We’re both first home buyers: Here’s what we learned

Bryce: [00:00:26] Welcome to Get Started Investing a podcast where we answer the most common money and investing questions from our community. If you have joined us for the very first time, a huge welcome. We do strongly recommend that you scroll up and start at episode one. Now, while we are license, we're not aware of your financial circumstances, so any information on this show is for entertainment and education purposes only. But with that said, my name is Bryce. And as always, I'm joined by my equity buddy, Ren. How are you? 

Alec: [00:00:53] I'm very good, Bryce. Very excited for this episode. Very excited to see you. First time we've seen you this week. Yes. You've been M.I.A. 

Bryce: [00:01:01] I saw you on Monday.

Alec: [00:01:03] While working from home. See you through screen. But the reason that you've been Mia is because you bought a house. Mm hmm. You and your partner bought a house. Harriet. And your wife, I should say. Yes. And you've been moving this way?

Bryce: [00:01:17] We have? 

Alec: [00:01:18] Yeah.

Bryce: [00:01:19] I'm knackered. Absolutely right.

Alec: [00:01:21] You're looking pretty sharp. You've got a new haircut. We were commenting on that. Okay, go ahead. That's not a sell to go on. Watch us on YouTube. I don't know what it is. 

Bryce: [00:01:29] Got the haircut. Got got the mow still going.

Alec: [00:01:32] Yes. But today we wanted to talk about the home buying journey because you've bought a house. I've bought an apartment. And we've learnt a lot. I think a lot of people listening would be thinking about buying a house, wanting to buy a house in the future, or just wondering what you need to do. And we certainly learnt a lot over the last, I don't know. Six months, call it.

Bryce: [00:01:58] At least for me I would say over 12.

Alec: [00:02:00] Fair enough.

Bryce: [00:02:01] But has been a massive learning experience. It's been an exciting one. It's been a draining one for me anyway. Yeah, I think we've both both happy with the result. 

Alec: [00:02:09] Yeah. So before we get into what we've learnt, how much should you spend on your house? What's your address on it? Yeah, well, I mean, you said it was a draining experience. Over 12 months, I think, before you got into specific lessons like give us the story.

Bryce: [00:02:27] So I would say over in November of 2022, a year ago, a year ago was when we first touched base with a mortgage broker to try and get approval for a pre-approval and just understand what our borrowing capacity was, because up until that point, we were throwing things into mortgage calculators online and really felt like we needed a level of professionalism to actually tell us this is the ballpark you're playing with. So we did that, and then it took us a year of searching, essentially.

Alec: [00:02:58] So for people unfamiliar, Bryce has a in our friendship group, he has the Leskeisms where he takes two sayings and jams them together. And there have been some crackers over the years. I think the ballpark you're playing with is one of them. Yeah, both hockey pieces. The numbers you're playing, this is the ballpark you playing in is you playing with. Yeah, yeah, yeah, yeah. Anyway, so continuing. And so you spoke to a mortgage broker?

Bryce: [00:03:21] So we spoke to a mortgage broker, Chris, who we. I would highly recommend. We can give you these details if you'd like. And, and then we knew sort of what the figure was that we were playing with both our financial. Yeah. And we started looking and it took us about a year to find something. To be fair, though, we did have a European trip and our trip to the US to see Warren sort of interrupt that, but pause the golf membership and we landed on something in October.

Alec: [00:03:52] Yeah. But I mean, there was some fits and starts in that time. I remember we were in the office one week and you had to keep cutting out because there was a, for want of a better term, a rundown shack that you were considering buying. But then you eventually decided you took a bill to throw it and you decided that there was going to be too much renovation. And I think it's hard to get builders at this point to do renovations.

Bryce: [00:04:17] Blew my mind. The renovation costs. Yeah. So you're right. One of my key lessons and I was told this right at the start from Chris is in property, I guess just like investing, though, you know, Warren Buffett not swinging at everything. But patience is a virtue, A because you're spending so much money. You don't want to buy something that in six months you're going to be like, we made a mistake. And B, you just generally get to learn the market and understand like what you if you form your own opinion on value I think because value is just what essentially you're going to pay for it and comparable Sales in the area.

