Friday August 6 2021

Tips every first home buyer needs to know

Buying your first home is a major milestone and goal for many of us. But whether you’re ready to take the plunge or not, it’s important to understand how the process works (and how to make the process work for you). 

No matter how old you are or where you’re at in your financial journey, discover everything you need to know about buying your first home and our top tips for making this process as smooth and stress-free as possible.

Saving for a deposit

One of the biggest hurdles first home buyers have to overcome is saving for a deposit. This initial down payment can be enough to keep us trapped in the mindset that property won’t be possible for us. 

But we’re here to tell you this: you can get your foot in the door with a much lower deposit than you’ve been told, in some cases even with no deposit at all. And here’s how. 

Let’s talk about the 20% deposit myth 

You’ve probably been told you need to have a 20% deposit ready to go before you consider buying your first home. But, this isn’t the case. 

While a larger deposit is great, it’s not your only way to secure a property. In fact, you can get away with as little as a 10% deposit for a property purchase (and in some cases, you can get away with even less).

But here’s the catch: with less than a 20% deposit, you’ll generally need to pay an extra fee known as Lenders Mortgage Insurance (LMI). This is an insurance policy you pay for that protects the lender in case you’re not able to pay back your loan.

LMI can be borrowed as part of your loan, or paid upfront, depending on your preference and cash reserves. Though, it’s worth pointing out that if you opt to borrow the LMI fee, you’ll be paying interest on that amount for the life of the loan.

The cost of LMI varies between lenders and is calculated with a number of things in mind, including the size of your loan and its value relative to that of the property you’re buying. Though as a general rule, the smaller your deposit (as a percentage) the greater the LMI.

Some see LMI money poorly spent and advocate for the full 20% deposit, whereas others view it as a necessary cost to reduce upfront cash requirements so they can purchase sooner. There’s no right or wrong stance on the value of LMI, it’s really a matter of personal preference.

The ‘other’ purchase costs

Something that’s often overlooked when talking about deposits are the additional costs of purchasing a property that exist outside of it. These include certain unavoidable costs like stamp duty and other government charges, legal/conveyancing fees, as well as other optional costs such as building and pest reports, bank fees, and buyers agents. Confusingly, these aren’t usually included when talking about your need for a 20% deposit.

Say for example you’re looking to buy a property in NSW for $900,000. Based on the 20% deposit rule you’d need an upfront contribution of $180,000 to avoid mortgage insurance, right? Well, not quite. The true cost of purchasing a $900,000 property in NSW is closer to $940,000 after taking the above costs into consideration. That means that in this case, you would need another $40,000 on top of your existing $180,000 to make up the 20% deposit (or a ‘true’ deposit closer to 24%).

Alternative ways to get your deposit sorted

Even if you don’t have enough for a deposit, there are other ways you might be able to get into the market instead, including:

  • Family gifts: banks will allow you to put gifts of money from your family towards a property purchase in the form of a “non-refundable gift”. By signing a one-page document, you could use an early inheritance or gift from a family member as a way to secure your first home.
  • Shares: If you’re looking to boost your existing funds to get you to a deposit sooner, investing in shares can potentially help you do it. By putting your funds into high-yield stocks you may be able to generate capital growth to increase your initial investment.
  • First Home Super Save Scheme: this allows you to make additional contributions to your super fund to save for your first home. You’ll then be able to access these contributions early (as well as any interest you’ve earned) to put towards your deposit.
  • Using a guarantor or family guarantee: (more on this later...)

While there are a few ways to skirt the 20% deposit requirement, lenders still like to make sure you’re able to demonstrate the ability to save. To cover this off they’ll sometimes ask for proof of ‘genuine savings’ (which is equivalent to a 5% deposit saved over a period of more than 3 months), or if you rent then a copy of your rental ledger is usually sufficient.

Getting your finances sorted

A key step to preparing to buy your first home is to get a handle on your finances. This means understanding exactly how much you spend as well as how much you earn. Doing these calculations will help you create a realistic budget you can stick to when saving for a deposit (as well as to meet your repayments and service your mortgage). 

Using our online calculator, you can estimate your borrowing power, repayments and costs all in one. With these clear figures in mind, you can start to factor in these new costs in your existing budget. 

This will take the fear factor out of what your budget will look like with your repayments, and will give you clarity over what you’ll be paying (which is especially important if this is more than what you’re currently paying on rent). 

Need some help creating a monthly budget? Here are some of the key categories to factor in when setting up your budget:

  • Groceries
  • Eating out 
  • Transport: Rego, petrol, Ubers, trains, buses, taxis
  • Holiday (even weekend getaways count!)
  • Entertainment 
  • Insurance
  • Memberships 
  • Utilities (including your phone bill, Spotify and Netflix subscriptions)

Figuring out how much you can borrow

So, you’re probably wondering: how much can you borrow for your first home? That’s what borrowing power is all about. By understanding how much lenders are willing to give you, you’ll be able to narrow your property search and set realistic expectations for what you can afford from the beginning. 

Generally speaking, your borrowing power is based on how much you earn after your outgoing costs. But, it’s important to remember that different banks will offer different products, which can impact how much they’re able and willing to lend you. That’s why we give our clients a range of what you can expect your borrowing power to be. 

What is pre-approval (aka ‘the green light’) and why is it important?

In a nutshell, a pre-approval indicates how much a lender is willing to lend you to purchase a property. Pre-approval requires an application to your chosen lender and generally lasts for 3-6 months once approved, as long as your financial circumstances (a.k.a. income, outgoings, and deposit) don’t change. And, if you don’t find your dream home by then, it’s easy to renew.

