Goodbye Renting
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will pay in interest.
That may not necessarily be such a bad thing if you have no other
option an dare prepared to knuckle down and really put all your hard
work and effort into paying off the loan as much and as quickly as
possible.
You see, if you’ve been through a bankruptcy or defaulted in the past,
your ability to get back on top is obviously going to be even more
difficult so an opportunity like this could be a good one. If you’re
servicing a loan and getting your own home/property you are building
three things: a home; a financial base; and demonstration of a better
credit rating for future purchases.
Ask about it when you’re investigating lenders.
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Just make sure you can feasibly afford the
repayments first (even with a higher interest
rate) and work it out in a weekly basis because
that is how you are going to pay off your
mortgage and show you are a safe bet for a loan
next time.
A shared equity loan
This could be an alternative for people who are on very minimal
incomes. It means that you don’t get all the equity of the property but
share it with your lender. It also provides a means for getting into the
market with up to 28% less cost in repayments. This loan needs real
consideration as you will need to understand the implications of sharing
your future capital gain (on the property) in return for lower repayments.
But - if you read on I have given several examples throughout the
book of people who don’t wish to sacrifice one of the benefits and
therefore never make the transition into home ownership, thus losing out
in more ways than one.
If you do this, you could make the sacrifice to ultimately getting a
bigger gain i.e. your own home and some capital gain for future
prospects.
I really wish this loan had been available when I was struggling to
find a lender in the early days because I could have provided my
children with a whole lot earlier. Even if I did have to share some of the
proceeds upon the sale, it would still have been a permanent home, given
them a sense of security and would have grown in value.
That’s got to be better than the alternative!
Other people who may benefit from a loan such as this would be
those seeking a larger or more expensive property, particularly if it is a
lifestyle they are seeking i.e. a ‘sea change’.
Other loans to be aware of are:
The Construction Loan, The Fixed Rate Loan, and A Line of Credit.
Fixed rate loans
These loans will suit borrowers who are concerned about the rise of
interest rates. If they fix the loan rate they are protected from the pain of
having to find more money each month when the interest rates go up. If
you were to fix the interest on the loan, you will likely incur a higher
interest charge from the onset.
The main benefit for fixing a loan is the security of always knowing
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how much your payment will be because the payments won’t fluctuate.
The downside of a fixed interest rate is that the interest rates might
actually come down, but yours won’t!
Another drawback is that fixed interest loans have more limitations
attached to them. In many cases the loan doesn’t allow you to pay extra
off it and there may be other fees and charges attached so check it out
thoroughly before you decide.
Loan amount warning
Don’t fall into the trap of borrowing more just because the lender is
prepared to give you MORE.
When applying for a loan you need to know that
the amount you can borrow is not necessarily the
amount you should take. In other words, if the
lender is prepared to loan you quite a few thousand
dollars more than you actually need to borrow, don’t
be swayed and start thinking about getting a bigger
or better home… especially your first property.
You might be surprised by how much you can actually borrow based
on your income etc, but this needs to be as pleasurable an experience as
possible and affordability is the key. The first entry into property needs
to be as pain-free as possible and taking on more than is needed can
overextend you financially and personally. You need room to breathe
with your money, and the ability to pay the loan off.
Pre-Approval
A pre-approval is usually valid for at least three months.
It’s always a good idea to get a formalised pre-approval (in writing)
of your loan, by the lender, before picking out the property.
The pre-approval is an acceptance letter by the lender that you have
qualified for a loan and will get one with the prescribed amount
specified. It basically means that they have checked you out and the
lender is willing to give you a loan when you find the right property.
Now, as much as you don’t have to get a pre-approval I strongly
suggest you do for two good reasons:
Firstly, looking at property first without really knowing how
much you can feasibly borrow might set you up for
unrealistic expectations and disappointments if and/or when
you need to set your sights a bit lower. If you know exactly
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how much you can borrow you’re more likely to look at
homes within that price bracket and won’t feel as dissatisfied
as you would if you had seen and compared others outside
your price bracket.