Alec: [00:04:57] So you're all waiting different things, you know like some people. Value being close to a bus stop a lot and other people don't give a shit about it. Like it's just like your perception of value is your perception of value.

Bryce: [00:05:07] Yeah. And well, it's to that point, the weighting of things like being patient, you really get to understand like what you're actually looking for. Because I think what we started looking for, we, I kept every single pamphlet from open homes that we went to. We had four think we had 42 pamphlets. So that I kept so for 42 inspections. And it was really interesting to see what we started looking at versus what we ended up getting.

Alec: [00:05:36] Which way did the trajectory go? Did you start looking at places that were out of your price range and you came back to a more realistic home?

Bryce: [00:05:43] No.

Alec: [00:05:44] Oh, you went the other way.

Bryce: [00:05:44] Yeah. Well, I think about my other lesson and I don't know how far we want to go before we hear your.

Alec: [00:05:49] Story, let's go through your lessons and then I can talk about mine.

Bryce: [00:05:52] Okay. Well, my other big lesson, which comes off the back of having a good advisor, is understanding actually how you can structure a loan, but or structured structure your circumstance and so that you can probably move into a different price bracket and still have the same cash flow position.

Alec: [00:06:09] Okay. Well, I mean that people are wondering what magical structure have you done that allows you to buy your house?

Bryce: [00:06:16] So we were I mean, we're very, very rich, very, very privileged that we had help from our parents and that allowed us to put down a deposit, but also then have some cash on the side. Now, our original thinking is you just want to put as much of your cash straight into your deposit so you're borrowing the smallest amount possible.

Alec: [00:06:40] Okay?

Bryce: [00:06:41] And that's just how we're thinking. You want as little debt as possible. And we knew that offsets existed, but we didn't really get our head around it. And we just like it just makes psychological sense that we want to borrow as less as possible. But then through our mortgage broker, they sort of showed that by putting down just your deposit that is required. 

Alec: [00:07:03] Yeah, Yeah. So your wife is a lawyer, so you get the 5% deposit.

Bryce: [00:07:08] Yes, we put down a bit more, but we didn't put down all the money that we had. And so then you obviously going to borrow the remaining, which is more than we needed to borrow. But what that means is the cash sitting on the side is treated as an offset and it essentially reduces the interest that you pay on that loan. What it does do, though, is huge. We've structured it so that we just pay the interest component of the loan and then the principal repayment comes out of that offset account. And so it means that the total servicing, we're not actually paying the full total servicing amount.

Alec: [00:07:46] Right? So you just you just going to draw down the offset?

Bryce: [00:07:49] Yeah, we'll just drawdown the offset as long as we keep up with the interest payment and obviously that offset has a terminal life on it and then it gets to a point in zero and then we have to pay the total servicing amount. So essentially what it allowed us to do was borrow more and then essentially cover the difference with some of our funding, if that makes sense. And then that got us to a higher price point.

Alec: [00:08:13] Okay. I'm going to be honest. I'm still trying to get my head around that maths because you're still paying interest on a higher amount.

Bryce: [00:08:20] Net borrowing is.

Alec: [00:08:22] No, no, because like, let's say round numbers, let's say if you didn't have to, if you were going to put all that money into a deposit, let's say, then you would have only had to borrow $500,000. But because you're doing it your way, you had to borrow $750,000, you're still paying interest on the higher loan amount. You're paying interest on the 750, not the 500.

Bryce: [00:08:41] Yeah. Yeah. You're paying. Yes.

Alec: [00:08:43] But your monthly repayments are less until that extra cash in the offset is drawn down.

Bryce: [00:08:49] Well you're paying more towards principal to start with. Let's just say we wanted to pay 4500 dollars a month. That was our cashflow that we wanted to pay. And you could, we could scale that to six or whatever. That means we'll pay the interest on that. But if the total repayment is for A's of numbers ten grand a month, that the other six comes out of the offset account.

Alec: [00:09:11] Does that mean you're going to have a balloon payment at some point when that offset is drawn down to zero and then all of a sudden you have to stop paying principal and interest? And it goes from four and a half to ten.

