in a few things to be aware of with this scheme. There are property price caps. So in Sydney, that property price cap is 900,000. So properties above that, ineligible for Melbourne, it's 800,000 for Brisbane, 700,000. And then Adelaide, Hobart and Perth 600,000. Again, there's also an income eligibility criteria. So for singles, they can earn above 125,000 in the tax year, and for couples that 200,000 income eligibility criteria. But it's still a great way to not have to have that full 20% deposit saved. It's not a cash, it's not cash that the government is giving you. They're just literally saying you don't have to pay Lenders Mortgage Insurance and can purchase with just that, you know, between five and 20% deposit other ways around that hurdle. There's certain professions which have the LMI waiver. So medicos, doctors, pharmacists, audiologists, they've just introduced a few new categories in that they can all buy with only a 10% deposit under some banks packages, I guess it's just the bank recognizing that they are in steady employment. And they're sort of going to always be in demand. Sports stars, and like entertainment professionals, like your TV stars also have such a wave of suppliers. Sometimes I feel it's crucial that it's like how the celebrities get, you know, the free stuff.
Molly Benjamin 13:53
It's like a privilege waiver
Grace Bowe 13:54
Completely. Yes. Can we just call it the privilege waiver ash. So that's another way around the deposit. And then finally, this idea, which like I said, it's not for everyone, but it's just working out what is your long term goals, it could be just sucking up that LMI cost as a way of getting in sooner. So that example of let's say you're wanting to buy the 800,000 apartment, so the 20% deposit been 160,000 You might have had 80,000 saved, which is huge. But to get that final 80,000 You know, that could be another few years from now. Or because LMI works on a sliding scale, you might pay 25,000 LMI, like get to buy that property sooner. And you know, hopefully that's going up. So that's sort of another way that I encourage people to think of,
Molly Benjamin 14:38
okay, great. And for those people, again, who are in a kind of privileged position where their parents might own property. How does the gap is it the guarantor scheme or program I'm not sure...
Grace Bowe 14:51
It's known as like guarantee loans and that is another great way to avoid LMI and that's where you don't even have to ask your parents for cash. Have to go cap in hand. It's just if they have a family home, and they're willing to sort of put that as the security or the guarantee house, that's where the name comes from against your loan, then that's a great way to get in sooner as well. And sometimes people might have a bit of hesitation around that. But you can also have what's known as a limited guarantee where instead of having the whole family home on the line, you might just put that 20% of equity on the line. And then few things to be mindful of that. And anyone looking to go into a guarantee loan is always both parties. So like the parents and the child, because mostly it is parents who are the guarantors are encouraged to get sort of different advice. But the parents need to have at least 80% of like equity in their home with their own loan against the Home Plus, what would be the guarantee loan. So let's say the family home is worth 500,000, their own loan against that home plus the guarantee that they're giving their child cannot go above 400,000.
Molly Benjamin 15:58
So well, they will have had to have paid off quite a bit of that home.
Grace Bowe 16:01
Which I mean, for most boomers, they actually do have that
Molly Benjamin 16:06
Yeah, they have. Okay, great. And what about do you come across many cases of people buying with like friends?
Grace Bowe 16:13
Do you know what? In the past three months, and I think this speaks to just the crazy house prices in Australia, I have had three people approached me and we've done that thing of working out their borrowing capacity, we've sort of looked at, almost treat them like a couple, and banks on their different servicing calculations you can have like, I've seen up to four applicants, which I think really does speak to that idea that people are going in together. So I've got three people at the moment who haven't brought yet but they're on the road to it. Yeah, again, it just speaks to this idea that because, um, house prices are so expensive here, you know, we're just trying to look for different ways to get in.
Molly Benjamin 16:50
Yeah, no, I love that. And I know if you are thinking about that, there's definitely certain contracts that you need to have in place. You can't just be like, Yeah, this is what's going to happen. You've got to really make sure you've got the legal contracts sorted on that one
Grace Bowe 17:03
A prenup, but like a friendshipnup.
