Buying a home can feel like a daunting challenge, especially when it's your first. Answering these five important questions will make the whole process much easier.
1. How much do I really need to buy a house?
This is a very complicated question and you really need to have it answered before you can think about buying a property. There are two components to a property purchase: the deposit and the loan amount.
The deposit is the amount of money you have saved up (or will save) that goes directly towards purchasing the house. Lenders typically need a deposit that is 20% of a property's price, but many will lend you money if your deposit is 5% or 10%. However, with a smaller deposit, you may need to pay lenders mortgage insurance (LMI) on top of that.
The loan amount
The loan amount is the money you will borrow from a lender to cover your purchase. This amount is basically the purchase price of the property minus your deposit.
Let's use a basic example. You want to buy a property for $500,000. You have a 20% deposit saved:
- Your deposit = $100,000
- Your loan amount = $400,000
You're going to borrow $400,000. This is the money you will have to repay, plus interest.
Working out how much you can borrow
Understanding how much money you can borrow really comes down to whether you can afford the repayments. As a rough calculation, take the loan amount (or an estimate if you're not sure) and put it into a mortgage repayment calculator.
With a lender's interest rate applied, the calculator will show you how much you'll have to make in repayments each month. Here's a quick example:
- Property value: $500,000
- Your deposit: $100,000
- Loan amount: $400,000
- Loan term: 30 years
- Interest rate: 3.57%
- Your monthly repayment = $1,812
Now you need to think about regular income and expenses and then decide if $1,812 is an affordable monthly repayment.
Once you have a rough idea of the deposit you can save and the amount you can afford to borrow, you can start looking at properties with more confidence.
2. How do I actually save a deposit?
Let's take a step back and look at how you can save a deposit. The deposit is often the biggest hurdle for many first home buyers.
Here are a few tips to help you get your deposit together. While some of these might be impossible in your situation, others may help you:
- Cut back on your spending and try to save more money.
- Try to bring in more income either by changing jobs, asking for a raise or finding secondary sources of income.
- Look for a cheaper property in a more affordable area.
- Find a home loan that only needs a 5% or 10% deposit (just be aware of LMI costs).
- Consider getting help from your parents if you can.
That last point is a touchy subject. Most people can't rely on their parents to help them buy a property, but many Australians do rely on some parental help when buying a home. And it doesn't have to involve actual cash.
If your parents own their own home they could act as guarantors on your home loan. This means that your parents can offer to use some of the equity in their home to help you reach your deposit goal
Richard Whitten, finder.com.au
3. How do I find the right home loan?
Finding a property to buy is a complex process in itself, but then you have to find the right home loan too. Knowing some key home loan terms will help you navigate this process more easily.
Fixed vs variable rates
A fixed interest rate doesn't change during the fixed period, usually between one and five years. This means you know exactly what your repayments will be for that period. They will never go up, or down. Fixed loans are a little less flexible and can be more expensive to refinance.
Variable rates can change at any time, either up or down. They're more flexible as they tend to have lower fees and no breaking costs when you refinance, but you won’t know exactly what your repayments will be in future.
Principal and interest or interest-only repayments
You should also consider the repayment type, which can be either interest only or principal and interest. Most borrowers choose principal and interest loans, which require you to repay the money you've borrowed (the principal) plus interest.
Interest-only loans only charge you interest in the beginning. This means the repayments are much lower. But there’s a catch: because you're not repaying any principal your home loan doesn't get any smaller. An interest-only loan is cheaper at first but more expensive in the long run.
4. How can I make sure my home loan application gets approved?
You will need to provide a lot of documents to prove to your lender that you can afford to repay what you're borrowing.
Every lender has their own criteria, but you'll typically need to provide these documents:
- Identification documents such as a driver's licence, birth certificate or passport
- Proof of income documents such as payslips
- Asset and liability documents related to any debts or assets you own, such as investments or HECS debt
5. Is there any help available for first home buyers?
There are federal and state policies to help first home buyers, but whether you're eligible depends on what type of property you're buying, how much it costs and which state you live in.
First home owner grants
Some states provide first home buyers with a one-time grant of money to go towards their property purchase. Usually you need to be buying a newly built property under a certain amount of money. You must be buying a house to live in (not an investment) and it must be your first home.
Stamp duty concessions
Many states also offer a concession on stamp duty (the tax you pay when making large purchases such as property). In most states this concession means you pay no stamp duty if the property is under a certain price. Above that, you pay stamp duty but at a discounted rate.
Stamp duty can be a very expensive extra cost, so getting this concession can be a big help.
Federally, the First Home Super Saver Scheme allows you to make extra super contributions and then use them for a house deposit, with tax benefits for doing so.
Richard Whitten is a property writer at Finder, Australia’s most visited comparison site.