Bryce: [00:09:20] The total repayment doesn't change month on month. It's just what Harriet and I contribute to the total repayment. So yes, it will get to a point where the offset goes to zero. And Harriet and I will have to pay the full payment amount. Yes. Yes.

Alec: [00:09:33] But we're not using real numbers here. But. Yes. Yes. So when are you worried about that? No.

Bryce: [00:09:38] They know we're not.

Alec: [00:09:41] No.

Bryce: [00:09:43] Well we need to do is keep up with it. But also the other thing is the way that they all you.

Alec: [00:09:47] Need to do is keep up with prices. Message to mortgage holders Australia wide.

Bryce: [00:09:52] Like if you if we start not paying the interest and you really stop falling behind. Yeah big time and so. That was a big learning for us just because and I know it's not it's a very, I guess, privileged position to be in because I imagine most times your entire money just goes towards the deposit. 

Alec: [00:10:10] Look, we've both bought real estate in this market. There is an element of privilege to this conversation which we both just have to acknowledge. But I think it's still a worthwhile conversation to have because I think a lot of people listening want to buy a house or in the process of buying a house.

Bryce: [00:10:25] So psychologically, it's that was probably the biggest thing for us to get over, knowing that there's going to be a much larger total loan in the ANZ net banking.

Alec: [00:10:36] Yeah. I reckon psychologically that would be.

Bryce: [00:10:39] And that took us a while to kind of understand, but then it allowed us to go, well, we can essentially move up there.

Alec: [00:10:45] So don't tell us, don't tell us actual numbers, but on a percentage basis doing it that way. How much more house could you buy? Like how much more could you spend on like 50% more or like.

Bryce: [00:10:56] No, probably 35% more.

Alec: [00:10:58] So that's that's a lot. Yeah. Well, like 3 or 4 more bedrooms for, you know.

Bryce: [00:11:04] And then finally, this is obviously in hindsight, but we were very conscious from the beginning of having a very wide berth when it came to factoring in our interest rates.

Alec: [00:11:14] Yeah. So we used the same mortgage broker when they first sent our estimate. They stress tested it on one interest rate rise. Well, like, here's the rate the bank is giving you. And if interest rates go up 25 basis points, here's what you repayment. Here's what your repayment would be. Which I felt wasn't a meaningful stress test. So what did you factor it like when you you would have been given an interest rate probably with a five in front of it when you first got your estimate? What did you stress test it yourself?

Bryce: [00:11:47] Well, when we did a year ago, I think you had a four in front of it. Yeah. And then and then the other thing is, every time you you get your pre-approval and you have to keep renewing it. And because we were doing it for over a year, we had to keep renewing. We did. We started out at 2%, like like if it was four, we were doing six. As interest rates increased, I think we became a little less committed to the full two. So we, we've done it up to one and a half. If it gets to one and a half, it's like wearing track. We're in a bit of trouble. Yeah. But we yeah, we definitely factored in more than if the RBA were to do 0.25%. I think this is the other thing. It's like no one tells you what to do in these situations. Like you need to do it yourself. Yeah, and be comfortable with it yourself.

Alec: [00:12:35] I mean, not to talk ill of the mortgage broker, but I was a little bit cynical when you were talking about the structuring of the loan because it's great that it allowed you to borrow more and buy more. And it sounds like you did the work and it works. It also works for the mortgage broker because they just get a commission from the lender on how much you borrow.

Bryce: [00:12:56] No, but it's the net loan that they get commission on. Not so.

Alec: [00:13:02] No, no, it's not like that. I, I don't know how much you're going to park in your offset on day two of having the offset account.

Bryce: [00:13:08] No, but they do it monthly and they get monthly commission so they know exactly how much is in my offset.

Alec: [00:13:12] So but the upfront would be based on the, the gross loan and then sure. Okay. Then it's net from there. Yeah. I reckon they made more doing it that way is what I'm saying.

Bryce: [00:13:21] I mean that's the industry.

Alec: [00:13:23] Yeah. But if it works for you, that's fine. Yeah. Like, I'm not saying it's bad. I'm just.

Bryce: [00:13:27] It's a watch out.

