What first home buyers need to know:

13 Mar

Buying your first property is an emotional investment, it can be daunting. What is the difference between fixed and variable, what is mortgage insurance, is it better to choose principal and interest or go with interest only? Which lender is tightening up, who is super conservative?

First home buyers are usually bursting at the seams with questions. They would love someone to champion these concerns and give them courage to do what they’ve always dreamed of. The journey in buying your first home can take weeks, months or even years. Here’s what you need to know.

Deposit
The bigger your deposit, the easier it is to get your loan approved and the cheaper the rate. Some lenders let you borrow 98% of the property value and charge a higher rate for having a smaller deposit. Mostly, you will need 5 to 20% of the property value saved. If you have at least 20% you can usually get a cheaper rate.

Guarantor
The other option could be for a first home buyer to use some of the equity in someone else’s property, like their parents. This way, first home buyers can borrow between 100% and 110% of the purchase price of a property. This is a really good way to get your foot in the market when you don’t have the deposit saved today. Also, you don’t need to pay lenders mortgage insurance (LMI).

What is Lender mortgage insurance (LMI)
It’s a fee the borrower is charged when they do not have at least 20% of the property value saved. If you do not have a guarantor and do not have 20% of the property value saved, your lender needs to have your specific loan approved by a mortgage insurer to insure the loan for the event of the borrower defaulting. Yes, that’s if you unfortunately default on the loan. The fee to the bank for having this loan insured, is passed onto the borrower. Most banks begin charging LMI once the loan amount is greater than 80% of the property value, so if your loan amount is greater than 80.01% of the property value, you’re paying LMI. Other lenders charge this LMI fee from 85.01% and above.

Principle and interest or interest only
With principle and interest repayments (P and I), assuming the rate doesn’t change, you are choosing to pay off the loan from the get go in addition to the banks interest charge. See your repayment here when P and I, includes two components, the principle portion and then also the interest portion. You will slowly see your loan reduce over time as your repayments slowly edge away at your originally approved limit.

Interest only on the other hand, only allows you to pay off the interest so you’re not actually paying off the property loan at all, no P. Why would you choose interest only then? Generally, these repayments are a lot lower because the contractual obligation is not including the P (principal) component. You can make the additional repayment whenever you like on your own accord. Investors receive a tax deduction for the interest that’s charged on their investment loan so they tend to allocate their savings to other areas that can generate a better return, as opposed to paying off their debt sooner. This way, they keep their deduction higher. This is a risky approach and generally banks are asking for explanations as to why a specific repayment type has been chosen. Interest only as of today, is mostly detrimental to the amount you can borrow because banks look at your ability to service your loan over the term, minus the interest only period. So if you’re looking at a 30 year term and wanting 5 years interest only as a repayment type for reasons above, your repayments are calculated over a 25 year term which reduces the time you have to pay off the loan and at the same time, increases your repayments. So simply put, interest only is detrimental to your serviceability, the word for your affordability meaning you can’t borrow as much as when you choose to repay with P and I.

Fixed or Variable
If you want security over your repayments and believe that rates could move upwards in the future, then it’s wise to take a fixed rate option and secure your repayments for the specific fixed period. Different lenders have red hot fixed rate campaigns that they release at time to time so your broker needs to know when they’re available for you to grab a hold of. If you sell or refinance out of the fixed rate during it’s set fixed period, you will incur an early termination fee which can be costly. Damn! If you’re wanting flexibility, this isn’t your option. You are usually not allowed to pay off more than a certain amount each year of your fixed rate loan.

If you believe that the rates are not moving for an extended period of time and would like the flexibility, then it’s wise to choose variable. With variable rate loans, you’re not locked into any early termination fee periods.

What type of property
If it’s for investment purposes, generally speaking you need to find a good location. Inspect the area, look for schools, parks, transport, amenities, comparable settles sales for checking out the general price, is it near a bushfire or flood prone area? What infrastructure is around? Can you add value to the property? Maybe see if your broker can obtain an independent property report for you. Your broker can also help you with this process in determining the risks that each property might carry for a certain lender. Some lenders for example don’t want to lend you more than 80% of the property value for a high-rise apartment, instead the lender would only be comfortable with lending you 70% of the property value.

If it’s for lifestyle or owner occupier purposes, it’s really up to your own personal taste really. Your broker can help with this part of the process nevertheless and show you how to use property to build wealth.

What are the purchasing costs associated with buying a property?

Deposit: we saw above, the difference between our loan and purchase price.
Stamp duty: Each state has its own charge for the transfer of ownership on title. The state government your property being purchased in, will have a different percentage that they charge of the purchase price but it’s usually between 3 and 5%. NSW charge can be found here: http://stampduty.calculatorsaustralia.com.au/stamp-duty-nsw. This amount is not part of the purchase price and separate so we need to cover this with either our savings or the guarantor.
Other Government, bank or even inspection costs: Generally, these fees include land transfer, title search, discharge, legal disbursal, mortgage registration, settlement and sometimes application fees. Valuation fees for the property could arise and sometimes an independent pest and building report is recommended to ensure the property is structurally sound and not full of termites.
Conveyancer or solicitor charges, can be up to $2000 or more, depending on the amount of work required. See below.

Do you have a conveyancer?
Your mortgage broker will run you through the above important factors and can also help you find a solicitor or conveyancer near you that they have a sound relationship with on the back of proven experiences with them or their clients.

The conveyancer will make sure that the property you are buying isn’t detrimental to you, mainly through reviewing the contract of sale. They will do important searches, ensure services (water, council and strata) are transferred into your name and sometimes help with your application if eligible, for the first home owners grant.

First home owners grant?
Each state has a different First Home Owners Grant Scheme with different concessions based on different rules.

Have you prepared well from a credit rating perspective?
For most lenders it helps if you have a good credit rating. Your credit rating is in essence your historical record, similar to your driving record but instead it records the amount of times you’ve applied for credit. Utility and mobile phone company enquiries appear here as well. Too many enquiries on your record, can come across to a certain lender as if you have an appetite for credit and that is not suited to all lenders so your broker will be able to manage this by proposing lenders that are ok with your certain scenario. Just try to pay all your bills and loans on time, especially those credit cards and don’t let your brother in law convince you to continue knocking on different lenders doors until one of them gives you an approval.

Peter Vassilis
Black and White Finance

Peter Vassilis

What first home buyers need to know:

Home loans for doctors and medical practitioners:

Why use a mortgage broker?