This client was a Real Estate Agent who wanted to work more with first home buyers in the market and requested this for their Blog Page on their website. They also wanted to make sure the article was technically correct and not misleading, therefore it was required to be quite involved.
As you read through this article, we know that you will have many questions, and that’s exactly what we want! We want you to ask us questions! The more questions you ask the more you will learn, so ask away!!!
What you need to consider when buying your first home.
So, you’re looking at buying your first home as a place to live, to spread your wings and create your own personal space that is yours and yours alone, or you want to break away from renting. Maybe it’s a stepping stone to get to your eventual desired home, or even as an investment. Regardless of the reason, there are a number of things you will need to consider.
Buying your first home may seem like a huge step and also a little scary, however this doesn’t need to be the case, as it can all be broken down into a step-by-step process.
Note: We have some great people such as mortgage brokers, legal professionals and so forth, who we highly recommend who can help guide you along the way.
Where to buy and what type of property?
One of the most important things to consider is Capital Growth of your property; Capital Growth is just a fancy term for the property value increasing over time.
Obviously you also need to consider the price, as you can only buy what you can afford.
You also need to look at infrastructure where you want to buy. Infrastructure may include schools, shopping centres, parks, locality to public transport such as buses and trains, access to main highways, future developments in the area, and so forth.
Do you buy a standalone home on its own block of land or a unit/townhouse or duplex? Buying a stand-alone house may cost more initially, however the ongoing costs will likely be less and may also potentially provide better capital growth in the long term due to the land increasing in value over time.
Alternatively, you can buy a unit/townhouse, which may cost less to buy, however ongoing costs may be more if body corporate is involved. In addition to this, capital growth potentially could be lower over time as the land that the property sits on will likely be a smaller size, so capital growth may be limited here. However buying in the right area can help to negate this.
You should keep these things in mind when buying, but your ultimate decision will also be based on the physical appeal of the property, it’s character, it’s location, etc. If you like it, buy it!
How much money can I borrow to buy my first home?
You can starting looking at properties to your liking at any time, but it may be a good idea to start with knowing how much you can spend on buying your first home before you even start looking at properties.
All banks and non-bank lenders have guides and calculators which will give you a good indication of how much you can afford to borrow. Generally these calculators are pretty simple but you will need to know how much you earn before tax, your existing financial commitments i.e. personal loans, credit card limits etc, and whether you are buying the home by yourself or with a partner. That’s a good place to start. You may also contact your bank directly to get a “Pre-Approval” which is provided by your bank as a more accurate idea of your borrowing capacity.
Once you have an understanding of your affordability, you’ll need to know how much you can borrow against a specific property value; this is what a lender calls a Loan to Valuation Ratio (LVR). An LVR is calculated as a percentage (%) of the property value, here’s a simple example:
$320,000 is the loan amount
$400,000 is the property value
Simply take $320,000 and divide it by $400,000 and you will get 0.80, then multiply this figure by 100 and you will arrive at a figure of 80.00. So the LVR is 80%. Quite simple really.
So, in the above case if you are looking to buy a property for $400,000 you would need to have $80,000 cash to put towards the property, plus an additional amount for duties and legal costs. That sounds like a lot of money right? Ok, there are other options.
Firstly, you can borrow more than 80% of the property value and in some cases up to 95% (inclusive of LMI – see below) of the property value depending on the strength of your financial circumstances, which will reduce the amount of cash you will need to put towards the property. In this case you will only need about $30,000 plus costs; quite a difference from $80,000 as above.
Once you borrow more than 80% of the property value then the lender charges a fee called a Lenders Mortgage Insurance fee (LMI), and this fee is added on top of the loan so you don’t need to come up with the cash to fund the cost of the fee.
Another alternative is to discuss with someone you know, like a family member such as parents, other sibling, or trusted friend who owns a property who may be prepared to let you use part of the equity in their home. Is option is called a Family Pledge or Family Guarantee, or a similar depending on what terminology your lender uses.
What this allows you to do is to avoid the LMI fee altogether, as the lender secures 20% of the loan against the other persons property. So on the above example of $400,000 property value:
$320,000 is borrowed against the home you are buying equalling 80% of the property value.
$80,000 is borrowed against the other persons property equalling 20% of the above property value.
This may also reduce further how much cash you will need to contribute towards the purchase of your first home. Things are starting to look good, right?
You will be able to talk to your lender or mortgage broker who can assist you with this and any other questions you may at a later stage. Always consider the option of utilising the services of a good mortgage broker, as they have many more lenders available at their disposal and know all the requirements and policies of each lender, allowing them to choose the most suitable finance option for you.
What other costs do you need to consider?
Ok, so at this point we’ve looked at raising the money required to reach the purchase price of the property. Next we need to consider the legal costs, transfer duty and any other incidental costs.
There is good news here!
In all states of Australia the local state government has incentives for first home buyers where they offer a grant or assistance if you have never owned a home before. Each state varies somewhat, but generally the grant or assistance may be sufficient to cover any costs such a legal fees of your solicitor for conveyancing costs of settling the property into your name, transfer duties and incidental costs.
In addition each state offers a concession or removal of the transfer duty payable if you are a first home buyer, which means no duty is payable up to a certain property value; in most states for residential property it’s up to around the $500,000 mark or thereabouts, in some cases slightly more. Conditions will apply in order to obtain the grant or assistance; generally you are required to live in the home for a period of 12 months, or move into the home within 12 months of the purchase date if you initially decide to rent it out to a tenant.
A quick explanation of transfer duties.
When you buy a home, a car, a business etc, your state government charges a duty or fee for completing the transaction of transferring the asset into your name. For first home buyers this fee is generally waived.
We trust that the above explanation will give you a better idea of most things that you need to consider.
Remember, we have our own preferred local brokers and other professionals who can guide you along each step of the way.
However, if you follow these suggestions or guidelines you will be a lot better informed and much better prepared as you begin your search for your first home.
Happy House Hunting!!!