Molly Benjamin 17:05
Yeah, literally. Yeah, a prenup. Cuz as soon as money's involved, sometimes people can turn very different. It's just crazy. The effect. All right, so we've got potentially a government scheme, we've got our pre approval, I just wanted to because this is something we also get a lot of questions on when we run our property sessions credit score, like I mean, you mentioned before, like, yeah, will the bank check our credit score, because I know, sometimes there's myths around if you need to have good credit score, you have to have a credit card to have good credit score, can you buy some of these myths.
Grace Bowe 17:36
So you definitely don't need a credit card to get a credit score, if I can just bust that myth right open. Now, especially, it's cruel when people sometimes get a credit card under that idea that they need it for their credit score, and then it ends up negatively affecting their credit score, because like we said before, that even a 10,000 limit can take away $50,000 worth of borrowing power, or they might just be a bit late on, you know, repayments like happens. But then that's, again, a real black mark against the credit score. So a credit score can be from, you know, mobile phone bills, if you're paying rent on time, again, often for my first time buyers, the bank can ask for just that rental agreement and see that you have been a really good tenant, you know, there's so many ways for the bank to see that you are a responsible person when it comes to money, but you do need to have a good credit score. So it's one of the first things that we have to do, which is to sort of run a credit check on someone. And if there is a negative credit score, there are some banks who just blanket rule won't take them on, you know, there's certainly banks who will take them on. But that's at a much higher interest rate, which again, is kind of that cruel catch 22 that it's hard for them to be making those repayments on a higher interest rate.
Molly Benjamin 18:45
So anyone can check their credit score, and it's not going to affect your credit rating. Again, we get this question where people like, But won't I get a mark against my credit score if I'd been searching for my credit score? So that's completely different to then applying for credit?
Grace Bowe 18:59
Yes, I encourage people to check their credit score and to see where it is. And this idea that looking at your credit score, you know, is detrimental to being an applicant. That myth has come from that when you're applying for lots of credit. So if you add if you've done that, in the last formats have taken out five different credit cards. That's what's that because the bank sort of saying, Oh, you're not managing your money. Well, you've taken on all the credit card, but just literally you're saying to a bank or to the credit score company, what's my credit score? That's not black mark? Does that make sense? That difference?
Molly Benjamin 19:33
Yeah, that does and I think that's a really good one to point out. And so people can check their credit scores. I know we money budgeting app lets you do it now. LFOs Yes, beautiful. But yeah, that's definitely one because I've seen people check their credit scores, and they're like, What the hell I've got such a low credit score, and it's because like they moved house like five years ago, and they owed like $5 on electric bill, another person owed literally like $20 on an old mobile bill. And so then they had to go to the saw it because it was really negatively affecting him in such a small amount was having a massive negative effect on their ability to borrow money. Okay, so found the property, it's looking good. How do I know whether to get a fixed or variable loan? And what are they?
Grace Bowe 20:16
Good question. And in this current interest rate environment, it's something I've been asked every day. So the difference between fixed and a variable rate is, as the name suggests, a fixed rate means you are locked in at a rate that is fixed. And you could have a one year fixed rate, you could have two year three year five year, like five years sort of the max. And the good thing about a fixed rate, because pros and cons to everything, always in life Rush is nothing if not a compromise. So the fixed rate gives you that certainty around repayment. So you know, if you're someone who really needs that peace of mind that this is what your monthly repayment is, a fixed rate gives you that a fixed rate some of the disadvantages of a fixed rate is you lose a lot of the flexibility. So you, if you're someone who wants to make extra repayments above and beyond and pay that loan down sooner, there's only one bank, I know that lets you make a $10,000 x ray of repayments if you're on a fixed loan, but most fixed loans do not let you make extra repayments. And if you ever break your fixed rate, and there could be different reasons to do this. So if someone sells their house, they're essentially breaking that fixed contract rate. There's huge penalties like a friend, not a client of mine, I've seen her pay $11,000 In exit fees of a fixed rate. So just something to be aware of. But we have just come out of what was historically like the lowest period of fixed rates we've ever seen people have fixed rates of 1.29 and 1.5, incredible low cost of borrowing. So a lot of Australians did opt for fixed rates that are now rolling off into variable. So variable rates are where like it says it's kind of that floating rate. So when the interest rates go up, your interest rate and monthly repayments got in the same way when it goes down, you always go down, it does give more flexibility. So you can be making extra repayments and paying off faster.
