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It’s Important to Set Home Ownership Goals
Somewhere along the way, you’ve probably heard that buying your own home is the Australian Dream. While that may be true for some, it’s not the only reason to buy. Before entering into a contract of sale, you should have a solid idea of why you want to own a home.
Most first homes aren’t forever homes, which is something to keep in mind when you’re house hunting. They do need to tick a few boxes, but they don’t need to tick every box. If you waited for the perfect home, you’d probably rent forever.
Some people dream of owning a home they can raise a family in, while others just want to get their foot in the door of the property market, with a vision of investing down the track. Whatever your reasons for buying, you should keep them in mind as you make decisions along the way.
You Should Consider a Mortgage Broker
Buying a house is a personal decision, so it’s natural to want to do everything yourself. However, it can be a complicated process and it helps to have an expert on your side, especially the first time. Mortgage brokers won’t cost you anything, but they can negotiate terms on your behalf and help you understand the ins and outs of your home loan.
A mortgage broker earns an income through commissions from lenders. These commissions are usually comparable across lenders, to keep competition strong. A good mortgage broker is on the lookout for a home loan that’s right for you, because they know that if you’re happy, you’ll probably tell your friends. Repeat business is their bread and butter, and it’s a strong incentive to do right by you.
Know How Much You Can Borrow
House hunting without a budget is a slippery slope: it’s easy to fall in love with a house that’s out of your price range if you don’t set a budget first. If you’re working with a mortgage broker, he or she will be able to give you an idea of how much you can borrow. Otherwise, most lenders have borrowing calculators on their websites that can be a good starting point.
Banks want to be sure that you can afford the repayments on your mortgage before issuing a loan. Your borrowing power is based on several criteria, including:
- Size of deposit
- Employment history
- Credit card limits
First Home Owner Grant/s and Concessions
As a first home buyer, you may also be eligible for first home owner grants and concessions.
Each state or territory offers a First Home Owner Grant (FHOG), which typically applies to the purchase of a new or substantially renovated home. The amount of each grant varies by location, and can only be granted once in Australia.
Some states and territories may offer additional concessions to cover the cost of additional fees like stamp duty. For all grants and concessions, eligibility rules, terms and conditions apply.
|ACT||$7,000 to 30 June 2019|
|NT||Up to $26,000|
|TAS||$20,000 to 30 June 2019|
|VIC||$20,000 to 30 June 2020|
|*Information was correct as of July 2018|
When It Comes to Your Deposit, There Are Options
Saving up a home loan deposit can create a barrier to the housing market for many first home buyers. As you save, the house prices keep going up, so the amount you need keeps getting further out of reach. While it’s true that you may need to make sacrifices as you’re saving, such as living at home where possible or going without luxuries big or small, you don’t have to wait forever.
Many lenders will loan up to 95% of a property’s value, which can be much more attainable for first home buyers. However, a low-deposit home loan often comes with Lenders Mortgage Insurance (LMI). This insurance is in place to protect the lender in case you default on your loan, and usually applies when your deposit is less than 20% of the property value.
However, you may be able to avoid LMI if you have a family member who is willing to act as guarantor. A guarantor is someone (usually the borrower’s parents) who can offer up the equity in their own home as security. This is also known as a family guarantee.
Know the Ins and Outs of Interest Rates
Interest rates have a huge impact on your mortgage and can be a major determining factor in the loan you choose. The interest rate determines how much you’ll actually pay over the life of your loan, which is a number that can come as a huge shock to many people.
The type of loan you choose will have an effect on the interest you pay.
Fixed rate loan: Rates are usually slightly higher, you can lock in your interest rate for a fixed period of time.
Variable rate loan: Rates are usually lower, but can fluctuate over time.
Split loan: Get the best of both worlds and split your loan into two parts, one with a fixed rate and one variable.
You may also have the option of making your repayments as interest-only or principal + interest.
Interest-only: You are only making repayments towards the interest accruing on your loan. Repayments are lower but you may end up paying more in the long term.
Principal + interest: Higher repayments, but you chip away at your principal as well as interest. These repayments help you pay down your loan faster, saving more over time.
Understand Useful Home Loan Features
Home loan features are the ‘bells and whistles’ that come with your home loan. They do not always represent good value, so consider whether or not you’ll actually use the features before paying for them. Here are three common home loan features that can be beneficial when used effectively.
An offset account works like a savings account, but with a different purpose. It’s linked to your variable-rate home loan. The amount in the account works to offset your loan, meaning, if you had $20,000 in your offset account, you wouldn’t have to pay interest on $20,000 of your principal. The more you have in your offset, the less interest you pay.
If your home loan allows you to make extra repayments, you may be able to redraw those payments at a later stage with a redraw facility. This can be useful if you need money in an emergency, such as to make unexpected repairs. Note that there may be fees or minimum amounts to redraw.
If your lender is also a bank, you may be able to package your home loan with banking services. For an annual fee, you generally receive a rewards credit card along with a reduction or elimination of certain fees associated with your home loan.
Be Aware of Upfront Costs
Home loans come with upfront costs, so be sure to factor them in when budgeting. You may need to incorporate these costs with your home loan, or they may even come out of your deposit. Upfront costs vary by state and territory but may include:
- Stamp Duty: A state government tax related to the property’s purchase price.
- Registration of Mortgage: Fee to register the property title with the Land Titles Office.
- Transaction Fees: Various administrative fees.
Remember to Be Realistic
Buying your first home can be an emotional process. There are hoops to jump through and there may be disappointments along the way, but be realistic and persistent and you will eventually be rewarded.
Remember your home-buying goals and set your priorities early. Shop around for a home loan and apply for the one you want; then your home ownership journey will be underway.