A Beginner’s Guide to Buying Your First Home
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Buying your first home is an exciting time. It can also be exhausting as there are so many decisions to make and factors to consider during the buying process. This brief guide will take you through some of the key things you need to know as you take the exciting step of buying your first home — and taking on a mortgage.
Determining Your Borrowing Capacity
Before you get started with serious house hunting, is important to have a good idea of your borrowing capacity. You may be surprised to learn that your borrowing capacity can vary a lot amongst lenders due to their differing lending policy. The lending policy is the criteria you need to meet in order to be eligible for a home loan with that particular bank or lending institution.
Lending policies will differ from institution to institution on a wide range of criteria, including:
- Your employment situation
- Your credit score
- Type of property
- Size of your deposit
- Living expenses
- Credit card limit (even if you don’t use it or you pay it off in full)
While using an online calculator can offer a helpful starting point, the best way to determine your borrowing capacity is to speak with your bank or a mortgage broker.
Setting Your Budget
Knowing your borrowing capacity is great, but it shouldn’t be the only criteria to help you set your purchase budget. Make sure to also consider your long-term financial strategy and other factors like:
- How soon do you want to be debt free?
- How much debt could you afford if interest rates rose to, say, six per cent?
- What sacrifices are (or are you not) willing to make in order to afford a particular home?
- How likely are you to want to change careers or start a family in the near future – how much debt could you afford in this case?
Answering these questions honestly should help you narrow down your property search and put you (rather than the bank) in control of your decision.
Accessing Grants and Financial Support
Another decision that may sway your choice of property is whether you are eligible for any government support as a home buyer. Some schemes place restrictions on the type of property you can buy (eg new or established) and the maximum purchase price of the property. So before you begin house hunting, make sure that you are familiar with the grants that apply to you:
First Home Super Saver Scheme (FHSS) — as we know, your money isn’t earning any interest in the bank these days, and although share markets can offer greater returns, they aren’t without risk. The FHSS offers a compromise by allowing you to put your savings into your super account and withdrawing them once you are ready to buy. Be sure to get familiar with the fine print first by visiting the Australian Taxation Office website.
First Home Loan Deposit Scheme — this scheme allows you to purchase your first home with only a 5% deposit and without having to pay Lenders Mortgage Insurance (LMI). Limited spots are available and there are income limits and other eligibility criteria to meet, which you can inspect here.
Family Home Guarantee — this scheme allows single parents to purchase a home with only a 2% deposit while avoiding LMI, even if they have owned a property before. Once again, limited places in the scheme are released each year and eligibility criteria apply which you can read here.
First Home Owner Grant — separate to the above schemes, as a first home buyer you may be eligible for some government assistance in the form of the First Home Owner Grant (a cash payment) or a stamp duty concession or a combination of both. The conditions and grant amounts are subject to change and are different in each state. They also vary depending on whether you are buying a new or established property. You can find more information here.
Difference Between Buying Auction and Private Treaty
While sellers and real estate agents love selling at auctions due to the competition and sense of urgency they generate, as a buyer it is important to be aware of the risks of buying at auction.
The main risk comes from the fact that at auction there is no cooling off period and the deposit is payable immediately. This means that if you change your mind, or if in the heat of the moment you bid more than you can afford, you may risk losing your deposit altogether.
On the other hand if you buy via private treaty (meaning, not at auction) you are able to negotiate the terms of the purchase and have a 3-5 day cooling off period after your offer has been accepted and you have been given a copy of your sale contract.
If you are considering buying at auction, make sure to speak to your solicitor and mortgage broker beforehand so that you understand the risks and can manage them appropriately.
Should You Use a Buyer’s Agent?
Most first home buyers don’t use a buyer’s agent because it is an additional expense they can’t afford. They can be worth considering however if you don’t have time to do your own research, would like assistance with negotiating the purchase price or are buying interstate and unable to inspect the property yourself.