Alec: [00:13:28] It was just like, to your point around, no one's going to tell you what to do. Understanding how incentives work in any financial transaction matters. Yeah.

Bryce: [00:13:38] Well, just to close out on the broker bank pace as well, the biggest lesson we had at the start was the number that you're given in terms of your borrowing capacity for us was nowhere near what we could afford to service. And so it was a very easy to get excited and be like, Oh my God, we have all this money. Then when you plug it in, it's like, Oh my God, how are we going to pay for that? The bank doesn't say this is what you can actually afford to pay. They just say based on your income and a rough estimate of your outgoings, we can give you this much money. There we go.

Alec: [00:14:15] All right. Well, let's take a quick break here. And then on the other side, I'll share my story and what I learnt and I guess how I did a little bit differently to you. All right. Welcome back to Get Started Investing. We are talking about the start of a whole new investing journey. We are more levered and more concentrated in our portfolios than we have ever been and we will likely ever be again, because we have both taken our first steps into the property market. And whilst we mainly talk about the stock market here, obviously property, property investing, buying land in Australia is the dream. And so we thought we'd talk about our experiences and what we've learnt. We just heard all about your very patient, very long term experience of what, 12 plus months?

Bryce: [00:15:08] Yeah. Not the longest out there, though.

Alec: [00:15:09] No. We spoke to Andre Botes from ubank on this podcast a couple of months ago and he said he was looking for more than two years. That would do my head in. I know.

Bryce: [00:15:20] Right? Yeah. Especially if you're looking every weekend.

Alec: [00:15:22] Especially if like the news at the moment is just prices are up, record levels of immigration, record low levels of supply, rents are up, prices are up like that. Headlines would break me. But yeah, it was tough and I wasn't even looking for that long. Yeah.

Bryce: [00:15:40] Well, tell us about your story, Ren because you signed on the on the dotted line only a matter of weeks ago. And yours? You had a different experience a lot quicker.

Alec: [00:15:51] Yeah, a lot quicker, but lengthier in other points. So my partner and I started we engaged with the mortgage broker at the start of the front end of this year, 2023. But it took me ages to get my pre-approval and I think this is the first lesson is engage with a mortgage broker early. Because the long story short, I bought an interest free laptop through Apple and Latitude Financial.

Bryce: [00:16:20] Which you paid off.

Alec: [00:16:22] Which I paid off. They started charging me interest. I paid it off all in a lump sum. Then they kept charging me account fees even though I'd paid it off and cause I thought I'd closed it and I had paid all the money off that I wasn't paying it. And so then I hit my credit score anyway, back and forth, back and forth, months of going to latitude. And it was. But anyway, I got my credit repaired, got it fixed. Didn't have to go to a credit repair specialist, which was nice because they charge like.

Bryce: [00:16:48] Is that a thing? Credit repair.

Alec: [00:16:50] So they basically.

Bryce: [00:16:52] Mechanic down the street.

Alec: [00:16:53] I know, I know. But it's like a big business because.

Bryce: [00:16:56] People need good credit scores. 

Alec: [00:16:57] Yeah. To borrow and stuff like that. But my biggest lesson is just be politely annoying. Just don't give up, Never give up and keep asking to speak to someone more senior and politely, right. And when you're going back and forth on email, don't let emails lapse. Like just keep following up, keep following up because the company can't close the account. If yeah. And just keep asking for documents and like latitude eventually they basically made a business decision that it was too annoying to keep corresponding with me. 

Bryce: [00:17:30] Maybe the impact would have been that you couldn't have got a loan or it would have been less than you were. 