Molly Benjamin 22:06
So on the first Tuesday of each month, the RBA, the Reserve Bank of Australia comes out with the rate, can you just explain that process to our listeners, and how that then affects loan prices.
Grace Bowe 22:18
So again, historically, the RBA would meet once a month, and I don't know what what they've been doing the past few years, it just was must have been a meeting with keep caught up with themselves, no interest rate changes. But lately, we've really seen that people are starting to dread that first Tuesday of the month meeting where the RBA looks to set what's known as the cash rate. And the reason they do that is they've got this like ideal target that they want Australia's inflation rate to be and, and so the reason it was so low was they were trying to stimulate economic activity. So by making the cost of borrowing low, people were going out there buying houses, they're buying flat screens and lounges to go into that. And they were like, great, we're stimulating growth. And I guess they did too good a job. And there were different factors which was beyond their control global pandemic, for all these reasons. Inflation at the moment is super high. And so the RBA is trying to quell growth. And one of the ways to do that is by really slamming on the brakes of growth by putting up the cash rate to kind of set the mood. That's what like the cash rates meant to be doing to the economy. And we're sort of starting to see that interest rate rises, flowing through to the property market, we're seeing that drop in house prices, because the house prices are very much tied to interest rate rises. So that's what they're sort of doing on every Tuesday, and they have been putting it up the last few months. No one's got the crystal ball, but everyone sort of predicting that there's still a lot more rate rises on the immediate horizon.
Molly Benjamin 23:47
Great. And then the banks either decide to pass that on to their customers, or I mean, they're generally always going to pass that on to that customer.
Grace Bowe 23:55
Exactly. So there's quite college Chicken Little bit. It's like that first mover like which bank, you know, because then they get slammed for the very first bank. You know, the headlines are that Tuesday afternoon will be on I got this major bank was the first one to pass it on. But eventually, they all pass it on. Because what the cash rates dictating is the cost of borrowing money, which isn't just for everyday people on their home loans. It's for what the cost of borrowing is for the bank to borrow the money. So yeah, inevitably, we're really seeing that rate rise pass on but your own interest rate is going up, which means your monthly repayments for people who are on variable loans going up,
Molly Benjamin 24:30
Okay, thank you for explaining that subclass. I used to work in corporate affairs for a bank and every like the first Tuesday every month are going to be going to going crazy, but I was obviously not on that case or writing those press releases. But that is the reason why everyone was kind of freaking out so much on a Tuesday and didn't want to be the first bank. So then we've got the loan. So will the mortgage broker help us work out which loan we should get definitely like should we go fixed or variable...
Grace Bowe 24:57
Definitely, fixed or variable and then even within loans, there are different features. In fact, I saw a really good headline on the weekends papers that just were, which said, your offset account might be costing you more. And so an offset feature. So there are sort of like your bells and whistles products. So you'll learn products where you can have a lot of offset accounts and some different features that often you are paying a higher interest rate for those features. So again, that's why it's so important sitting down with a broker to work out, what is your unique set of circumstances? And what are sort of your goals. So often, for some of my clients who are just wanting the lowest interest rate, we'll put them in your more basic home loan rate. And that's a bank term, basically, like for them basic home loans, where it's that lower rate, they might not have the offset feature, but they can still pay extra and have a redraw feature.
Molly Benjamin 25:50
So yeah, and when you say the offset feature, can you just break that down in case people listening aren't quite familiar with it?
Grace Bowe 25:56
I know. I always apologize. This industry is just so full of like its own little words unto itself. And obviously acronyms the DTI, the LM eyes. But yes, offset account is where, when the bank charges you interest each month, it's charging it on what the principal amount is. And if you have an offset account, so let's say you owe 500,000, on your phone line, but in your offset account, you have 100,000 Just sitting there, the bank is only going to charge you interest on the 400,000. So that's the advantage of an offset account. There is like a tipping point. So sometimes, you know, people will say I want an offset account because my friends got an offset account. But if you only have $500 sitting in that offset account, it's kind of not worth paying for that feature unless you're putting it to good use. And redraw can work in the same way as the offset where even if you're on a like more low fruit or loan product, but you're making extra monthly repayments, they can just go against the home loan, but you can still redraw what you've paid off. That's above and beyond the minimum monthly. So you can sort of get that same benefit. Without the cost. It's just again, people have different ways they want to sort of manage their money in their accounts.
