Buying Your First Home?
Some of the considerations you're likely to come across when buying your first home.
For many Australians, buying their first home marks a significant and memorable milestone. Buying a house is the single most significant investment a person or family will make. Still, it can be a bewildering experience if you don't know what's going on.
And like most big achievements in life, we usually get there through a series of thoughtful decisions and smart, strategic planning. Statistics show that the average-income Australian couple takes almost five years to save for a deposit on their first home in one of our capital cities.
Some things might seem self-explanatory or evident to people who already own property. Still, I found there was a lot of contradictory information out there.
If you're considering putting some money down on your dream home, here are a few essential factors to consider.
We also talked about being a landlord in Australia and obligations.
Figure out how much money you have
Most loan terms in Australia are generally 25 and 30 years. A mortgage is likely to be one of the most significant debts you'll ever take on. It's essential to prioritize your financial goals and figure out where a home purchase ranks on that list.
The price of the property you're looking to buy will play a big part, as it will often determine the deposit you need. That being said, it's well worth figuring out how much you can realistically afford before you begin looking.
If your family is planning to help with finances, it's a good idea to sit down with them to discuss how they plan to contribute. Keep in mind that there could be risks, benefits and tax implications if financial help is given.
If you're buying a property with a partner, it's essential to be upfront about your financial past and plans.
We talked about myths about property investing in Melbourne.
Get home-loan pre-approval – and keep in contact with your lender
Many lenders offer a pre-approval service where they will weigh up your income, expenditure and amount of personal debt against your deposit to see if you qualify for a loan.
It gives you the confidence to go ahead and make offers on properties within your budget, but it is no silver bullet.
The full loan approval only comes after the lender receives a signed contract, where they investigate and see if the property is a worthwhile investment.
Before you even start looking at properties, get pre-approval from your lender. This will not only give you confidence that you're looking at the right type of property, but it will enable you to act quickly when you find 'the one.'
Before you dig too deeply into the process, check that you qualify for a home loan. Contact several lenders to get an idea of how much money you can borrow. This will give you a realistic understanding of what (and where) you can buy. Try out Finder's home loan eligibility calculator to get a better idea.
Make sure, however, that you keep in regular contact with your lender or mortgage broker.
The home loan market is complex and competitive. You need to compare as many loans as possible to make sure you're getting the right rate and features. You also need to know what types of home loans are available. From variable to fixed-rate loans, interest-only and investment loans, there are many different types of mortgages. Finding the type of loan that matches your needs is crucial.
Understand the real cost of purchasing a home
Of course, it's not as straightforward as a $50,000 deposit plus a $500,000 home loan equals a $550,000 property. There are many other costs to consider, including the cost of home inspection reports, lenders mortgage insurance (LMI), solicitor's fees and stamp duty.
Make sure you're across all of the additional costs that come with a home purchase and factor them in.
Here's a snapshot of the typical buying home costs you're likely to come across.
We talked about capital gains tax and how to avoid it in a previous post.
Purchase price – this is the actual cost of the property. Unless you're able to pay for it outright, you'll generally need to take out a loan. Take note: lenders will typically ask for a minimum deposit of 10% to 20%.
Loan application fee – this is a one-off payment to your lender when your loan begins. Fees can vary depending on your provider and will cover things like credit checks, property appraisals and primary admin.
Lender's mortgage insurance – if you have a deposit that's less than 20%, you may be required to pay lender's mortgage insurance, which exists to protect your lender in the instance you're unable to repay your loan.
Government fees - stamp duty is a land/property transfer tax applied by all Australian state and territory governments, which can vary depending on where your future home is located. Mortgage registration and transfer fees also apply and differ from state to state.
Legal and conveyancing fees – these cover the services of a real estate conveyancer or solicitor, who'll prepare the necessary paperwork and conduct the settlement process.
Building, pest and strata inspections - paying for these services will help ensure that any structural concerns or maintenance and financial issues are sorted—saving you from potentially detrimental problems down the track.
