House-buying costs can be trap for unwary

Press, 10 February 1982, Page 16

House-buying costs can be trap for unwary

x The level of private home ownership in New Zealand is high by world standards. Many people living in rented flats or houses see the move to a “house of their own” as the. end of all their housing problems. But buying and owning a house involve responsibilities. and indeed may require some sacrifice. There is a widespread belief that the ownership of one’s home is a “right.” While it could be claimed that the individual had some right to be housed, this right is more correctly described as one of shelter, with ownership being obtained only by the ability and willingness to pay for it. The first requirement in any purchase is a substantial cash deposit or. in some cases, a deposit in kind — such as a freehold section or one that has been paid off substantially. A deposit may be regarded as evidence of the buyer’s commitment, and gives him a personal stake in the property. The deposit is the most obvious and apparent part of a house purchase. Unlike loan moneys, which the buyer often does not either see or handle, the deposit is

tangible. It is often the fruit of many years of saving, and the buyer will be very aware of its value and the effort which went into raising it. For the buyer, it is the most obvious cost of the house; many other costs are not as obvious. ■

to $45.000. property is about $3OO. If about half this sum has been found by mortgage, a fee of nearly $2OO will be payable. Registration fees are $2O for each document and the stamp duty is $lO on each mortgage. The stampduty on transfer (conveyance duty) is $1 per $lOO value of the land and buildihgs up to $50,000, with $1.50 per $lOO on the next $50,000 and $2 per $lOO beyond that.

Some buyers have been known to borrow the whole or part of the deposit. This could be very unwise, particularly if a commitment is made to more than one mortgage on the balance of the price. The danger in this is revealed by looking at the other costs.

Thus., for a $40,000 to $45,000 property, costs of $3OO, plus $2OO, plus $4O, plus $lO. plus $4OO to $450 conveyance duty, totalling $950, will have to be found.

Legal costs can be a trap. As well as the deposit, the buyer will have to pay to or through a solicitor a number of fees. These are payable almost immediately after the transaction has been completed. These include the transfer or purchase fee, the memorandum of mortgage fee, the land transfer fee, and the stamp duty on the mortgage and transfer. Tables 1 and 2 are attached showing the transfer or purchase fee and the mortgage fee.

The bulk of the cash for a purchase will probably come from one or two mortgages. Although recognised lending institutions, such as building societies, insurance companies or savings banks, advertise the availability of mortgage money, most will require the buyer to have a savings or investment record with them over a considerable period. It is wise to “shop around" for the best terms rather than to. rush into a hasty agreement. Buyers without an established savings record do not have many sources of mortgage finance available

The transfer or purchase fee is based on the total price of the property, including chattels, and for a $40,000

Table 1. The transfer or purchase fee is based on property, including chattels.

he total price of the

Table 2. The mortgage fee is based on the principal sum of each mortgage and is payable in addition to the transfer fee.

The ownership of their own home is still the goal of most New Zealanders, but for increasing numbers., the..posts are making the goal less likely to be achieved.' OLIVER RIDDELL, in a two-part article, looks at the work’done by the National Housing Commission in identifying the costs ■ involved. - ”

to them, although this can vary depending on the state of the lending market — it is very tight at present. The Housing Corporation is the biggest single source of finance, for both new and second-hand housing, and its terms are reasonable. Buyers should first check with the corporation their eligibility for a loan before approaching other potential sources, unless they have guaranteed access to other institutional funds.

