First homebuyers: Your First Home

By Your Mortgage

 “Take into account any family considerations, whether you plan to start a family in the near term. If one partner takes time off work to raise a child, this situation could put a strain on your income”Gino Marra, CEO, Carrington National

“Having a good savings track record will help you because it will prove that you can afford to make payments. I think if you’re committed to a savings plan for a period of time before you buy, you are in a better position to pay your loan but also live comfortably after that” Brett Morgan, head of retail mortgage, ING Direct.

“A lot of people gets mesmerised by the fact that they find a house and don’t pay much attention to checking the fine prints. But they are not doing themselves a favour because they need to understand all or some of the hidden fees associated to buying a home” Warren O’Rourke, national corporate affairs manager, Mortgage Choice

Laying the groundwork

Despite the rising cost of buying property and sky-high fuel prices hitting the Aussie wallet, Australia still has one of the highest rates of home ownership. Owning a house is a real milestone for most people, particularly for young adults. It means you’ve made it; you’ve arrived; you finally have a place to call your own.

If you are one of the many would-be borrowers determined to get a slice of Australia’s real estate, there are a number of ways to crack the tough nut property market and get on the ladder, even if you have no savings for a deposit or you earn a low salary.

Be prepared. Be very prepared

Spontaneity is the spice of life, but when it comes to buying your first home, being predictable is a better option. It’s crucial not to rush into any sort of commitment and really take your time to map out your strategy.

Buying a home is a major purchase and even experienced homebuyers still feel overwhelmed by the process. A survey conducted by mortgage broker Mortgage Choice showed that more than half of borrowers (55%) are confused about the property buying process and about a third confess to having no idea at all. The greatest confusion arises around the order of who does what and unexpected fees.

Therefore, the best preparation you can make is to get educated so you can navigate the process with confidence. You can get information through seminars, by talking to experts and to people who have been through the home buying experience. But choose your sources carefully. Knowledge is power and misinformation can bring expensive mistakes.

Critical first steps 

1) Create a budget: The first thing you need do when buying your first home is to consider how this new acquisition is going to impact your finances over the long run.

When you buy your own home you will be tackling an array of new expenses including mortgage repayments, government rates, insurance and maintenance costs. It’s important that you take a long hard look at your finances and determine what you are planning in the years ahead and how much you can afford to repay.

Gino Marra, CEO of lender Carrington National, recommends you start by working out your total family monthly income against monthly expenses. The balance is roughly what you can afford to repay each month on a loan. It’s also important to consider where your career is headed and whether any salary increases are likely. “Take into account any family considerations, whether you plan to have children in the near term. If one partner takes time off work to raise a child, this situation could put a strain on your income.”

By also working out the amount you pay in rent now against the repayment of a mortgage, you will determine whether buying a home makes financial sense for you. If your new purchase will stretch your finances to the limit, you may even want to continue renting or just consider borrowing a smaller loan amount.

Banks and other lenders generally assess your capability of paying the loan based on your total income and financial commitments, with the majority willing to lend about 30% of your income before tax.

2) Decide your financial goals: Even before you start searching for that perfect home, you need to ask yourself why you are buying a property. Whether it’s part of a long-term investment strategy or you’re simply desperate to get out of the rental cycle, it’s vital to clarify your objectives.

Consider developing a financial plan. A financial plan becomes your guide not only to saving money for a deposit and other expenses but also for reducing your debts, and in turn, it will help ease the stress of buying a home by thinking ahead.

3) Get a credit check: Having a clean and established credit history goes a long way in getting you through the home buying process. It’s important that you review your past credit file to make sure that your credit report is correct – this enables you to rectify any errors that may arise. If you have defaulted or had bad debts under your name, these will be recorded on your credit file and will alert prospective lenders to the fact that you may not be reliable in meeting your mortgage repayment.

“Having a good savings track record will help you because it will prove that you can afford to make payments. If you’re committed to a savings plan for a period of time before you buy, you are in a better position to pay your loan but also to live comfortably after that,” says Brett Morgan, head of retail mortgage at ING Direct.

4) Obtain a pre-approval: Pre-approval is a proof that you have been carefully vetted by the lender and deemed worthy for a loan. To obtain this certification, you need to get your finances in order, establish your affordability, as highlighted above, then go to a lender who will then conduct check with the credit bureau and with the mortgage insurer. If they are satisfied that you are not a bad debtor, your pre-approval will be issued within two days.

Tim Brown, head of mortgages at Macquarie Bank, says: “Getting a pre-approval signifies that you have the buying power and have a distinct advantage when you are ready to deal. This piece of paper gives you the confidence when bidding in an auction or negotiating on private treaty. You’ll often find that some real estate agents will not even start showing you homes until they’re sure you have pre-approval in place.”

However, if your financial circumstances change before closing the deal, you have to inform your lender immediately in order for them to adjust the pre-approval criteria. This ensures that your pre-approval stays valid and you are able to access your loan.

The true cost of buying a home

When it comes to the cost of buying a house there’s more to it than meets the eye. Besides the initial outlay of a deposit, there are various government fees, taxes, lenders and legal fees that you have to pay before or around the time of settlement. It’s crucial that you have enough funds to cover all these upfront costs.