Molly Benjamin 27:11
And so when you get that loan, do you then decide as well, whether you want to be paying the principal, or just the interest or principal and interest. And I'll just and you can tell me if I've got this right. So principal is paying off the property and the interest rate sorry. And the interest is when you just pay off the interest, but you're not actually paying off the property, which I think is a that's quite popular with investors who are just hoping that the capital gain of the place or the value of the property will go up.
Grace Bowe 27:40
Top of the class that was so well explained. Yes.
Molly Benjamin 27:43
I've only had to do like 10 webinars on this topic. And I'm finally getting it.
Grace Bowe 27:48
Perfect, yes, that was a brilliant explanation. And again, that's why it's really important to know what people's long term goal is. If it is to own their own house outright, then definitely be paying down the principal, because then you're building up equity from the start, like you said, interest only is quite popular with investors, because the interest that you're paying. And again, it's something important to talk to your accountant about that that can be tax deductible. But again, you're never sort of building up equity in that property.
Molly Benjamin 28:16
Great, because I just had a friend recently who switched to paying off principal and interest because they were like, No, I want to actually start paying off my home. Now. I don't want to just pay the interest because I think they were waiting for like a job promo or something like that. And they got it. And so I might well not my dream home because it doesn't necessarily have to be a dream home. If it's your first home, you just trying to get into the market. So I'm not going to refer to it as a dream home. So the home that will help you get to your dream home. So found the house. I'm keen to buy it. So I've chatted with my mortgage broker, we've worked out my loan, what other things do I need to actually check on the House side? So I know there's some inspections that we need to do. Does that happen? Before you sign the contract?
Grace Bowe 28:55
Yes, I would encourage people pest and building is a really important one to have that before you sign a contract.
Molly Benjamin 29:02
And I'm assuming pest is just to make sure there are no pests or termites. I'm from Queensland guys, we have termites in Queensland. And then structure is just to make sure it's structurally sound. And it's not going to follow that tomorrow.
Grace Bowe 29:13
So yeah, when you are shopping for a home, you kind of need to assemble your dream team, even if it's not for the Dream House, kind of a dream team just for the home. You'll also need your solicitor and your conveyancer to look over the property contract just to make sure that it's sound and you're going to be okay legally.
Molly Benjamin 29:29
Is solicitor and conveyancer. Are they the same person or are they two separate people?
Grace Bowe 29:31
Some people have a solicitor some people have a conveyancer, they're essentially doing the same thing. And I hope I'm not offending solicitors or plants as listening, but you can you know, sometimes people say, Oh my gosh, I don't have a conveyancer. I've just got a solicitor but they're sort of doing the same job.
Molly Benjamin 29:46
And when you're looking for one you'd want one who specifically kind of is in the niche of preoperty.
Yes, I've got a few friends who I guess it's like any profession, a few friend who are lawyers and will say you know, they might be focused on like mergers and acquisitions. But then people on a weekend barbecue will be like, Oh my gosh, can you look over my property contract? And no, it's all very different and very niche. So you definitely want a property specialist.
Molly Benjamin 30:10
Awesome. Okay, so then we'll have the conveyancer solicitor, and then they will just do so they do like a title search to make sure the person who's selling the property actually does. And what are some things we want to like, think about when we're looking for a property? Like, obviously, maybe near schools, transport.
