Here's what you need to know.
Purchasing your first home is an incredible achievement. It’s a sign that you've worked hard and have achieved a goal that many can only dream of. But when you feel you're finally ready to take that big step, where do you start? Being a first home buyer comes with many questions. It is such a big decision, so it’s important that you spend your money wisely.
Here I have compiled a list of 10 things every first home buyer should know before making the leap. Having worked in the Brisbane market for a number of years now I've had plenty of experience helping someone through the process. Importantly, I feel that this can be an ideal time to use a trusted mortgage broker who will be able to support you through what you don't know- for us, it's certainly not just about which is the best bank to use. Things that we could support you with also include an overview of the general process, a recommended order in which to receive approvals, key submission documents and even the sourcing of other suppliers to help you through that process.
For now, here is a break-down of a number of questions we are regularly asked with some key information to keep you informed:
1. What is Lenders Mortgage Insurance?
Lenders Mortgage Insurance or LMI is a one-off payment added onto your home loan, which helps you purchase a home with a smaller deposit. This insurance policy protects the lender against any loss they may incur if the borrower can't afford to meet their home loan repayments. You can expect to pay LMI if you borrow more than 80% of your home's value (less than a 20% deposit). The amount you will pay is calculated based on the size of your deposit and how much you want to borrow. The lender will sort out the LMI, so you do not need to arrange it yourself.
2. What is a Loan to Value Ratio? (LVR)
Loan to Value Ratio or LVR is the percentage of the asset amount that you’re borrowing over the total value of the property you are purchasing (loan amount/property value = LVR). A good rule of thumb is that the bigger your deposit is, the lower the LVR. Most lenders consider an LVR 80% and over to be a risk. However, it is essential to remember that upfront costs such as stamp duty and conveyancing are not included in the loan amounts for LVR calculations, so you will need to take them into consideration.
3. What deposit do I need?
Generally, most banks recommend that you have a deposit of at least 20% of the property purchase price. The higher the deposit, the less risk you will oppose to the lender. Most banks will accept a lower deposit; however, you will be required to pay LMI and be considered a more high-risk borrower. In some scenarios, lenders will allow you to borrow as much as 95% of the property value (5% deposit), which is far more than most prospective buyers imagine they can.
4. How much can I borrow?
Based on your income and expenses (singular and joint), you can work out how much borrowing power you have and the amount you will be able to borrow when needing to purchase your property. All banks have different stipulations and borrowing limits; however, you can get an estimate off most banks websites using their borrowing calculators (e.g. ANZ home loan repayment calculator and Comm Bank borrowing calculator ).
5. At what price do I pay stamp duty?
Stamp duty is the amount of tax that you pay on a property purchase. Some buyers can get caught off guard with this fee as they do not consider it when creating their budget and have to continue saving before purchasing a property. The amount of stamp duty you will pay depends on the price you paid for the property. It also differs from state to state, however in QLD since July 1 2020; the stamp duty rates are as follows:
Transfer duty rate
(Stamp duty for new purchase in QLD Current as of 01/06/2020. Source QLD Government)
6. What is an offset account?
An offset account is a transaction account or everyday bank account linked to your home loan. This type of account can be a great way to reduce the interest charged on your home loan. The account balance or proportion of that balance is ‘offset’ daily against your home loan resulting in only being charged with the difference between the loan balance and the amount offset; therefore, the lender is charging you less interest. You can deposit your savings and salary into this account also. Your money is still accessible; however, it is working in this account to reduce your overall interest payments.
7. Should I have a fixed or variable loan?
7a. Fixed loan
A fixed interest rate loan is where the interest charged on the loan will remain set for the entirety of the fixed rate period of the loan no matter what is going on in the interest rate market. It means your payments will be the same over the entire loan period and will always be predictable. Generally, these fixed loan periods can vary from 1-5 years, even though the total loan length of the loan may be 25-30 years. At the end of the designated period, you can choose whether you want to continue with a fixed loan for the next period at a newly calculated fixed rate (which may be higher or lower depending on market conditions) or switch over to a variable rate for the remainder of the loan.