Secondly, depending on the market at the time, the pre-
approval can give you some bargaining power. When you are
competing with others, especially during a ‘boom’ market,
one of the ways to ‘sure up’ an acceptance of a contract by
the vendor is when a buyer doesn’t need to apply the clause
‘subject to finance’. If you have received a definite yes to
getting the finance (in writing) then you don’t need to wait for
an approval. This demonstrates to the owner that they don’t
have to wait for clearance on finance on your part, but they
may have to wait for other buyers to get approval. Your
contract is more appealing in the eyes of the vendor. (Unless
there are exceptional circumstances it is always better to err
on the side of caution and put ‘subject to finance’ and
‘subject to building and pest inspection’ in the contract’).
TIPS - I know I tend to harp on about this but -
you need to sacrifice a little and plan.
If you make a PLAN with a timeframe in mind, mark the spot on the
calendar on which day you start and the day you plan to finish this
financial sacrifice. This is one way of actually seeing where you’re
going and the goal becomes a challenge rather than a chore.
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Story Time
Impressing can mean Regressing
Kathleen was a fun-loving young woman who loved to shop… and shop…
and shop. When Kathleen was just 21 years old she had racked up several
credit card bills and a personal loan totalling $69,000. At the time she wasn’t too
concerned because she was in a great job working as a travel consulta
nt and
earning a $65,000 salary plus bonuses. Those bonuses amount to as much as
$12,000 extra each year with a wage CPI increase every birthday.
Kathleen justified the need to purchased tailored suits and imported shoes as
a requirement for her job. Naturally, she had to look good to give the best
impression so she ensured that her nails were done weekly and the gym
membership she purchased at a cost of $1,200 per year was a necessity, even
though she didn’t use it very often.
Her car was a luxury import which was also important in order to chauf eur
some of her corporate clientele around in. The fact that it cost her couple of
weeks wages for replacement parts was immaterial - it gave the right image.
She rented an apartment close to the city but paid a premium to store her car
in parking facilities during the day.
Then just before Kathleen’s 22nd birthday she was called into her manager’s
of ice for a chat: Kathleen actually thought she might be up for a promotion given
that a number of people had left the business. A few disgruntled employees in
senior positions had resigned recently and those positions hadn’t been filled yet.
Sadly, this was not the case. The manager informed Kathleen that her position
in the company was about to come to an end. While sales had been steady, the
company had been poorly managed by senior management and as a result was
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going into the hands of liquidators.
Kathleen immediately began looking for another job but her particular area of
expertise was in a niche market so most of the standard travel agencies weren’t
keen to employ her, believing she would quickly leave when a bet er position
came alone.
Within weeks she was forced to relocate to her sister’s house as she was
unable to af ord the cost of her apartment any more. Her credit card debt kept
mounting and even the minimum amount became too difficult to pay. As the
weeks passed she managed to get some temporary and casual work, but her
spiralling costs were engulfing her. She began to feel ill all the time. A black
cloud had formed around her, her physical appearance began to change and
she dreaded the mail coming. She got so anxious she couldn’t sleep at night so
she turned to Valium to wipe her out. This in turn changed her demeanour and
now Kathleen was no longer the fun-loving young woman she had once been
and her sister told her so.
Kathleen had stopped answering the door or phone for fear it would be a
debt collector, until one day a trailer pulled up out front and two men in
fluorescent overalls walked up and banged on the door. Kim, Kathleen’s sister
answered it and discovered the men were picking up her sister’s beloved car. It
had been repossessed. It was no longer a shock for Kathleen who just accepted
it and handed the debt collectors the car keys. Her sister watched on in horror at
the drama, and decided enough was enough.
That night, Kim demanded Kathleen get all her statements out to find out how
much debt she had accumulated. After examining the paperwork they both
realised that while the debt was indeed big, there wasn’t anything of value to
show for it either.
This made Kathleen realise she had wasted her hard-earned income on
trivial wants without any thought as to the ef ect it would have later on. She
started to sob, then cry some more, then she got angry at herself for being so
stupid. Finally, she took stock of the situation and asked for help, her sister’s
help, to get her out of this mess.
Her sister wasn’t well of which meant she couldn’t just bail Kathleen out, but
she had budgeted her own income within her means and could maintain what
she had with ease.