Grace Bowe 30:27
Yes. And banks themselves have criteria around this criteria. But often people can be shocked that there's certain postcodes that a bank might lend against. So remember, impacts are so risk averse, if they see, you know, like, you might go past a suburb and go, Wow, like every second block is like an apartment building development. A bank can actually sometimes look at that and go, oh, there's going to be oversupply there. And so there's a few postcodes where they might lend to it, but there might have even stricter lending criteria around it. So you might need to have more of a deposit saved in the same way. Listen times, like you might be going on a holiday and see, you know, you'll be driving down this country road, and you'll be like, Oh, that property has been for sale for the last five years. Every time I drive past it, we should buy it. And the reason it is probably is the bank won't lend against it. Because again, if it says that it's in a rural area, and by rule, I mean, like you know, really far out, not a lot of access to infrastructure. Again, they might see that you have to remember that a bank is always assessing something from the perspective of if things go belly up, can the bank sell their money and get it back here? And so if they say that's going to be difficult to sell, they won't do that. Which is a long winded way sorry to answer your question of you want to know that your property that you're buying is going to always be in demand. So proximity to good transport links, schools, everything like that.
Molly Benjamin 31:48
And that actually brings up another question I just have on LMI lenders mortgage insurance. So that's not an insurance me that's insurance for the bank.
Grace Bowe 31:54
Exactly, you're not covered by that
Molly Benjamin 31:56
if I can't pay off my property, the lenders mortgage insurance is covered means the bank can get their money
Grace Bowe 32:03
Yes, the bank is looking after them, not you. I'm so glad that you brought that up.
Molly Benjamin 32:06
I think it's an important difference because most insurances cover us, but not that one. All right. So can you just chat us through the process of what are those last few things, which means like, we exchange the keys, the contracts are signed? Could you talk us through that?
Grace Bowe 32:22
Yes, though, they're sort of thrown conveyance has probably more I feel like and I often tell people, especially around the wording, even though in our scenario, you're being the dream candidate, you're coming to me early to get your pre approval often it doesn't happen like that. So let's use a different example of Molly should be named Sally friend, Sally, Sally, let's say Sally, sorry to other Sally's out there, walks past her house on the weekend and says, Oh my gosh, I love it, I want to put an offer in I've told them I'm going to put an offer in can you try to get me a home loan, and she's basically signed a contract. And then she's going into what's known as cooling off which cooling off his wave it in the case of an auction, which is why it's really important not to you know, just go to an auction and put your hand up if you haven't done your pre approval. So Sally is now in the cooling off period and were clambering at the back end to get her approval in time before the cooling off period is over.
Molly Benjamin 33:12
Because the cooling off period means that you can...
Grace Bowe 33:15
...cancel out. sometimes you lose like you'll put down a nominal deposit. Again, I'd like to encourage everyone to remember that everything is always up for negotiation. So sometimes even people will say I've got to put down the 10% deposit, even the percentage of deposit that you're putting down to enter into a cooling off period can be negotiated settlement. Again, sometimes people will say, Okay, I've got six weeks settlement. Again, I've seen people to clients at the moment, one's got a six month settlement, one's got an eight month settlement. So everything, literally everything can property and home loan deals is always up for negotiation. And so we might need to get that cooling off period extended if people are still tracking, you know, if there's a delay in the bank loan approval process or something like that. Sometimes when you said a piston building, sometimes real estate agents can sort of if there's a few of you who are wanting a property, they might just, you know, someone might feel pressured to put the deposit down but not have had the piston building yet. So then that can be arranged in that cooling off period as well. So then you can walk away.
Molly Benjamin 34:15
Okay, so cooling off period happens. So in this scenario with Sally, she comes to you. And then when does like the key the contract gets signed in the keys.
Grace Bowe 34:25
Yeah, so that is known as settlement. So settlement, again, can be your standard settlement. So most contracts will always have six weeks is your standard settlement period. So from the time you kind of first see it and say yes, I want to buy and sign on that dotted line. That's why I'm saying that everything's up for negotiation. So you might say, You know what, I don't want to move into 12 weeks, you know, you might be going overseas on a holiday that's already pre booked and you can just sort of that's where everything is up for negotiation. But the handing over the keys happens on settlement day. And so given that it is six weeks people typically They have six weeks to get the finance.
Molly Benjamin 35:03
And so you would arrange for the mortgage broker on your behalf or yourself, you would arrange the money to be put into the account.
Grace Bowe 35:11
Right? That's on settlement day.
Molly Benjamin 35:13
Okay, great with that. So I just had another question. So private sale through a real estate agent. That's what's hap that happens when it's an auction. And you said then, so when I if I go to an auction, I bid on a player's that becomes mine straight away right away. So you need to have everything sorted.
