First Home Buyer

What’s The Secret To Buying My First Home?

Saving for it.

Saving for a home loan or mortgage isn’t glamorous but it has to be done. So here are some savings tips for first home buyers to help get you into the property market.

How much should I be saving?

One of the first rules of saving is to set a goal. But what should that goal be? Different people have different needs, but a rough guide is that you should be saving 10% of your pre-tax income. Not saving anything like that? Read on.

What are you spending?

To help with saving, you need to know what you’re currently spending. And not just on the big items like rent, utilities and groceries. Get yourself a notebook and every time you spend money, write it down. Everything! For at least a month but preferably longer. You’ll be surprised where your money goes.

What do you really need to spend?

If you’re a typical first home buyer, you probably haven’t been exercising a lot of financial restraint to this point. Invited out to dinner? You go. See shoes you like? You buy. Take lunch to work? Are you kidding? There’s nothing wrong with that, but if you really want a home, you’re probably going to have to start making some sacrifices. Look through your spending record and decide what you’re willing to give up. You might decide, for example, that life would still go on if you didn’t spend $1500 a year on coffee.

Get rid of credit card debt

You probably used to pay your credit card off every month. But then one month you couldn’t quite manage it and things snowballed from there. That credit card debt is killing you. It is expensive money and you need to eliminate it. Consider transferring the debt to a new card that gives you an interest-free grace period, and save like mad to get your balance down to zero as soon as possible. Then consider the old trick of keeping your credit card in a cup of water in the freezer.

A savings history

If you’ve spent everything you’ve earned, don’t be surprised if the mortgage market doesn’t put out the welcome mat. Lenders like to see proof that you can save. So start putting something aside every month and you’ll be surprised how quickly it adds up – and how much more popular you’ll be among the lenders.

How Much Should I Borrow?

As much as you can comfortably repay.

It’s not that hard to work out your borrowing capacity. Every bank and finance broker has an online home loan calculator that answers the question, “How much can I borrow?”. Working out how much you should borrow can be a little more difficult.

How much can I borrow?

The factors that lenders take into consideration in determining your borrowing limit are:

Net income

• How much do you clear?
• Will you have one salary or two?
• Do you have other sources of income?
• Stability of income

Are you in full-time work?

• How long have you been with your employer?
• Are you self-employed?
• Other loan repayments

Do you have a car loan? HECS debt? A Credit card debt?

• Total credit card limit
• A high limit can decrease your borrowing capacity

Credit history

• A bad credit history won’t help – but you should be honest

Number of dependants

• Do you have children?

Term of the loan

• Are you taking out a 15-year or 30-year loan?

Interest rate

• When rates are higher, your borrowing capacity will be lower

Debt-service ratios

In determining your borrowing limit, lenders use what is called the debt-service ratio – the ratio of loan repayments to your gross income. For single income earners, this ratio should not exceed 35%. For double income earners, the ratio should not exceed 40%.

How much can I borrow?

• Use the home loan calculator

How much should I borrow?

While we are bound to ensure you don’t borrow more than you can service, ultimately only you can decide how much you should borrow.

What you should take into account

The lender’s main concern in determining how much you can borrow is “Can they repay the loan?”. They may not take into account a host of other personal matters – but you should. These include:

Income security:

You know more than the lender about the security of your income. How safe is your job?

Family planning:

You might not have children now, but are you planning to? And if so, will this mean going from two salaries down to one?

Job satisfaction:

If you have a highly paid job, you can borrow more. But, if you don’t like your job, or it’s highly stressful, taking out a large mortgage can have long-term lifestyle implications.

Lifestyle:

You might be able to afford to service a large loan, but only if you have no social life whatosever. You need to consider whether that’s a trade-off you’re happy to make.

Other goals:

Property ownership has become a preoccupation for Australians. But, there are other financial goals to consider – like providing for your retirement. And money isn’t everything. Will taking out a large mortgage mean you’ll never fulfil your dreams?

Only you can decide!

That’s why the question should not be ‘How much can I borrow?’, but ‘How much should I borrow?’. And only you can ultimately make that decision. To learn more, talk to us.

Five Things First Home Buyers Need To Know

Before you decide to purchase your first property there are a number of things to consider, including your current personal circumstances and financial status.

1.  Think about why you want to buy a home

Do you want to live in it or will it be an investment property? This can help determine the kind of loan you apply for and home you buy, depending on your short and long-term plans.

2. Research potential properties and loans

Knowing the market is crucial, so do some research on the areas you are targeting, check out auction clearance rates and recent sales, as well as price trends in the area. Once you are aware of what you are looking for and the approximate price, the next step is saving a deposit.

While some lenders will offer loans if you have saved less than the usual 20 per cent deposit, being able to show a record of good saving habits will aid in getting your loan approved.

Then, when you talk to your local MFAA Approved Finance Broker about applying for pre-approval on the right type of loan, ask for their help to work out what you can afford in terms of repayments.

3. Factor in other costs involved

Depending on the property, there can be a number of additional costs, so ask your finance broker what other payments you will face. This can include, but isn’t limited to, stamp duty, loan establishment fees, legal and conveyance services, utilities, property insurance, maintenance and lenders mortgage insurance .