There’s a stack of reasons why pre-approval is helpful as a first-home buyer, including:

  • It provides a clear guide to how much you can borrow
  • It helps you set realistic budget expectations before you begin your search 
  • It helps you narrow your property search and focus on properties within your budget 
  • If you’re using a buyers’ agent, it also helps give them clear direction to help you find your first home 
  • It can help you forecast other costs for your first home, such as stamp duty, estimated repayments and more 
  • It shows you’re a serious buyer and gives you the ability to negotiate with confidence
  • It provides peace of mind
  • It reduces wait times at the bank once you’ve found a property

How much you can borrow vs how much you should borrow

Yes, there is a big distinction here. While lenders may offer you a higher figure than you expected, that doesn’t mean you should necessarily borrow the entire amount you’ve been approved for. 

It all comes back to your other financial goals. In some cases, the repayments at the top end of your borrowing capacity may cramp your lifestyle and make it difficult to take holidays, invest in shares or even save to start a family. 

If you factor it into your budget, taking on a mortgage doesn’t have to mean the end of eating out and weekend getaways. In fact, it can open up the opportunity to build long-term wealth and hit some of your bigger financial goals (like securing an early retirement or building a property investment portfolio). 

How to boost your borrowing power

So, what steps can you take as a first home buyer to boost your borrowing power? Here are some key steps you can consider:

  • Pay down your debts and cancel unused credit cards 
  • Get your expenses in order and find ways to eliminate unexpected expenses (such as unused subscriptions, overpriced memberships etc.)
  • Get all your paperwork sorted to ensure it’s easy for lenders to assess your financial position (such as showing evidence of stable employment or income over a number of years and tax returns)
  • Work with a mortgage broker to understand all your options and find the right lender and product to suit your needs and goals 

Navigating home loans 

As a first home buyer, understanding your loan options is key to making the process as smooth and stress free as possible. By finding the right loan for your situation, you can speed up the process of securing your first home and even lower how much you pay over the life of your loan. 

Consider a guarantor loan 

To put it simply, a guarantor is someone that guarantees a loan (or a portion of a loan) for someone else. In most cases, it’ll be a parent or close family member of the borrower and they’ll usually use their own home as security for the new loan. 

It’s a big commitment as the guarantor has to be willing to pay off the loan if the borrower isn’t able to meet their repayments.

So, what are the benefits of using a guarantor?

  • It allows you to buy with a smaller deposit: it helps you secure approval without having a 20% deposit ready to go. Depending on your circumstances, a guarantor can sometimes help you purchase without any deposit at all.
  • It removes the need for LMI: this can work out to be a hefty expense, so it’s helpful to be able to waive this cost with a guarantor. 

But it’s important to note that guarantor loans are trickier than usual home loans, and they can put significant strain on your relationships if things don’t go to plan. Find out what you need to consider before taking out a guarantor loan on our blog. 

Fixed vs variable loans: what you need to know 

There’s a lot to weigh up when it comes to choosing a fixed or variable home loan. In summary, a fixed interest rate loan means your interest rate doesn’t change for a set period of time. On the flip side, a variable loan means your interest rate goes up and down as the market fluctuates. 

If you’re looking for peace of mind in knowing your repayments will stay the same and you’re not a big fan of risk, a fixed rate might be a good choice to consider.

However, if you’re happy to accept a level of risk and have the wiggle room in your cash flow to meet changing repayments, a variable loan can allow you to access competitive rates when the market changes.

Some other things to consider:

  • Fixed loans can attract additional (and sometimes quite expensive) fees if you break the fixed contract early. This can happen when you change loan products, lenders, sell the property, or offer it as security for another purchase.
  • Fixed loans often have a limit on how many additional repayments you can make during the fixed term
  • Variable loans typically have more flexible ‘product features’ such as offset accounts, redraw facilities, and the ability to make uncapped additional repayments
  • You can split your loan into a fixed and variable portion if you want the best (and worst) of both worlds

The decision to choose a fixed or variable rate home loan (or even a bit of both) is a highly personal one, and it really is different for everybody. Working with a mortgage adviser that you trust will help you to make sure you’re across all the fine print, you’ve weighed up your options, and you're making a decision based on what’s right for you.

Should you consider an offset account?

In summary, an offset account is a loan feature that is available with certain home loan products. It’s an account that exists alongside your home loan and is used to ‘offset’ the amount you owe on your loan (and help you save on interest, enabling you to pay off your loan sooner). 

Basically the more money you have in your offset account, the more you’ll save on interest. 

An offset can be a great way to speed up your repayments if:

  • You’re earning a good salary and have a large amount of surplus cash 
  • You’re a diligent saver who has a good track record of managing your money
  • You have a large amount of cash sitting in your savings account ready to use

Learn more about whether an offset account is the right move for you on our blog. 

Understanding the grants and schemes you can access

You don’t have to go it alone when saving for your first home. There are a wide range of scenes, grants and incentives available across Australia targeted towards first home buyers. Different schemes are available in different states, so check out our full guide to learn which programs you might be eligible for in your state. 

Securing your first home can feel like an overwhelming task. But, by taking the time to get your finances sorted, understand how much you can borrow and learn about the schemes and loan options available, you’ll put yourself in the best position to make a successful purchase. And if you need a hand to guide you through the process, we’re here to help. 

Before you get ready to secure your first home, make sure you’re clued up on all the schemes and incentives available to first home buyers across Australia. Plus, discover everything you need to know about the process of buying a home and how to consolidate or pay down your debts prior to securing your first mortgage.

The finance information contained in this post is general advice only, and doesn't take into account your personal circumstances or goals. You should always reach out, or seek professional advice, before making any financial decisions.

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