Tomorrow we all head to the polls, regardless the outcome of this election we will see a policy introduced that will make home ownership much easier for First Home Buyers, we're talking a $50,000 deposit would be a big enough deposit to buy a $1,000,000 home (dependant on borrowing power and meeting lender policy) which sounds completely insane. You would assume there will be strict caps on the purchase price that would be able to take advantage of this scheme but details are scant at the moment.
Knowing this I wanted to share a story, this is an interaction I had with a potential client who was referred to me from a builder, the clients were given terrible advice and are now unlikely to be able to build on the land they purchased.
The two first home buyers had purchased a block of land August of last year. They now own the block of land and have the mortgage to show for it. They had a 10% deposit and engaged the services of a broker to help them with their finance. The broker advised the clients to get a personal loan to boost their deposit from 10% to 20% meaning they wouldn't need to pay Lenders Mortgage Insurance which in theory has merits but without knowing the full details it's hard to imagine this was in the clients best interest.
A few things went wrong in the months following.
1. The personal loan added so much to the clients monthly expenses that the clients now don't have the borrowing capacity to build on the vacant block of land.
2.The personal loan funds that were obtained to avoid LMI while achieved their purpose for the land transaction, whenever the clients needed to add the construction amount to the loan the Loan to Value ratio would be thrown out and be above 80% resulting in LMI charges.
3. When you purchase any type of property (land, house, unit) a valuer will value the property. When it is being purchased the valuer will use the Contract of Sale and commonly the price paid is what the valuer values the property at. Once the transaction has completed however the next time the property is valued a valuer doesn't use the Contract of Sale and arrives at a number on their own. This generally results in a lower valuation. In the clients case the land is now worth 10% less than when they purchased it 5 months ago which means the clients have lost equity.
Once this policy comes in to effect and if the wording and conditions surrounding it are not water tight there will no doubt be property sharks circling. People will try to take advantage. There will be no more of an important time to get good advice and fact check anything that doesn't sound or feel right. A phone call to a second broker anywhere would have more than likely picked something was not right with the above transaction and saved the clients money and heartache. Do not hesitate to call someone for a second opinion regardless of how reputable they seem.