7b. Variable Loan
A variable interest rate loan is a loan with an interest rate that can change over time. If the interest rate decreases, you will take advantage of the interest rate, decreasing the loan terms, therefore paying less interest on the home loan balance. If the rate goes up, so will your payments and interest. Though there are many factors in play. This type of interest loan often fluctuates with the Reserve Bank of Australia’s cash rate.
Each type of loan offers unique advantages and conditions depending on your finances and circumstances. Choosing the right kind of loan for you is essential to ensure you save money over the long term. You can swap between the two; however, costs may incur if you break the interest agreement before the end term.
8. What’s a guarantor, and who can do it for me?
A guarantor on a mortgage is a person who provides an extra level of security for a home loan. This person is usually a parent, sibling or grandparent. As a guarantor, this person is responsible for paying back the loan if you cannot so it’s important they understand the risks and requirements before signing on. Usually, this can be done by the guarantor having a stable income, good credit score and offering equity as security for part or all of your mortgage. Having a guarantor can allow some first home buyers to purchase a home of their own much sooner than if they were on their own.
9. What is the process to get approved and settled?
Getting your home loan may seem like a complicated and confusing process if you have never purchased a property before. To familiarise yourself with it, these are the typical steps from application to settlement:
We suggest talking to us before you go house shopping and we're only a phone call or an email away. Conditional pre-approval provides you with an estimate of how much you can borrow based on the information you provide to the bank. It will help give you confidence and allow you to understand what you can afford when the right property comes around.
9b. Property Valuation
When you find the property that you love (and we will be able to guide you through this process) the next step is to seek a certified valuation of the property to ensure that the price you are buying it for is acceptable in the eyes of the bank.
This is where your mortgage broker will work with you to source key documents and ready them to submit (e.g. bank statements and payslips). If you do not have all the required documentation, your loan application could be pushed back or put on pause meaning it will take you even longer to purchase your home so this is where it really helps to have support throughout the process. At this stage, you should get in touch with us again to select a suitable home loan and organise the rest of the application.
9d. Unconditionally approved
Once your loan has been accepted, it becomes unconditionally approved or formally approved. It means that the lender approves your loan, and they will send you a letter that confirms everything in writing.
Once all the documents are approved, it's time to sign the formal approval and the loan offer documents. During this time, you should complete your government mortgage documents (stamp duty). Don't worry if you are a bit confused with this process, we’re more than happy to help out. It is advised to take these documents to a solicitor to have them explained, so you understand what you are signing and are happy with the agreement.
Settlement is when the ownership of the property passes from the current owner to you or when the purchase of the property is completed, and it officially becomes your own. The bank organises a settlement time with your solicitor to complete the transfer. This is when stamp duty is paid. After this day, you are also responsible for all rates and council fees. Once completed, you can officially collect your keys and move into your new home.
10. When should I engage a solicitor or
conveyancer to act on my behalf?
We advise you to engage with one of these professionals after finding the property you are interested in, and the real estate agent provides you with a copy of the sales contract. This document can be confusing and should be analysed by these professionals before you sign. This stage is a good starting point to engage with one as they will assist and guide you where possible throughout the sometimes confusing process.
Hopefully, this has helped you answer the questions you had regarding your first home purchase process or opened your eyes to topics that you had not yet considered. The process of buying a first home is certainly one that I love being a part of and my team and I are happy to answer questions anytime.
If you feel that you need clarification and further explanation on any of the above or if you feel you are ready to take the next step in your first home purchase, give us a call; we’re happy to help simplify things and hopefully get you into your new home sooner.
General Advice Warning: This communication contains general information only and in no way constitutes the provision of professional advice, nor should it be relied on as a substitute for financial, credit, accounting, legal or other professional advice. We have not taken into account your financial situation, investment objectives or particular needs. Before making an investment or financial decision, a person must seek appropriate independent professional advice and also consider whether this information is appropriate to their needs, objectives and circumstances. The author as well as their representatives, agents and employees give no guarantees and make no representations, express or implied, as to the accuracy, currency, completeness or suitability of the information contained in this document. Nor do they accept any liability whatsoever as a result of any information herein being incorrect, incomplete or unsuitable or as a result of a person in any way using or relying on the information herein.