Moving costs – this will come down to how much you do yourself, whether you rent a truck, hire professionals, or prod your family and friends into giving you a hand.
Loan repayments—what you pay back and how often you make repayments—can have a significant impact on the time it takes to pay off your home loan.
Interest charges - you can generally choose a fixed or variable rate or a combination of the two. This is worth some research, mainly as interest rates can go up and down.
Other ongoing expenses – the ongoing costs of owning a home might include strata fees for communal properties, council rates, utility costs, building and contents insurance, and things like home improvements.
If you're already in debt, you might find it harder to get a home loan approved, or you may not be able to borrow quite as much. Focus on paying off any large debts you may have before you apply for a home loan, primarily high-interest debts. Consider combining several debts into one if you can. But note that some debts, such as university HECS debt, are far less troubling than, say, credit card debt.
The prospect of saving a large deposit — say $100,000 for a $500,000 property — can be daunting, but lenders do provide mortgages to buyers who have saved less than one-fifth of the purchase price.
But you will have to pay for it.
Buyers with less than 20 percent of the purchase price will often be required to pay lenders mortgage insurance (LMI), which protects the credit provider in the case the borrower cannot pay.
It can be added to your loan, but the lender can also charge you a higher interest rate.
The bigger your deposit, the more you can borrow. And you can apply for loans with lower interest rates. While it's possible to take out a loan with a 5 or 10% deposit, you will have to pay lenders mortgage insurance if you have less than a 20% deposit.
Purchase within your comfort zone
Buying your first home should be a happy experience, not one that leaves you racked with doubts and resentment. First-home buyers who stick to their budget are less likely to suffer from regret.
The best way to avoid overextending is to have a firm grasp on your current incomings and outgoings. If you know exactly where your money goes each month before you buy, you will be in a much better position to plan an affordable repayment strategy.
When it comes time to make an offer, never go above your budgeted purchase price. You never know what might happen in the future that could put a strain on your finances.
Make sure the locations you're looking at stack up
They say location is everything, which is especially true when it comes to making a smart financial decision on your home purchase. To help you buy a home you love - and for the right price - consider:
- how much properties are going for in the suburbs you're interested in
- how far you're willing to live from family, friends and work
- whether there are off-street parking and local amenities, such as schools, shops and transport
- whether you'll need to renovate and if you have the extra funds to do so
- if there is price growth potential in the suburbs, you're looking at
- if there are proposed developments in the area that could impact the value of your home
- what the crime rate is like in the areas you're keen on
- if you're moving far away, how the local job market fares.
If you need help gathering some of this information, try speaking to real estate agents who work in the area, or look at real estate companies online.
Of course, different features will appeal to different people when looking for a home to live in, so consider what works for you.
Figure out your home buying strategy
If you want the ease of moving into a home that is already landscaped and liveable, then you may consider buying an established home. Buying a house that has already been built has the advantage of being in an established area with established streets, footpaths, nearby parks and, importantly, shops and transport. You could even buy an older home and carry out some improvements.
If you would prefer to put your stamp on your home from the beginning, then you might want to build your first home from the ground up. Choosing the block and the neighbourhood, the street and the orientation, select the plan and the builder, then choosing everything from the doorknobs to the paint colours, the pavers to the curtains and everything in between. If you are building your own home, you will need to apply for a construction loan to draw down on funds.
If you've fallen in love with a particular property, other buyers probably have too. Having all your paperwork and deposit together, plus pre-approval, puts you in a much better position to snap up your dream home when you find it.
Get a property inspection
A building inspection is a worthwhile investment for several reasons. Aside from its ability to bring potential problems to light, building and pest inspections can also be used to negotiate on the purchase price.
Home inspections of the property you're considering will alert you to severe issues that may not be visible—asbestos, termites, electrical, ventilation and serious plumbing faults, for example. These problems could eventually cost you a whole lot more than the building inspection itself.