Understanding the Different Types of Loan Approvals
Most borrowers are surprised to learn that an approval may not mean the same thing to the bank as it does to you and me. There are in fact three types of loan approvals that you will encounter on your way to becoming a home owner:
- Pre-approval — although they’re often required before bidding at an auction, keep in mind that a pre-approval is simply a rough guide of your borrowing capacity. It does not mean that the bank has assessed your application and is not a guarantee your loan application will be approved, so tread carefully.
- Conditional Approval — means that the bank has taken a look at your application and supporting paperwork and believes there is a good chance they can approve your loan application once you meet certain criteria. However, it still does not mean your loan application has been approved.
- Unconditional approval — this means that your loan application has been approved and loan contract documents will be issued. Keep in mind that even with a full loan approval the bank will reserve the right to rescind it at any stage prior to the settlement date. This can happen if your circumstances change between loan approval and settlement date (for example you quit your job, obtain another loan or credit card or even get pregnant). In these cases the bank may decide that your ability to pay back the loan has been jeopardised and that they need to reassess your application.
Home Loan Terms to Be Familiar With
It may come as a surprise that getting a home loan involves more paperwork than getting a marriage license, but it’s true! Understanding a few key terms will make the process a lot less overwhelming:
Basic Loan — a type of loan that has minimal or no fees, and doesn’t come with any additional features such as a credit card, offset accounts or the ability to split your loan between a fixed and variable rate.
Comparison Rate — an interest rate that also includes the additional fees and charges of the loan. It is there to allow you to compare the true costs of loans with different fee structures. Refer to it if you’re looking at two loans and trying to decide which one is cheaper.
Fixed rate — interest rate that is locked in for a set period (typically 1-5 years). The benefit is that it can protect you from interest rate rises, but it does come with strings attached. A fixed rate loan often can’t be linked to an offset account, can remove your access to your redraw facility and can limit the amount of additional repayments you can make. You can also incur significant break fees (sometimes in the thousands of dollars) if you decide to break the fixed rate early.
Lenders Mortgage Insurance (LMI) — the insurance premium you pay when you borrow more than eighty per cent of the value of the property. Keep in mind that this insurance policy covers the bank, not you, if you default on your loan repayments.
Loan to Value ratio (LVR) — the proportion of the loan amount against the value of the property (it is calculated as loan amount/property value x 100). Some banks will lend up to 95% of the value of the property and most will require you to pay LMI if borrowing more than 80% of the property value. Some banks will also set additional LVR limits on what they are willing to lend in certain high-risk areas (for example, high-density apartments or vacant land).
Offset Accounts — a bank account that is linked to your home loan. It works like a regular bank account, but any money you have in that account is ‘offset’ against your loan balance, reducing the interest you pay. One of the main benefits of offset accounts is from a tax perspective. Instead of having to pay tax on the interest rate you’re earning on your savings, you can instead use it to reduce the amount of interest you’re getting charged on your home loan. An offset account is also beneficial if you intend to convert your home into an investment property some day, again due to the tax benefits that it offers.
Package loan — a loan facility that offers you additional features all under the one fee. These extra features can be a credit card, offset account and ability to split your loan into several portions.
Redraw Facility — if you consistently pay more than the minimum on your mortgage you may be able to withdraw these amounts at a later stage, but fees and restrictions can apply to the amount that you can redraw at any one time. The main risk of keeping your savings in redraw rather than a separate bank account is that the bank can also reduce the amount that you can redraw if they believe that your property has dropped in value – check your loan contract for the fine print.
Variable rate — an interest rate that the bank can change from time to. The benefits of variable rate loans are that they enable you to link your home loan to an offset account and don’t limit your ability to make extra repayments, but the risk is that they can increase your loan repayments with little notice.
Natasha Janssens is a Certified Money Coach (CMC)® and founder of Women with Cents. She is an award winning financial educator with a passion for supporting women to transform their relationship with money. If you don’t know what you don’t know when it comes to money and financial matters, her book Wonder Woman’s Guide to Money is for you. For more of Natasha’s tips follow her on Instagram and take the Money Type Quiz.