Buying your first home is a big deal and working out where to start can feel pretty overwhelming. So to help you get moving with a little more confidence, here are 6 things we think you should know before you start looking to buy your first home.
The first thing you need to do is take stock of your current financial situation and spending habits. Gather as much information as you can on what you earn versus what you spend in a month. There are a number of apps that are free and easy to use, giving you more control over your money and helping you stick to a savings plan. You also need to get on top of any current debts, starting with your credit card. The fewer the debts you have, the more a lender will look favourably at you when it comes to making your home loan application.
A solid budget with a clear savings goal can turn the act of saving from a daily slog into something really exciting. Just make sure you’re being honest and realistic with yourself when working out your budget so you can implement real changes to your spending habits to achieve that savings goal. We find putting an actual figure and end date next to your goal will help keep you focused. Sure, cutting back on that daily coffee is going to help (approx. $1,500 a year in fact), but moving back in with the parents short-term will make an even bigger impact. If you can, try saving a similar amount to what your mortgage repayments might be for a few months. You’ll soon find out what you can live without, but more importantly, your lender will see your strong savings record.
“I’m saving for a house deposit” is a common declaration made by 20 and 30-somethings. As a general rule, people aim to save a 20% deposit of the property price (excluding other fees – more on these later). It means you can avoid paying costly Lenders Mortgage Insurance (LMI) and you’ve got a great head start on paying off your loan.
If you’ve got 5-10% saved, paying LMI is a small price to pay to crack into the property market. LMI can also be included in your loan repayments so that it’s spread out over the term of your loan.
Don’t want to pay LMI? You could get a guarantor for your loan, usually mum and dad, where they offer their own property as extra security for the loan. This does have its drawbacks, as it makes it harder for your folks to sell their property or use the equity themselves.
There are lots of different types of loans out there, so you need to find one that’s going to work for you with the help of a mortgage broker or your lender. If you want to know more about home loan options get to know our mortgage broker business, Foundation Finance, but in the meantime here are some of the key terms you’ll need to know:
Variable rate: This means your repayments go up and down with interest rates. Typically you get more flexibility to pay off your home loan sooner.
Fixed rate: This gives you the certainty of knowing exactly what your repayments will be with the same interest rate for a set period.
Offset account: This is a transaction account linked to your home loan account. Money in your offset account can reduce the interest you pay by offsetting what you owe on the loan without limiting your access to this money.
Redraw facility: This is not a separate account but a feature attached to your loan. It allows you to draw back additional payments you’ve made on the loan.
Principal + interest loan: This is repaying the principal and interest on the loan, which results in paying less interest over the life of the loan versus an interest-only loan.
Interest-only loan: Repayments are lower for a set period because you’re not paying off the original loan itself. At the end of the interest-only period, your principal and interest repayments will be higher and it can increase the amount of interest you pay over the life of your loan.
Believe it or not, as a first home buyer you might be eligible for the First Home Owner Grant scheme (FHOG), a government assistance program designed to help you get into the property market. Incentives for people living in Victoria include a $10,000 First Home Owner Grant (FHOG) for new homes valued up to $750,000 (or $20,000 if you’re in regional Victoria) as well as stamp duty concessions. Incentives for people living in Queensland include a $15,000 FHOG for eligible first home buyers who are buying or building a new home up to the value of $750,000 – including off-the-plan.
There are a bunch of conditions that apply that do vary from state to state. The main one includes that the eligible property must be a brand new home (purchase or construction) up to a maximum value of $750,000, you can’t have previously received the grant or owned a residential property and you will need to live in the house for a minimum of 12 continuous months (the grant isn’t available on investment properties). Read more on the FHOG here.
Keep in mind that like all government schemes, they are subject to change. So get the latest information from the State Revenue Office website relevant to your State.
First home buyers can get quite a surprise when they find out there are other costs associated with buying a home other than the deposit and loan repayments. You’ll also need to cover conveyancing fees, loan application fees and much more. Factor these extra costs in from the start so they don’t put a dent in your savings:
Stamp Duty and taxes: Stamp duty is likely to be the biggest cost, but for new homes, concessions are available for first home buyers. In Victoria, if your home has a dutiable value of $600,000 or less, you’ll receive the first home buyer duty exemption (visit the State Revenue Office’s website for more details). But you’ll still need to pay a fee for the registration of your property’s title to the Land Titles Office (maximum $3,606) and you might need to pay GST too.
Conveyancing and legal fees: Reviewing of a Contract may cost around $600, whilst the full process to settle a property could be $2,000-$3,000. Things can get complex so these specialists can help settlement happen smoothly. Be sure to check if there are any government conveyancing rebates available to you.
Mortgage registration fee: The mortgage gives the bank the right to sell your property if you don’t pay them back. The fee as of 1 July 2018 is $116.80.
Bank fees and loan application fees: Your mortgage broker or lender will advise you of these costs, as it depends on the loan you go with.
Lenders Mortgage Insurance (LMI): If your deposit is less than 20% of the purchase price, you may need to pay this insurance, which protects the lender should you miss your loan repayments.
Council and utility rates: Make sure to budget for the connection of utilities like electricity, water, gas and internet. There’ll also be council rates to cover.
Building and contents insurance: It’s smart to protect your property with insurance in the event of a fire, flood, storm damage or theft. Building insurance might also be needed when you reach loan settlement as part of your home loan agreement.
Other costs: Moving or lease-break costs if you terminate your lease early.
The information provided is meant as a guide only. Porter Davis recommends that all clients seek independent legal, tax and financial advice. Full T&Cs here