Grace Bowe 35:30
Yes. You know, I don't want to pay out the salaries, and I deal with salaries. And I love the excitement. I'm an impulsive girl myself. But Sally needs to stay clear of auctions, unless you have that pre approval in your back pocket. And you know that the bank is going to give you the money. Yeah, because at an auction, you're on the line for it. Then in there,
Molly Benjamin 35:47
yeah. So my girlfriend was looking to buy in Sydney. And she went to three different options to be a better, and she had to do three lots of like, pest and structure. So she was spending a couple of 100 Every single time just to make sure that if she then was the winner, that would be sort of,
Grace Bowe 36:06
you know, again, pros and cons to everything, but it can be expensive. Like you said, you know, if you've gone to your third fifth auction, sometimes take the lead rocking up to it. And it's the same thing that you might have had your solicitor or your convenience and look over the contract, because and there can be my husband, I've been at a few properties at auction, and you can have like your own separate contract where if you're an IT sort of pre negotiated in that week before the auction. So if we were going to be the winner, we have, you know, negotiated a longer settlement. But again, you sort of paying the solicitor or conveyancer to have pre booked over each time.
Molly Benjamin 36:41
Okay, so settlement day happens, everything goes smoothly, I'm sure there's a lot of like, there's not that smooth but smoothly. So I've got the home and paying it off. What are some of the ways now that I can pay off my home quicker? And what do you see?
Grace Bowe 36:55
Yeah, I love it. So there's lots of little tricks like one is to make the frequency of your repayments fortnightly instead of monthly, as that means your lender will take your monthly repayments and divided into. And that sounds really straightforward, right? But because there's 26 fortnight's and only 12 months, you ended up making two extra payments per year, which amazingly like you don't miss it from your day to day life. But that can shave a couple of years off your loan. Because paying more than the required amount each month, that's a really effective way to get the principle down faster. And even a couple of $100 extra per month can take years off your bone. So there's this site that ASIC Moneysmart calculator, and that has shown that let's say you pay an extra $386 per month on top of your normal monthly payment of like 2315. That alone that extra 386. That saves you six years of your loan. Wow. I know like it's crazy the difference it makes. And I think right now September, we're starting to see a lot of people get their tax returns back. And that can mean for a lot of people a little bit back from the tax office. And I encourage like all my clients or people who are serious about sort of getting that mortgage free status to divert most of that bonus to your learner's it makes such a difference there, especially at the start when most of your repayments are going towards that interest rate component, and additional lump sum comes straight off that principal amount. So again, just to give it like an example, if you have a bonus of $5,000, or the tax return, and you pay that into your mortgage after one year, that will save you $8,712 in interest so that $5,000 is costing you like saving you 8712. And you know that takes six months off, you're gonna do that each year, and you're really seeing that loan term come down at Wow, gosh, a lot of figures there. But I just like to sort of really demonstrate the power of how a little bit makes such a big difference.
Molly Benjamin 38:44
Yeah, and I think even just like, you know, that extra couple of 100 can dramatically reduce your, your loan term as well. Well, thank you guys so much for coming and talking us through that process. I know I'm feeling a lot clearer about what the steps that are needed to be taken. Where can people find if they're like, grace is awesome. I want grace to be my mortgage broker. Where can people find you?
Grace Bowe 39:04
Oh, thanks, Molly. So my business name is Coast Home Loans. And we do clients all over Australia. So www dot Coast home loans.com. Today, you and we're on Instagram, like every business these days and try to share lots of sort of behind the scenes advice there.
Molly Benjamin 39:21
And what is your handle for Instagram?
Grace Bowe 39:23
Molly Benjamin 39:25
Well, thank you so much for joining Ladies Finance Club.
Grace Bowe 39:27
Thank you so much for having me. Like Australians were so obsessed by property. You know, it's our national pastime. And I see you know, friends buy a house and people don't hold back and asking how many bedrooms how many bathrooms land size, but we would never ask someone, what interest rate do you want, but we have so much to learn from each other. If we could just make talking about money and every day apart, and you're doing that through podcasts. Thanks Molly.
Molly Benjamin 39:54
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