First Home Buyers
By Tamara Scutcheon
The First Home Buyer journey can be tough. For most of us, it’s the first major financial decision we’ve had to make on our own. It’s also usually a time for managing lots of expectations: What you want vs what you can afford, which areas you think you’d like to live in and what your parents think you should look for.
Doing your research early in the journey is a must. Having a good idea of how much you want to spend and what the bank is willing to lend you upfront will leave more time for you to focus on finding the home that meets your wish list of features. It will also give you more confidence when it comes time to make an offer.
When it comes to making an offer, there is a lot of conflicting information about what to do. Your parents might advise you to always offer 10% less than the asking price – you don’t want to spend too much! A friend might tell you to offer more than the advertised price, just to ensure you’re successful – you don’t want to miss out on the perfect home… It’s important to know that making an offer is a completely subjective matter. The saying ‘it’s only worth what someone is willing to pay for it’ springs to mind. In this regard, there is no substitute for doing your research. Research recent sales in the area for a similar home, research which features of this house might make it worth more than the next door neighbour, research how long properties in the area are usually on the market. Sites like Realestate.com.au and domain.com.au really are your friends here, they have a wealth of information and some pretty nifty reports you can generate to get these answers.
So, after months of open inspections and countless hours online researching you’re ready to make an offer on your dream home. Now what?! First things first, tell the agent you’re interested. They may ask you to make your offer in writing, or give you feedback on the spot as to whether their vendor will consider, accept or reject your offer. All things going well and your offer is accepted, it’s time to sign your contract and schedule the appropriate building or pest inspections during your 2 day cooling off period. Next, starting the process of obtaining finance.
There is no sexier term then ‘budgeting.’ Hopefully, when you first decided you wanted to become a home owner you sat down and went through how much you can realistically afford each month. A sound budget is a key tool which can help inform your purchase price, and in turn how much deposit you’ll need to save. With your budget in mind, you’ll also be better prepared to answer the question any good bank or mortgage broker will ask you – at the end of each month, after you’ve paid for your normal living expenses, how much will you be able to put towards your new mortgage?
There are many different parameters which will determine a ‘good’ application for finance. The most important being the income to debt ratio, how much of your pay will be left over after you’ve covered all of your debts and the new mortgage? All banks assign an arbitrary value to cover ‘living expenses’ each month. This includes things like running a car, paying gas and electricity bills and buying groceries. Next, any credit cards or car loans will need to be accounted for, it’s worth noting that a credit card you never use will still need to be included. Now is a good time to streamline yourself financially and close off any unused or unnecessary credit cards or loans, they may be stopping you from borrowing enough to buy your dream home.
After you’ve demonstrated you can afford the new loan it’s time to show how much of a deposit you’ll be able to contribute. The most a bank will ever lend for a home purchase is 95% of the purchase price. This leaves 5% as a minimum deposit, but then also an additional amount to cover the costs of stamp duty. As such, a good guide to determine the minimum amount you’ll need to save is roughly 10-12% of the purchase price (buy at 350k, deposit of approx. 35-42k) The more deposit you have behind you, the more options you will have in terms of lenders wanting to obtain your business. This is where having a savvy mortgage broker is a great advantage, your bank is never going to tell you that their competitor has a better offer!
If you’re like most first home buyers and are struggling to save while paying rent and starting your career then you’re more than likely going to become familiar with Lenders Mortgage Insurance (LMI) Lenders Mortgage Insurance is the way banks are able to lend up to 95% of the home’s value, it’s the way banks mitigate some of their risk for these types of transactions. Essentially, LMI is cover which protects the bank if you default on your new mortgage. The banks simply pass this cost on to you, which is why many people view LMI as ‘dead money.’ Indeed, LMI doesn’t cover you as a borrower at all, but it does allow many more people into the housing market with lower deposits. At the end of the day, the decision comes down to paying the once off LMI premium to get into your home vs another few years of paying rent and trying to save up to 25% of the home’s value.
Aside from cash savings, there are other options to gather the deposit to buy - one being asking your family for assistance. If your family isn’t in the position to help with a cash sum, you could also consider talking about a family guarantee loan. In short, the bank takes security over a portion of your parent’s home equity to mitigate your low deposit. In some cases, guarantee loans can be organised without the buyer having to contribute a cash deposit at all. There is a certain degree of risk associated with family guarantee loans: namely that if you default on the payments, your parents can be called on to repay the remaining debt. As such, it’s important to ensure any family guarantee loan is limited to a dollar amount and all parties seek independent legal and financial advice. Having a guarantee from your family can also help you avoid paying Lenders Mortgage Insurance.
Now you’ve got your deposit sorted and you know how much you need to borrow – where do you start in choosing a loan product? This is again, where a great broker will come into their own. They will know all of the hot offers each lender is currently promoting and will save you countless hours of legwork and comparisons. The two main loan products are arguably fixed or variable loans. Fixed loans will give you the certainty of knowing your repayments won’t change over the fixed term if rates increase. The drawback of a fixed loan being that if rates decrease during your fixed period you won’t see any of the savings either. You will also be limited in the amount of extra repayments you can make to a fixed loan. Variable loans are the alternative, being flexible and allowing you to experience the changes in rates with the market. Some banks will allow you to ‘split’ your loan: keeping some fixed to lock in a good rate, while the rest remains variable and allow you to pay as much off as possible.
When it comes to mortgages, no one wants to contemplate paying off their home for 30 years! There are several options to help you get ahead and minimise the time and money spent paying off your new asset. The easiest strategy is to pay your mortgage weekly or fortnightly instead of monthly. This will ensure you make the equivalent of 13 monthly payments per year. Next, consider making the most of any money you have left sitting aside – your monthly bills payments, some savings for a holiday. This money can be put to work by sitting in an offset account, or in loan redraw. An offset means that any savings held in the account will be taken off the total amount owing on your loan when the bank calculates the interest payable each month. E.g. if your mortgage was 100k and you had 10k sitting in your offset account, at the end of the month the bank will only be charging you interest on 90k. It’s worth noting that not all variable loans come with an offset, and some banks will charge you a large annual fee for utilizing an offset structure. It’s best to reflect back on your budget and estimate how much you will likely be able to keep in the offset each month and calculate if the interest savings will be worth the fee. If not, perhaps parking your money in loan redraw will be more beneficial. Most banks have a basic loan which will allow redraw and is not subjected to monthly or annual fees.
Once your loan is underway it’s also a good time to start thinking about your future goals. Not just in regards to property but also in terms of your career, starting a family, building an investment property portfolio. All of these goals need to be considered when structuring your first home loan. Take the approach of ‘do it once, do it right.’ Having the loan set up correctly now will likely avoid extra fees or charges later, while also making sure you can pay off your new home as soon as possible.