Alec: [00:17:39] No, it just it would have been like a non-bank lender and the interest rate would have been higher. Yeah. So engage your mortgage broker early, figure out if there's any issues, get those issues sorted. And so that's my first lesson. Anyway, once we did get pre-approval, things moved pretty quickly from there. So we live in Coogee at the moment renting and we want to stay by the beach. We really like Maroubra and it felt like it was more in our price range. So we've spoken to the mortgage broker about buying there and he was like, Look, I don't know that area that well. There are some buildings which are great and then some which are pretty not great. There's a buyer's agent in that area that I think you should work with. And we were pretty sceptical about the whole buyer's agent thing because you've got to pay them upfront. It comes out of your pocket, it doesn't come out of it. You can't like capitalise it into the mortgage or anything like that. So it feels like a lot of money. But we spoke to him. We decided to go ahead with it and we had a really good experience. And so I think the second lesson is you get what you pay for. And he more than made his money. So we bought off market so it wasn't on domain or real estate, which meant there were no other bidders. And it meant and he got us access because he knew the real estate agent. So that was really valuable to us. But then he also negotiated and he got us a lower price than was listed.

Bryce: [00:19:02] I think we never went down the route, got very, very close to doing it because we were just sort of out of our wits end kind of thing. But I think one thing that you said that sort of stuck with me and it's like, I wish I'd thought of that, or someone else had told me, you know, six months into it is just the the dynamic between the buyer's agent and the agent in an off market listing. The relationship there is completely different to an agent. And like if I was at an open home and I think that's like it feels like the agent is much more open to trying to work with the buyer's agent to somewhat get a good price because the relationship with the buyer's agent means long term. Yeah, more clients, you know, you don't you want to be buddies with the buyer's agent. And so you can see how the balance of power kind of shifts there. 

Alec: [00:19:56] But there's also there's also I and we were speaking to Frank, the buyer's agent about this, and there's sort of some real estate agents will try and maximise what they make from every listing and so they will never sell off market. They will take it to auction, they'll never sell before auction. They want that competitive tension. They want as many contracts in market as possible because they want to maximise the amount that they make on each listing. And then there are some real estate agents that will just try and get a fair price. But they work, you know, they're like a volume business. Yeah. And so if they can avoid the listing phase paying REA into May and paying an auctioneer, if they can avoid all that cost for their client and they can get a good price and move, that's their business. And they're the agents that buyer's agents want to can be productive with. Yeah, because then, like, everyone feels like maybe they didn't get as good a price as possible as a buyer, as good a price as possible as a seller. But I got a price that they're happy with and then everyone moves on. And so that's kind of the game that we were in. I'll actually I'll show you. So there were two places that we really liked. He actually so he, he, we had this one Saturday where we sold ten places. He organised our Saturday, picked us up in his car, drove us around. Great experience. Half of them were on market and so you there's that competitive tension and everyone looking around people asking for contracts and you know like over overhearing that conversation and being like, oh, they're probably going to put it over anyway quickly. And then the other half were off marketplaces. It was just us, the buyer's agent, the real estate agent. And it's like the dynamic, the balance of power shifts. Yeah. All of a sudden, the real estate agent is there trying to convince you to buy rather than not caring about. So there were two places that we liked and we were really tossing up which one we wanted to go with. One of them was on market and Frank was like, It's going to go to auction anyway. It did go to auction last night and we message him were like, What did this place go for? Have a look at the amount of messages that got back.

Bryce: [00:21:56] He's messaging you. I'm at the auction the bid this is what the bid starts at And then it's just a big, big, big, big, big, big, big, big bid. He sends through all the bid prices. 

Alec: [00:22:06] It was like 50 messages of just the price. The price, the price. So that's what we avoided by buying off market. So one final thing with the buyer's agent. You know, we're talking earlier about understanding incentives. And, you know, I was pretty cynical about, so the buyer's agent normally gets a percentage of the purchase price. Yeah and that made me pretty cynical because isn't the you want them to be representing your interests and get as lower price as possible. But doesn't that incentive structure set them up to get as high a price as possible to try to push you to borrow more, get you in a higher price point overpay? And that was probably my biggest reservation, but the this I guess speaking to a few people and trying to get my head around it and what I guess made me comfortable in the end was that because these guys all specialise in such localised areas and they rely on word of mouth, if people all of a sudden are unhappy with them, feel like they overpaid, got a shitty building. It's not like you can just move on to the next one. Yeah, because you're dealing with a local, like a pretty local community and the same real estate agents over and over again. And so that, like, brand building and reputation matters more than like squeezing a lemon on each transaction. And so I don't know, some people might not agree with that take and be more cynical about it, but that's where I sort of, I guess, got comfortable enough and we had a really good experience and we were really happy. 

