Article by Mozo
The feeling of picking up the keys to your very first home is priceless. No more rent hikes, evictions, or a cutthroat renter's market to deal with (and you can even own a pet!). Plus purchasing property is generally a good investment, as your home should appreciate in value over time.
But before you get to the stage of packing boxes and choosing which colour paint and planters you’ll use to jazz up your new home, there are a few must-dos to land the property of your dreams.
Start by punching your numbers into our home loan borrowing calculator, to get an idea of how much you can realistically afford to pay off.
Scenario: First home buyer Tom has an annual income of $62,000, this means he can comfortably afford to borrow around $400,000 over 25 years.
Read our how much can I borrow article that reveals the other hidden costs of purchasing a property.
Once you’ve figured out your borrowing power, then you’ll have an idea of how much you will need to save for your dream home. When it comes to saving up that first home loan deposit, consider taking advantage of the First Home Saver Super Scheme (effective from July 1 2017), which allows you to make additional super contributions and withdraw the funds later (check out this guide for the lowdown).
Now as you’ve probably heard, the ideal deposit amount is 20% of the property value, as this will give you a loan to value ratio (LVR) of 80%. Banks in Australia use your LVR to work out whether they will lend to you, so the bigger your deposit (and the lower your LVR), the more likely they’ll approve you for the loan.
Scenario: In order for Tom to have a 20% deposit on a $400,000 property he will need to save up $80,000. However, if Tom like many first home buyers decides he wants to get into the property game sooner and goes for one of the low deposit loans available (with only a 10% deposit of $40,000), since he doesn’t have a 20% deposit he will have to pay lenders mortgage insurance. This is an insurance that the provider takes out to protect themselves financially if you are unable to repay the home loan. While Tom has the option of paying this cost upfront, he can also opt to add the cost to his home loan.
Who doesn’t want to live in close proximity to the CBD, with public transport at your door step? But the reality is your budget may not be able to fund that inner city pad.
So we recommend conducting a little recon work using real estate search engines like realestate.com.au and domain.com.au to see how far your green will go. It’s also a wise idea to search the suburb you’re considering on homepriceguide.com.au to get an idea of the growth potential of the area.
The two scenarios below show the difference that a $400,000 budget will get Tom in two different areas of Sydney:
Scenario 1: Tom works in the CBD and is after a first home that will make getting to work a breeze. At the time of writing, if Tom wanted to reside close to the CBD his $400,000 budget would generally only get him a studio apartment, with no parking facility.
Scenario 2: However if Tom decides that he is willing to commute to work, by moving out to the Western Suburbs of Sydney, this could mean Tom is able to purchase a two bedroom apartment with a lock up garage and rent out the additional room to cover part of his home loan repayments.
Getting a foot in the property door isn’t easy, that’s why the Australian Government introduced the first home owners grant that offers first timers a one off grant. Each state has their own offering and eligibility, which you can check here. As mentioned earlier, the First Home Saver Super Scheme is well worth your while reading about too, if you want to ramp up your savings strategy for that home loan deposit.
First home buyer grant scenario: Since Tom lives in NSW, if he decides to purchase a brand new or off the plan property he will pay no stamp duty and receive a one off payment of $15,000 (reduced to $10,000 on 1 January 2016). However, Tom will have to consider whether the savings from the grant is worth paying more for a new or off the plan property in the booming Sydney market.
By obtaining a free copy of your credit report before you apply for a home loan you’ll be able to check that all the information is correct and that you won’t be knocked back for a home loan due to a red mark against your name.
Scenario: Tom decides to get a copy of his credit report and finds he has a bad credit score due to a student credit card and car loan he missed repayments on. Thankfully, Tom can improve his credit score before he applies for a home loan, through some simple measures like consolidating his debt into one loan to help pay it off sooner and show the lender he has a good savings record, by ensuring he is putting money away each month into a high interest savings account. Keep in mind, banks will usually ask for 3 months worth of bank and savings account statements when you apply.
You might be inclined to take out a home loan with the provider you’ve been banking with since your first kids saver account but being ‘loyal’ could end up costing you thousands over the life of the loan in interest. So it’s a good idea to compare home loans online, which you can do using our first home buyers comparison table.
Scenario: Tom is offered a 5% interest rate by his current lender but decides to see what’s on offer from smaller providers in the market and finds a 1% lower deal. Over 25 years on a $360,000 home loan ($400,000 - $40,000 deposit), if Tom goes for the lower 4% option our home loan comparison calculator shows he would save $61,293 in interest.
Apart from the interest rate, also consider the below features when you start your hunt:
Fixed interest rate: There are two different rates you can choose between in the home loan world - fixed or variable interest rate. The fixed rate option is a popular choice for first home buyers, as it means your repayments will never change over the fixed rate term (usually 1 to 5 years). Just be mindful that fixed rate loans may not come with some flexible features like an offset account or extra repayments facility (see below for a full definition).
Variable interest rate: Whereas, with the variable rate option your repayments could change at any time - so you’ll benefit if rates go down but have to budget for an increase in repayments if rates are hiked up. See how much a rate change could affect you with our rate change calculator here. The ultimate benefit of a variable rate home loan is that the interest rate is usually more competitive and you can enjoy those flexible features we mentioned above like an offset account.
Offset account: When you factor tax and inflation into the equation, leaving your money in a high interest savings account isn’t always the best option. Especially when there is a handy feature called an offset account that will allow you to reduce the amount of interest you pay on your home loan. How does it work you ask? Well, an offset account is just like a regular bank account, which you can deposit your salary into and comes with a debit card for everyday purchases. But here’s the great part, the money that is in the account is offset against your home loan balance.
Scenario: Say Tom has $20,000 in an offset account. That $20k will be offset against the $360,000 he owes, meaning he would only be charged interest on $340,000 of the home loan.
Extra repayments: When it comes to paying off your home loan every little bit counts, so make sure the mortgage you sign up with allows you to make extra repayments without charging any fees.
Scenario: A year after Tom takes out his home loan he gets a promotion and decides to put some of his extra pay towards his loan by making an additional monthly repayment of $200. Our extra repayments calculator shows that this would save Tom $33,147 in interest and reduce the life of the loan by 3 years and 7 months.
Redraw facility: All those extra repayments can do wonders to the amount of interest you pay, but there could be a time when you need to dip into those funds, to well, fund things like a renovation or new car. When that time comes, a redraw facility could come in handy. But of course this will mean your home loan will stick around longer!
Flexible repayment cycle: Another feature that could help you pay down your home loan sooner is the ability to choose your repayment cycle. By paying your repayments fortnightly, instead of monthly you will ultimately pay off an extra month each year.
Scenario: Say Tom’s monthly repayments are $1,900, over a year he will have paid off $22,800. But if he opts for the fortnightly option of $950, when the year comes to an end he will have paid $24,700 back.
Last but not least, when you find a home loan provider that ticks the boxes for you, get your loan pre approval organised. This is an obligation free approval, which means you can put an offer down once you’ve found the perfect property. Just keep in mind, pre approval usually only applies for 3 months.