Solicitors do sometimes have funds available, but usually only for short-term lending. Most financial institutions will not lend housing finance if the outgoings on the mortgage will exceed a certain percentage of the incomes of the mortgagors. The limit varies but it is usually in the 25 to 35 per cent range. There are four types of mortgage.— 1. Flat mortgage — one in which a sum is borrowed for a specified period at a stated rate of interest, but payments made on the mortage meet the interest only and do not reduce the basic debt. This means that at the end of the mortgage term the full amount borrowed must be repaid together with any interest still owing. Other money must be saved or borrowed to pay back the principal. 2. Table mortgage — one in which the payments made by the borrower to the lender meet the interest and at the same time reduce the actual amount borrowed. In the early years the proportion of the payment which meets the interest is far greater than that which is subtracted from the principal, so the debt is reduced very slowly. “ Thus, on a mortgage of $20,000 for 30 years at nine per cent, in the first year out of each weekly payment of $37.20 only $2.65 contributes towards reducing the main debt. This proportion gradually increases over the life of the mortgage. On the whole mortgage the borrower could expect to pay interest of $38,000 over the 30 years, thus paying a total of $58,000 on $20,000 borrowed.

On ,a table mortgage a true interest rate is much, more favourable to the bor-,. rower than on a flat mortgage, because the former is calculated on reducing the amount of principal outstanding at fixed intervals, whereas a flat rate is applied to the. full amount of the money borrowed for the whole term of the mortgage, 3. Second mortgage — one - taken when the amount available under the first mortgage (which seldom exceeds two-thirds of the total price— does not, with the deposit, add op" to the cost of the property. It is usually for a smaller amount, for a shorter term, and carries a higher rate of interest because the lender

carries a greater risk of nonpayment. 4. Bridging finance — needed to bridge the gap betwen making the purchase and finalising long-term finance. This may be obtained from a solicitor, trading bank or savings bank, at a high rate of interest, and some collateral such as insurance policies may be needed. Table 3 shows the amount which should be allowed every week for every thousand dollars borrowed. On the $20,000 borrowed for 30 years at nine per cent, the weekly requirement would be $37.20. Nine per cent is a very low interest rate these days; the more likely rate of 14 per cent would require $54.80 for the same mortgage.

Different institutions vary in the way they calculate interest. Buyers must ask for a breakdown of their weekly payments, or however long the gap between payments. Most long-term table mortgages are now subject to a review of interest by the lender at set periods. Thus the interest rate at the start of the mortgage is not fixed, and is subject to being raised to meet market conditions.

Total House Transfer Total House Transfer . Price • Fee . ■ Price Fee $•< •, <?• ' ' > ■ . $ . 20,000 ’■ 175 -x40.000' . 291 ■ 25,000 . <>•206 ' 45,000 - ? v > 317 ’ 30,000 236 50,000' , 342 35,000 *. 266 55.000 ?•' 366 60,000 386

Mortgage Value, ■' Fee Mortgage Value Fee ■ $ ' ' $’- . $ ■,< $ 2,000 40 14,000 . 139 4,000 71 18,000 163 6,000 84 22,000 188 8,000 101 ' 26,000 , 212 10,000 114- • 30,000 •7 236

Table Mortgage Term of Loan Rate 5 10 12 15 20 ■ 25 30 % • $.c. $.c. $.c. $.c. $.c. ■$.c. $.c. 9 4.86 2.96 2.65 2.36 2.09 1.95 1.86 10 4.98' 3.09 2.79 '2.50 2.24 2.11 2.03 11 5.10 3.22 2.92 2.65 2.40 .2.27 2.20 11'/ 2 5.16 3.29 2.99 2.72 2.482.36 2.29 12 5.23 3.35 3.06 2.79 , 2.56 : 2.44 2.38 12'/ 2 5.29 3.42 .3.14 2.87 2.64 2.53 2:47 13 5.35 3.49 ?.21 2.95 2.72 2.61 2.56 13’/ 2 5.41 3.56 3.28 3.02 2.80 .2.70 2.65 14 5.48 3.63 3.35 3.10 2.88 2.79 2.74 14’/ 2 5.54' 3.70 3.43 3.18 2.97 2.88 2.83 15 5.60 3.77 3.50 3.26 3.05 2.96 2.92 15’/ 2 5.67 3.84 3.58 3.34 3.14 3.05 3.01 16 5.73 3.92 3.65 3.42 3.23 3.14 3.11