With a pen and paper they worked out the best possible way out of the debt
and it meant that Kathleen had to accept positions of employment without
prejudice. To get out of the debt she was in meant she needed not one job but at
least two.
She took a job working in a deli four days a week and waited tables at night.
Every pay was calculated to cover her minimal living expenses (which became
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minimal because she didn’t have time to spend any more). When she received
tips she put every cent into paying of her debts. It took her two solid years of
staying focused and finding other inexpensive things to keep her entertained,
including a gorgeous bloke who also waited tables in the restaurant opposite. He
was studying forensic science at the university so was also broke most of the
time. They found long walks, jamming with friends and being together was all
they needed.
Kathleen finally paid of her debt entirely and could now ease up on work. By
now she had secured another job in the travel industry, but decided to keep
waiting tables at night because now she could actually save for herself, which
she did.
Determined not to make the same mistake again, Kathleen began reading
books on investing and felt the property was something she could actually see,
as an investment. After all she had worn the brunt of her money going without
anything to show for it so wanted to make sure she could physically see where
her money was this time.
With a deposit saved, she purchased one side of a duplex. It had two
bedrooms but required some TLC to give it some warmth. She moved into her
own place for the first time. It wasn’t quite up to the standard of the apartment
she had rented previously, but at least this place was hers. Diligently, she made
payments on the mortgage and vehemently stuck to her weekly budget. On
weekends her boyfriend would help her paint or fix until eventually she was
ready to ask him to move in - which he did.
With the extra financial help with the mortgage, Kathleen started looking
around for her first investment property. She was able to secure an investment
loan against her own place and bought a small cot age in an area further out.
House prices in regional areas were considerably lower than the city and
although the return was unlikely to be as good, she felt any capital growth was
much bet er than nothing at all. After some minor handyman work, and with a
reasonable rent on of er, the cot age was quickly tenanted.
Three years on and Kathleen currently owns six more properties and has
given up her day and night jobs to concentrate completely on property. Oh, and
her little son! Her portfolio is worth some 2.5 million dollars, and funnily enough
she still budgets for the essentials in life.
Oh! And the bloke who moved in, well, he never actually left. The moment he
earned a regular income she had him buying into properties of his own. This
turnaround took going from being swamped in debt to millionaire status in less
than five years.
So it can be done!
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Getting into the real estate
market with friends or
relatives
Mum and Dad’s house
I know this will be a delicate one to broach, but with the changing
times comes changing approaches. If your mother and father are of the
generation that did indeed pay off
their home (over 30 years), they are
likely to have an extraordinary amount of equity that is not being used to
its full potential. What I am talking about is the ability to use a small
portion of equity from Mum and Dad’s home to assist with a deposit or
other associated costs for your own transition into a home. Now, before
you dismiss this notion as a no goer because you just couldn’t ask Mum
and Dad to put all their hard-earned equity into a risky venture like your
own home, you need to really hear this one out.
Once upon a time, parents left their assets, estate and belongings to
their children when they had passed away. Their last will and testament
ensured that what was in the estate was divided up to those loved ones
left behind, usually the children if they had any.
But what if!
What if Mum and Dad could help out now rather than later?
Take a look at this graph below.
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The Australian Bureau of Statistics reports that people in the 55-64
age range have the second higher rate of wholly owned homes i.e. are
without mortgage and people over 65 years are the highest number
without mortgages. Furthermore, the older people who are more likely to
have paid off their home loan have also received an average net equity of
almost $300,000. This is up 68% since 1994.
That figure alone provides a considerable amount of mean equity
available.
What I am suggesting isn’t as mercenary as it sounds, inasmuch as it
makes a whole lot of sense for all involved. As a parent myself, I have
worked hard in order to provide for my children, but I didn’t stop being
a parent or stop wanting the best for them when they left home. More
importantly I want to see the result of whatever they achieve in life right
up until I can no longer be around to help. For me, if I can help them at
all with achieving their own home, then I certainly want to - which is not
to say that I am all for giving your kids a hand out for nothing, or indeed
be the fall back guy when money becomes tight. No, I am seeing this as
a potential winner for both parties concerned if it is handled correctly.
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In times when owning your home is
more than just a sense of finally owning
it, the value of that home is now far