Buying your own home has
remained a top priority for generations of young people.
Over the years, that first home has changed from a house on a quarter acre to a townhouse or a unit close to the city.
Partly this is because of affordability considerations, but also because many young people are prioritising location over backyards.
Plus, they are delaying parenthood until much later in life (if at all) than previous generations, so a smaller property is not only more affordable, it also boasts plenty of room for them.
One thing that has never
changed over the decades is that buying your first home has always required diligence
Decades ago, most households only had one income so while property prices may seem more affordable in the rear-view mirror, serviceability still made securing a home loan difficult.
Today, property prices are higher, and many first timers also have higher incomes than their ancestors.
However, saving the deposit remains the biggest hurdle for prospective property owners.
Get rid of bad debt
Like anything to do with finance, having a solid savings history and little personal debt is the best place to start.
Before embarking on the journey
to property ownership it’s wise to review your bank account to determine if you
are overspending as well as to create a plan to eliminate bad debt.
When I say bad debt, I mean personal loans for such things as cars as well as credit cards that you never seem to pay off.
Now, there is nothing wrong with having a credit card as long as you can afford to pay off the balance each month.
If you can’t, well, it’s likely you are spending money that you just don’t have.
So, a good strategy is to create a budget and stick to it to ensure your money doesn’t run out before your month does.
This could include plans to pay off credit card balances, if you have multiple, before you start saving for a deposit.
That’s because it’s futile to be paying sky-high interest rates on bad debt and saving at the same time.
Also, it’s vital that you present a healthy financial situation to lenders when applying for a home loan – and having thousands of dollars of bad debt will always hamper your chances.
Once you have created a plan to pay off bad debt, you should then start a savings regime that sees an allocated amount of money put into a secondary account regularly.
It’s important that you don’t
double dip this money by transferring it back to your transactional account
because you’ve decided to go away for a long weekend, or your favourite band is
These savings must be transferred as soon as you’ve been paid and should then be left alone.
Not only will this show a regular savings system to lenders, your nest egg will start to grow into something that starts to resemble a deposit.
Get expert help
Today’s mortgage market has hundreds of different loans on offer as well as myriad lenders big and small.
Savvy first home buyers make sure they get expert advice and assistance to ensure they are only considering lenders who are the best fit for their financial situation as well as their property investment goals.
On top of that, there are a
number of first home buyer schemes that they may qualify for but can be quite
tricky to understand.
There are grants for first homeowners in each State or Territory, but they each other different rules and regulations, including for stamp duty concessions.
From 1 January, there is also the First Home Loan Deposit Scheme, which will enable 10,000 first-time buyers to purchase a property with a deposit as low as five per cent.
Again, this scheme, also comes with its own criteria, such as income and location-dependent property price gaps that can be difficult to get your head around.
How much deposit do you need?
The size of your deposit will entirely depend on your borrowing capacity, serviceability as well as the purchase price of the property.
Of course, depending on where you are buying, that could be anywhere from $20,000 to $100,000 – plus stamp duty and other costs!
Most first home buyers end up
with a deposit of between five and 10 per cent of the purchase price.
That’s because paying rent as well as living expenses makes it tough to save a larger deposit.
The good news is that most lenders are happy with a deposit of this size because it shows that you have diligently been saving to achieve your property ownership goal.
Notwithstanding the first home loan scheme, which will see the government guarantee loans, most prospective property owners will need to pay Lenders Mortgage Insurance or LMI.
LMI is insurance that a borrower pays to the lender if their deposit is less than 20 per cent of the purchase price.
While this is an additional expense, unlike stamp duty, it can usually be added to the home loan, so you don’t have to physically come up with more money to buy your first home.
Some first home buyers use a guarantor loan, which removes the need for LMI to be paid, because their parents offer a proportion of equity from their own homes to make up the 20 per cent deposit.
Which loan is best for first home buyers?
In today’s lending landscape,
there are literally hundreds of home loan products to choose from.
Some are ideal for investors or upgraders, while others are well suited to first home buyers.
The thing is that first home buyers don’t have to just consider loans that are supposedly designed specifically for them.
That’s because some lenders offer introductory interest rates for a set period, but the rate after that can be much higher than a standard home loan product.
Ditto, with loans that may offer extras such as offset accounts or lines of credits, because these are often better for sophisticated investors or homeowners with property investment aspirations.
While you might be a first-time buyer, the best type of loan is usually one that is in-line with your personal financial situation.
So, this can be a standard variable home loan, which means that when interest rates change, such as go down, your repayments will reduce as well.
This type of loan is ideal for people who have solid cash flow and who won’t be majorly affected if rates go up at some point in the future.
Other borrowers might be better suited to fixed rate home loans, which guarantees their interest rate and repayments for a set period of time.
For them, the security of knowing how much their repayments are going to be every month is more important than the potential for lower interest rates.
Regardless of whether a variable or fixed rate loan is the best one for you, one thing that first home buyers must always understand is that one day you will need to pay off your home loan.
So, for first timers considering buying a property to call their home, I always recommend they make principal and interest repayments on their loans.
Over time that will see them reduce the principal amount they borrowed to create equity in their home – which they can then use to upgrade or perhaps to buy an investment property in the future.
This is a guest post by Andrew Mirams. He is the Managing Director of Intuitive Finance and is a highly qualified mortgage advisor who holds dual diplomas in Financial Planning (Financial Services) and Banking and Finance (Mortgage Broking). Andrew’s expertise covers all aspects of lending for a diverse range of applications – from first home buyers’ loans or property upgrader loans, property investor loans, expatriates and loans for self-employed.
With over 30 years of experience and having settled well in excess of one billion dollars in loans, Andrew has been acknowledged by the mortgage industry as one of its best and most consistent performers with multiple awards and regularly featuring in the top 100 mortgage brokers list.