If you're buying a townhouse or apartment, strata reports can tell you whether the property is well run, maintained to a decent standard, and adequately financed. Knowing what to look for when inspecting a house is a step in the right direction to finding these common and hidden imperfections.
We've all heard horror stories of buyers discovering structural faults, water or pest damage after spending their whole budget on purchasing the home. If you can get a third party to identify any issues before you are buying, you will have much more bargaining power with the seller.
Caveat emptor (home buyers, beware!)
Imagine buying a car without checking the mileage or the brakes, and then having it break down as soon as you buy it. A home is likely the largest purchase you'll ever make, and ultimately you as the buyer are responsible for making sure you're getting a quality property for the price you're paying. Get building and pest inspections, so you're not stuck with a collapsing, termite-infested disaster. Examine the quality of the property's fittings and construction as best you can. And if there are obvious repairs needed (and you're OK with that), make sure you get a quote for repairs and factor that into your budget.
Find out if you're eligible for financial assistance and take advantage of first home owner concessions
There are several ways you may be able to help fund your home purchase. We've outlined some options to look into below.
First Home Owner Grant
State governments offer a one-off grant to first homeowners who satisfy all the eligibility criteria. If you're unsure about eligibility, contact your state revenue office and be sure you apply with plenty of time.
Stamp duty concessions
Individual state and territory governments offer additional incentives to first home buyers, some of which involve stamp duty concessions. It's often worth researching what's on offer in the area where you're buying.
First Home Super Saver Scheme
Eligible first home buyers can withdraw voluntary super contributions (which they've made since 1 July 2017), to put toward a home deposit.
Under the First Home Super Saver Scheme (FHSSS), first home buyers who make voluntary contributions into their super can withdraw these amounts (up to certain limits) in addition to associated earnings from their super fund to help with a deposit on their first home.
If eligible, the maximum amount of contributions that can be withdrawn under the scheme is $30,000 for individuals or $60,000 for couples.
So if you're still some way off buying a first home, making voluntary super contributions (as opposed to saving them in a bank account), to access later under this scheme, could produce tax benefits that help you reach your first deposit goal faster.
The First Home Owner Grant is a government initiative to assist people in buying their first home in Australia and can save you thousands in duties and fees. If you're eligible for any financial assistance, make sure you claim it!
You need to take out insurance the day you sign the contract. After agreeing to a price with the seller, there is still a settlement period before the buyer can move in.
Even though it maybe 30 days before you pick up the keys, you need to take out insurance on the property in the interim to protect against any damages.
The legal liability for damages varies between the states and territories. Still, some lenders will insist that buyers cover themselves before settlement.
It is probably wise to take the advice of your solicitor or conveyancer to learn of your position.
Buying at an auction comes with a different set of conditions
Some agents prefer to sell houses via auction, but it can be a trap if you are unsure of your finances or have doubts about the building and pest reports.
In a standard conditional offer, you can add a backstop, where if your finance does not get approved or the building has any issues, you can pull out.
But you do not have that luxury with an auction, meaning if the reserve price is met and you win, you will have no option but to buy the property.
The process can feel like a game with changing rules
Buyers and agents seem to be locked in a set of distrust where everyone is holding their cards close to their chest.
When making an offer, you will most likely be told, "in the ballpark," only to find out the owner was looking for $50,000 more than you could pay.
Seemingly straightforward questions like "how much does the owner want?" were met with riddle-like responses like "the market decides the price" or "the owner has decided to go to market without a price as buyers have more information than ever and have a better handle of the value."
While you may be honest, it takes a while to understand the agents probably believe you are not entirely truthful about your budget with them.
There appears to be little choice but to play the game, trying to feel out the middle ground slowly.
It's also important to remember the agent works for the seller, not for you.
They will use sales tactics to try to eke out more from you to get more for the owner, and ultimately for themselves in commission.