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A guide to getting your finances in order before building

The banks may have tightened lending conditions, but it’s not all doom and gloom if you are seeking finance to build your own home.

Since the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry was established in 2017, the financial landscape across Australia has changed. A mixture of Australia’s property boom pushing house prices up and the banks new lending conditions as a result of the Royal Commission has made it harder for many to own a home compared to previous years.

However in Geelong, the property outlook is promising. Latest figures released by the City of Greater Geelong last October show an increase of 7.2 per cent of new dwelling approvals since October 2017. There was 2929 new dwelling permits issued by the council in 2017/2018 — an increase of 10.6 per cent compared to the previous financial year.

The final report from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has also recommended mortgage brokers must act in the best interests of the borrower. It has also recommended, “The borrower, not the lender, should pay the mortgage broker a fee for acting in connection with home lending”. Both recommendations, if introduced, could provide further confidence to borrowers that they’ll be better placed to buy a home that suits their financial circumstances.

Geelong Homes General Manager Andrew Carroll says both the recommendations, as well as the tougher lending conditions can only be seen as a good thing when it comes to reducing financial pressure on first home buyers.

He says despite experiencing a short period of low inquiries in response to the tightening of lending conditions, Geelong Homes has found that people have begun to refocus their attention on what the banks require to make their building dreams a reality.

“Inquiries have picked back up because everyone has their ducks in line but in a different way,” Andrew says.

“For some clients who really can’t afford a house, it’s not a bad thing. It elongates the process and it allows them to spend more time saving. But you know what? I’d rather that ethically any day of the week than to build a house for a client that they can’t afford.

“No one wants to put a family in financial hardship for a house.”

A new approach to seeking finance

Isaac Baker is Branch Principal and Wealth Manager at wealth management company Yellow Brick Road Geelong and Torquay, and assists first home buyers seeking finance approval.

“Over the past two to three years the lending environment has dramatically changed in Australia,” Isaac says.

“The banks are now looking for more supporting documents around income and savings to confirm an applicant can afford the loan they are applying for. This is due to a number of economic circumstances, particularly to avoid a housing crisis like we saw in America in 2008.

“An estimated figure I would say is, if a family could borrow $600,000 two years ago they can only borrow $450,000 now.

“The banks are now assessing customers at a higher interest rate so if interest rates were to increase in the future they will still be able to afford their home loan. This however has decreased a lot of people’s borrowing capacity.”

However, that doesn’t mean first home buyers should lose heart. Isaac recommends potential first home buyers need to research as much as possible before they apply for a home loan.

“It is very important to speak to a bank or mortgage broker as early as they can, so they can get familiar with what is needed to get a home loan approval,” he says.

“The most important parts to the approval they should be focusing on is income and savings, and avoid any liabilities, for example car loans and credit cards, as these can reduce their borrowing capacity.”

An easier option for financing a new home — build!

Isaac says that whether you want to buy an established home or build, your borrowing capacity will remain the same, however building has the advantage.

“First home buyers can receive the $20,000 grant if they qualify which can make it easier to gain finance,” he says.

“As a first home buyer, I would always look at building as an option first due to this which can make getting a loan easier.”

For Andrew, he recommends that first home buyers consider the bigger picture before they start shopping around for property or finance.

“Every first home buyer should write down their needs now and their needs in five years time — then look at a house, whatever that house is, and its floor plans, and think about that house for their needs in five years time not today,” he says.

“From there, go through that financial discussion, look at what houses are out there. What specifications they have. There’s a lot of builders, especially in the Geelong Homes market, that package up their homes with lower quality inclusions — they look like good products, but they wear terribly and they last two years out of the warranty period and then the clients are going to spend money to rectify it down the track.

“My advice for a first home buyer is really, really understand the products that are going into your home. If you are comparing price, look at the longevity of the inclusions and products being used by each builder.. It’s a value proposition, if I’m going to have to spend this money in five years time, why not spend the $5000 more now to save money in the long run. I don’t ever compromise on the products that I put in my homes, I treat every home like my own, and if I was put in their position I would want to include the products that’ll last, and with service agreements that will support them.”

Geelong Homes sales consultants can also provide support for clients seeking finance to build their home, and have a list of trusted, reliable mortgage brokers on hand.

“We don’t take a referral fee, we do it for good service not for a monetary sense, unlike other builders who may take a referral fee from brokers,” Andrew says.

“For us, if it’s an easy company to work with, and if they give our clients a solution and can help them, that’s what it’s all about — good work and solutions for our clients.”

Conclusion

Australia’s financial landscape has changed in recent times but that shouldn’t deter you from looking into buying or building a home.

Geelong Homes General Manager Andrew Carroll says the banks’ tougher lending conditions should be seen as a positive — and will ultimately help people buy the house that they can afford and avoid financial hardship down the track.

Yellow Brick Road Geelong and Torquay Branch Principal and Wealth Manager Isaac Baker recommends potential first home buyers need to research as much as possible before they apply for a home loan.

He says it’s important to speak to a bank or mortgage broker as early as possible to get familiar with what is needed to get a home loan approved. He also said people should focus on income and savings, and avoid liabilities, such as car loans and credit cards, which can reduce their borrowing capacity.

Andrew’s top tip for clients, in particular first homes buyers, is to write down their needs now and their needs in five years time. He says to consider the floorplans and specifications, and consider how they affect your needs in five years time, in terms of space to grow your family and the quality of the products and materials used in your home.

Geelong Homes also has a list of trusted mortgage brokers on hand to help potential clients seeking finance.

Want to learn more? Visit any of our display homes located in Lara, Armstrong Creek and Ocean Grove.