Buying your first property or dream home is often daunting and confusing as the learning curve can be steep. Moreover, nobody wants to make a costly mistake when they’ve spent years saving up for a deposit.
Therefore, it is crucial to read as much as possible so you are fully armed with the right knowledge when selecting a property and making an offer. At Solution Home Loans, we’ve answered hundreds of questions by first home buyers on a number of topics from property valuation to auction strategies and finding the right home loan.
To help you out, we’ve listed the 10 most frequently asked questions by first home buyers.
#1: How much deposit do I need?
Banks typically require 20% of the property value but it can fall to as low as 5%. It depends on a number of factors such as your financial position, family size, lifestyle costs, and income sources. The maximum amount you can borrow varies from bank to bank, and it all depends on their criteria set. It’s important to shop around for the right home loan before making a purchase because you don’t want to be stuck with a short deadline to pay for the property once your offer is accepted.
#2: What if I don’t have 20% of the purchase price for the deposit?
Most banks will accept a deposit lower than 20% depending on your circumstances and finances. However, you will be charged a Lenders’ Margin Insurance or LMI. A LMI is an insurance to protect the bank in case you fail to service your loan. The amount depends on your deposit amount as the lower the figure, the higher your LMI. An LMI can go up to tens of thousand dollars, and may be added to the home loan. However, doing this will increase the size of your loan.
#3: What other costs do I need to account for?
Aside from the deposit, there are other upfront costs which you must pay:
- Stamp duty – this is a state-based tax and varies from property to property. First home buyers will typically receive a discount. Some states will not charge stamp duty for first home buyers if your property is less than a certain amount.
- Legal fees – this is for your lawyer to settle the purchase according to the regulations
- Bank fees – this includes the application fee and other charges
- LMI – an insurance to protect the bank for low deposit home loans
- Renovation costs – some properties require urgent renovation to make it livable
There are also ongoing costs to maintain the property such as:
- Council rates – you’re usually required to pay the cost of the first year upfront when buying the property.
- Water and sewerage fees – this cost may also be required upfront for the first year when buying a property
- Home and content insurance
- Regular repair and maintenance
Depending on the bank, your finances and other factors, you may be able to lump some of the costs listed above into your home loan. Items such as stamp duty, LMI and even council rates may be part of your home loan if you don’t have enough cash to pay for them. However, this will increase the size of your home loan, which will push your repayment higher.
#4: What is a pre-loan approval?
A pre-loan approval means a bank has pre-approved you for a home loan of a certain amount. You will need to apply for this and state all your finances, budget, income, family size, lifestyle expenses and other things. The bank will give you a pre-approved amount, which is the maximum amount they are willing to lend you based on your circumstances and savings.
A pre-loan approval helps you shop around with assurance and ease. You can participate in auctions with confidence and negotiate a private sale comfortably, knowing the maximum amount you can get a loan for.
Moreover, having a pre-approved amount means you can sweeten your offer for a property because you’re not scrambling around looking for a home loan after your offer is accepted. You can obtain a loan quickly, and offer a shorter settlement period to entice the seller to sell to you.
#5: Should I go for an auction or look for private sales?
This all depends on your preference as there is no right or wrong answer. An auction may work out in your favour where you get to snag a bargain or it can make you go over your budget if there is fierce competition. This also applies to a private sale, as there can be other eager buyers too.
#6: How long does it take before I buy a home?
This varies for each buyer, their wishlist and budget. It also depends on the supply and demand of your preferred suburb. Some people get to buy their home within a month of searching while some may take up to a year before scoring what they want due to a low supply and a high demand.
As a general guide, you shouldn’t take longer than a year to buy a home. If you’re still empty handed after a year, then you should revise your wishlist and budget to something more realistic to what’s in the market.
#7:What type of home loans are there?
Each lender has different names for their home loans but essentially they are the same.
- Variable rate home loan
Your interest rate will fluctuate according to what is set by the Reserve Bank of Australia, so your minimum mortgage repayment can change.
- Fixed rate home loan
Your interest rate won’t change over the agreed period so your repayment is fixed.
- Split home loan
This is a loan where a percentage has fixed interest while the remaining has variable rate so you get the best of both worlds.
- Packaged home loan with additional features
Home loans can come with a variety of features such as withdrawing what you’ve already paid or an offset account which lowers your interest payment.
- Low deposit home loan
This loan may have a higher interest rate to make up for your low deposit.
- Low document home loan
This is a loan for small business owners and the self-employed who may not have a fixed or stable income.
- Home equity loan
This loan allows you to borrow based on how much your home value has increased. It helps with renovating, buying another property or any other needs. Some people call this as refinancing your home.
#8: How much will my repayment be?
It all depends on the type of loan you take, whether fixed rate or variable rate. It also depends on whether you are paying interest only or interest with principal. Taking an interest only loan will lower your monthly mortgage repayment.
However, you will end up with a higher repayment once you switch to paying principal and interest. Meanwhile, home loan packages with features such as an offset account and the ability to redraw will incur higher bank fees.
#9: What does a mortgage broker do?
A mortgage broker can be your best asset when buying your first property. They can:
- Assess your financial position, goals and lifestyle
- Provide sound advice on your finances
- Provide important resources such as property reports and suburb profile
- Get you a pre-loan approval
- Compare and find the best home loan for you
- Recommend legal, building inspection and other services
- Negotiate with lenders for lower interest rates or better deals
- Ensure you are getting all first home buyer’s discounts and benefits
- Do all the paperwork for you
- Reassess your home loan and finances to find a better deal from time to time
#10: Which home loan is right for me?
This is not a one-size-fits-all type of answer. It is unique to an individual or family. Do a lot of research and talk to people. Alternatively, you can work with a mortgage broker to help you in this journey.