When it comes to buying a home, it pays to be wise to the ins and outs of the property industry.
However, the majority of first homebuyers lacks basic knowledge about the property industry, according to new research.
A “property literacy” survey of 1000 would-be first homebuyers and existing property owners by ME Bank found most were clueless when it came to key property terms.
“It’s difficult enough for those trying to get their foot in the door to save up a deposit and decide where to buy,” ME Bank’s head of home loans Patrick Nolan said.
“A lack of necessary property buying knowledge is sure to increase the risk of young Aussies being caught out with unexpected costs, adding to the existing stress.”
Lenders mortgage insurance
The survey found that 88 per cent of first homebuyers don’t understand that lenders mortgage insurance (LMI) covers lenders, not borrowers.
LMI is designed to protect mortgage lenders from clients who encounter financial hardship and subsequently default on their loans.
Home buyers are typically required to pay LMI if they have a deposit of less than 20 per cent of the cost of the property. Buying property without a deposit of at least 20 per cent is considered risky, and is not usually recommended.
Rather than an upfront fee, LMI is usually an additional fee applied to directly to a home loan. A financial institution can make a claim if a borrower defaults on a loan, and the subsequent sale of the property doesn’t cover the value of the mortgage.
About 85 per cent of first homebuyers don’t know there’s no cooling-off period when buying at auction, compared with 66 per cent of investors, the survey found.
A cooling-off period generally applies to contracts for the sale of residential property purchased outside of an auction. (These vary from state to state, so check the limits in your state.)
However, in most jurisdictions a contract is exempt from the cooling-off period under the following circumstances:
The cooling-off period also doesn’t apply if the buyer is:
Paying a deposit
According to the survey, 78 per cent of first homebuyers don’t know that you need to pay the deposit on auction day.
Consumer Affairs Victoria advises that while there are “no laws setting the amount of deposits for a property sale”, the deposit is usually about 10 per cent of the purchase price and paid at the time the buyer makes an offer.
The buyer may pay the full deposit or a part deposit, with the remainder paid by a date specified in the contract of sale.
“A property remains on the market until both the vendor and purchaser agree and sign a contract of sale,” CAV says.
“If the contract conditions are not met, then the deposit is refundable.”
Conveyancing and conveyancers
The survey also found 66 per cent of first homebuyers don’t know what conveyancing is, with 38 per cent incorrectly thinking that the term refers to checking boundaries or physical issues with your property before you buy.
Conveyancing refers to the process of transferring the legal title for a property from one party to another.
Conveyancers provide advice and help to property buyers or sellers, with the goal of enabling a smooth and legally sound transaction.
“Conveyancers possess the legal knowledge, skills and expertise to conduct the complete range of property transactions,” the Australian Institute of Conveyancers says.
The survey found that 63 per cent of first homebuyers don’t know what an offset account is.
A mortgage offset account is an everyday savings bank account that is linked to a home-loan bank account. It generally only applies to variable-rate home loans.
An offset account works by deducting (or ‘offsetting’) the savings balance against the balance of the home-loan account.
This means that rather than earning interest on the savings balance, the amount of interest owed on the mortgage is reduced instead.