Bryce: [00:23:38] If I was to do it again, I'd definitely get one, I reckon. All right. So engage mortgage broker early and you get what you pay for. So what's the what's the next lesson? 

Alec: [00:23:48] So I think my final lesson is just have more cash than you think. And this is probably like I was just underprepared. But it was. So we only needed a 5% deposit unless my partner is a doctor. So that was nice. So for people I'm familiar if you're a doctor or a lawyer, you can avoid the LMI, the lender's mortgage insurance. So you can borrow up to 95%. Yeah. But then on top of that five 5% deposit, basically double that amount because of stamp duty. Then we obviously paid the buyer's agent. But then, you know, lawyers costs and there's a lot of cash that, you know need up front.

Bryce: [00:24:26] Do you have to pay your starter up front? Like if when you move in? 

Alec: [00:24:31] Don't know. Sit up. Because. Wait, wait, wait. 

Bryce: [00:24:35] When we settled, we had to pay out, like the rights and the water and wherever it landed in that quarter, like I think we were pretty early in the quarter. Okay. Late in the quarter. So I do like a you know, you are 80 days of right strata. No, but we have rights. I don't know. Yeah. But I think the big difference, the thing that we didn't factor into our numbers at all that's not not cooked us but we just didn't factor it in with building insurance. We had to have you had to show that you have insurance to get the loan? And I don't know if it's different because you have strata. [00:25:10][35.3]

Alec: [00:25:11] We have to do that as well, but we just have to email out strata. [00:25:13][2.7]

Bryce: [00:25:14] Yeah, yeah, yeah. Insurance. And because part of your building insurance is replacement cost. What you, what, how much would it cost to replace your house if it burnt down. Because all of the materials and labour at the moment is through the roof. We got a couple of builders in to have, well we just consulted a couple because all the calculators online, the insurers, the insurance companies were like way too like way too low. And all these builders came in and it was just like it just cooked the numbers because they're just saying, if you we really tried to do this today as it is, it's going to cost like, why? Why more than it was five years ago. We just didn't factor that in. Such a learning. 

Alec: [00:25:56] Yeah, that is. And then there's one more cost. You mentioned settlement costs before we started recording and I said, save that because we should talk about it. 

Bryce: [00:26:03] It's not a lot. 

Alec: [00:26:04] What is it? 

Bryce: [00:26:05] It's one of those stupid admin costs. Like, there's a system called Pexa. 

Alec: [00:26:08] Oh, yes, it does. 

Bryce: [00:26:09] It does all the stuff in the background. And you just paying pexa. Yeah. Yes. 

Alec: [00:26:15] Well, I mean for people unfamiliar with Pexa, it's like digital conveyancing. It makes sure that you have the title to the building. And it's, yeah, it's a lot better than the old system, which is paper based board. Yeah, yeah, yeah, yeah. 

Bryce: [00:26:27] So we have here 903 was our total transfer and Rec and bits and pieces.

Alec: [00:26:33] So yeah. So in the scheme of things in.

Bryce: [00:26:35] The grass here. Yeah.

Alec: [00:26:37] Yeah. Anyway, I think that's probably enough. I think we've learnt a lot. I think start early, be patient and get good people around you. Is probably that the key takeaway is this isn't a journey that you have to go on solo. But well, no, it's like the beginning of the end. No, no, no. At the end of the beginning, it's like we've now got our first step.

Bryce: [00:27:04] Yeah, it's the exciting part. 

Alec: [00:27:06] Yeah. And then the trucking along comes next. 

Bryce: [00:27:10] Yeah. Well, I think it's a lot of.

Alec: [00:27:12] Stay tuned. In six minutes you'll hear the next episode. We defaulted on that way too. So what did we learn?

Bryce: [00:27:18] Anyway. Join the conversation with us and the equity mates Discussion Facebook page. Otherwise Ren, great to chat and we'll pick it up next week.

Alec: [00:27:27] We'll be back with your regular regular scheduled stock market investing program. 

Bryce: [00:27:31] Yeah, sounds good.