“The majority of first homebuyers are not aware of these additional costs and fail to factor them in when planning their purchase,” says Luke Sheales, national sales manager with non-bank lender Mortgage House.

“Most of the arrears we get are caused by people underestimating the costs of buying and moving into a new home. You should realise that when you move into your new home, particularly if it’s a house and land package, that it may take up to 12 months to complete the work on the property.

“You see it all the time, you drive around and see sheets on the windows. That means is that people have used all their money to get into the house. That’s all good at the start, a bit of excitement, but six months down the track if you’re still living with the sheets on the windows and concrete blocks in the mud, its not much fun anymore,” says Sheales.

Warren O’Rourke, national corporate affairs manager with Mortgage Choice agrees: “A lot of people get mesmerised by the fact that they find a house and don’t pay much attention to checking the finer detail. They are not doing themselves a favour because they need to understand all or some of the hidden fees associated to buying a home.”

Things to budget for:

1) Stamp duty on a property purchase: You are liable to pay stamp duty to the government when you buy land in any state of Australia. This is a state government tax and it varies from state to state. You need to check with your solicitor or conveyancer if you are eligible to any exemption or concession.

There are two types of stamp duty payable when buying a property:

Mortgage: The amount depends on the size of your loan

Property: The amount is based on the market value of the property or the purchase price, whichever is higher.

2) Lenders’ fees: Most lenders charge a one-off loan establishment fee of $600-$1,000 on new mortgages. However, as competition hots up in the market, some lenders are waiving these fees altogether, though may still charge a monthly account keeping or annual fee.

3) Lender’s Mortgage Insurance: The amount is based on the size of the mortgage and the purchase price. You need to pay Lender’s Mortgage Insurance (LMI) if you borrow more than 80% of the value of the property you’re buying – this is to protect lenders for borrower defaults but does not protect you from having to pay what you owe on the mortgage. Insurance premiums vary but can be as high as $3,000.

4) Inspection costs: Before buying any property you must get all the inspections done. The cost depends on how much detail is required in the report. It must show details of any defects on the building. Building inspections range from $300 to over $1,000. Pest inspections cost around $150.

) Legal fees: The legal transfer of ownership is usually done by a solicitor or conveyancer. Fees vary depending on the amount of work done. Expect to pay in the region of $600-2,000. Your solicitor may also charge you for search and transfer fees.

6) Moving costs and agents’ fees: Professional removalists can cost up to $5,000. If you are employing a buying agent, you have to factor in their fees as well.

Helping hand

The cost of buying and selling a house in Australia is high. But before you throw your plan out of the window, it’s heartening to know that there is help available for new homebuyers, courtesy of the Federal Government and individual state governments.

The big one is the First Home Owners Grant (FHOG), which was introduced in 2000 as a one-off payment of $7,000 in cash to eligible first homebuyers. To qualify, you must be an Australian citizen or permanent resident and have lived in Australia for at least six months. You or your spouse/partner must have not previously owned a home in Australia. If you are claiming for the FHOG you must live in the property continuously for a period of at least six months.

In addition to the First Home Owner’s Grant, the majority of Australian states offer some form of bonus or relief, generally in the form of stamp duty exemptions and rebates to assist first homebuyers get into the property market.

While financial independence is a worthwhile goal, asking support from your family could help you break into the property market sooner. These days, more and more parents are prepared to put up cash deposits or become guarantors on their children’s mortgages.

Getting to know your team

Getting the right people on your side will undoubtedly smooth out the process of buying your first home. It’s worth asking for recommendations, particularly from friends or people who have already bought a house. Find someone who will listen to you and be prepared to help. These experts are an invaluable source of information so take advantage and use them to get the best deal.

1) Broker: Your broker will help you through a myriad of loan products and guide you through the process of obtaining a mortgage.

“You can either sit on the computer for two weeks trying to find the best loans, best packages or go to a mortgage broker who will come and see you in your place and educate you with the best products. They will provide that as a free service says,” Scott Durrant, coach and founder of Successful Ways, a training firm dedicated to first homebuyers.

2) Solicitors/conveyancers: Enlisting the help of a solicitor is a must, particularly for first homebuyers. They will help you draw up the contracts and help you navigate through all the legalities. “The role of the solicitor or conveyancer is to make sure that your dream home doesn’t come with potential nightmares, because there’s only a certain amount of information that is made available to buyers,” says Phil Pennington, partner with Maunsell Pennington Solicitors.

3) Builder/architect: If you are buying a house that would need lots of renovation, it’s important to bring in a trusted builder or architect who can advice you about safety and feasibility of the renovation work you are planning to undertake.

4) Real estate agents: Local agents are a goldmine of knowledge about your target area and are worth knowing. However, bear in mind that they work for the seller and are not actively trying to get you the best deal.

Warren O’Rourke of Mortgage Choice advises: “Buying a house should be a conscious decision and you have to plan and research it, get to know the market, the people who can help and ask the right questions. It’s your responsibility to educate yourself on the process.”