4. Think about your future

Just because your current situation allows you to get a home loan, that doesn’t automatically guarantee that you will still be able to service it in five years’ time. Is there a possibility your role at work will change? Are you considering going back to study and reducing your working hours?

5. Get professional help

With so many things to consider, getting professional help is highly recommended. There are many experts in the industry and it is in your best interest to use them for tasks such as property checks, pest checks and any other legal queries. Going it alone can prove costly. Avoid nasty surprises down the track by getting the right people to do the appropriate checks for you from the beginning.

How Do Lenders Assess Applications?

Brokers can help connect you to the lender best suited to serve your mortgage needs by shopping around on your behalf.

In order to decide whether or not to provide you with a loan, lenders will generally assess you against five qualities.

1.  Your ability to repay the loan – To establish your capacity the lender will look at your employment history and salary to evaluate whether you have enough cash coming in reliably to pay the loan over time.

2. How much cash you have up front – Assessing your ability to put down a percentage of the value of the property being purchased up front is standard. The percentage varies though, and some specialist lenders may approve a five per cent deposit.

3. The property valuation – Since the property is used as collateral if you are unable to repay the loan, the lender will value the property. Based on the report, the lender will decide whether the property is worth the loan being approved.

4. Your financial history – Your credit rating, expenses and debts will help the lender assess your reliability as a borrower and whether you are worth the risk.

5. Market conditions – Economic circumstances in the market can influence what interest rate you have access to and whether you need to provide extra security. They can also influence the repayment schedule.

The Finance Broker advantage

While loan officers work solely for a lending institution and can only offer that institution’s products, an MFAA Approved Finance Broker is able to shop around for you.

Finance broker are paid commissions by lenders to match borrowers to the right products, and can negotiate a very competitive rate on your behalf, which is why half of borrowers today turn to finance broker when it comes to finding a home loan.

How Much Is The First Home Owner Grant?

The First Home Owner Grant is a government scheme that was introduced in 2000 and after an increase in 2008-09, it has returned to its original figure of $7,000. It’s a one-off payment for eligible first home buyers who purchase or build a residential property to live in.

How does it work?

While the basic $7,000 grant applies across all states, some states and territories also provide their own additional grants and stamp duty subsidies, including additional benefits for new construction and new homes in regional areas.

The grant amount, eligibility criteria and payment details of First Home Owner Grants vary between states and territories, so it’s important to check with your home lender when you apply for a home loan. Usually, you may be eligible if you:

• Are a permanent resident or citizen of Australia
• Have never received the grant or owned residential property
• Are the minimum age set by your state or territory
• Are buying a new or established home as an individual (not a company or trust)
• Will live in the residence for the minimum time determined by your state or territory (the grant is not available on investment properties)
• Apply for the grant within 12 months of settlement.

The grant is usually paid at the time of settlement to your home lender and applied directly to your home loan. If you are building a home, the grant will be approved when your first loan repayment is due.

Some state and territories have additional grants for first home buyers who purchase or build a home, especially in regional areas.

How To Buy A Home When You’re Self-Employed?

Self-employed borrowers come up against the challenge of not being able to simply present payslips and tax returns to back up their loan applications. But this need not stop you buying your dream home.

Many lenders offer loans for self-employed borrowers who can’t hand over payslips and employment records. This means that, rather than the usual documentation, you prove your ability to service a loan using bank statements, declarations from your accountant and financial records.

Of course, as with any mortgage application, you must still prove that your income outstrips your spending and you can service the loan. Getting this right is more than presenting a lender with a few quick sums on the back of a napkin; it can take a solid six to 12 months of preparation.

Here are some quick tips:

1. Reduce debt: pay down credit cards and personal loans, and be sure to lower the credit limits as they are paid down, as lenders assess the total credit available to you as a potential debt level, not just the amount you owe;
2. Cancel credit cards that you don’t need (this will affect credit scoring);
3. Speak to a finance broker about how the structure of your business and your taxable income will impact your ability to borrow;
4. Do your taxes when you should, and always pay your tax assessments on time;
5. Save: saving a deposit is obviously important, and showing your ability to live within your means while saving is too. This is key to serviceability – you want to show at least a six-month history of high income and low expenses; and
6. Go to an MFAA Approved finance broker, rather than a bank. Finance broker have access to specialist lenders that assess applications on a case-by-case basis and tailor their products to self-employed borrowers and contractors, while bank lenders do not.

Loans to the self-employed do differ from standard loans in a few ways, apart from the application process. Lenders offset the extra risk they are taking when lending to a self-employed borrower or contractor by charging slightly higher interest rates and placing some extra rules on loan-to-value ratios (LVR) and insurance requirements.

Generally, you can expect an interest rate for such a loan to be one to two percentage points higher than for a full-documentation loan.

Most lenders will also insist on an LVR of no more than 80 per cent – meaning that under no circumstances will they lend more than 80 per cent of the property value, as assessed by the lender.

In cases where the loan amount is for more than 60 per cent of the property’s value, some lenders also require self-employed borrowers to pay for lenders’ mortgage insurance.