How do you buy your first home?
With the frenzy of media commentary around first home buyers following Federal Treasurer Joe Hockey’s recent advice for this segment, I thought it was timely to highlight the key issues around how to approach this highly emotive purchase.
Of my blog readership, first home buyers are without question the thirstiest for knowledge. Questions regularly come through about where to start, how to save, how much to save, how to pay it down quickly, etc. This is understandable, given the complexity involved and the lack of clear direction available. This article will summarise and condense the myriad of information out there, giving all first home buyers a clear strategy for how to move in to their first home.
Know how much deposit you’ll need
Without question, the most critical aspect of purchasing a home is knowing the deposit amount required. I regularly see excited clients believing they have saved a 10% deposit, only to realise that they haven’t taken into account the associated buying fees. A&C Finance Group provides first home buyers with a summary of all buying costs on our website to assist with this process.
Know how much you can save
Forget the politics for a moment; Joe Hockey’s advice was absolutely correct. Anyone who wants to purchase a home needs a stable job, where they are earning enough to both save and live a lifestyle they’re comfortable with. My advice for any client saving for a home is to live like they are paying their mortgage today, i.e. pay your rent, and save the amount over and above your rental payments that would be your future mortgage repayments.
Buying a home is a 20-30 year commitment, so you need to be prepared to alter your lifestyle to match. This will also give you an idea of the repayments you can realistically afford and what loan amount or purchase price you should be looking at.
Calculating fees
There are several banks who will lend up to 95% of the value of a property + 2% capitalised Lenders’ Mortgage Insurance (LMI). Whilst this arrangement allows the buyer to contribute less at settlement, it also means LMI charges will be higher. My preference for any borrower is to save a 10% deposit plus fees, in order to minimise ongoing interest costs. This is even more relevant if building, as costs and the timing of funds to contribute are often difficult to ascertain. For anyone contemplating building, it is recommended to do so once you have saved the necessary deposit plus 5% in case of unforeseen expenses.
To assist with calculating exactly what is required, I have provided an example below.
Assuming a purchase price for an established property of $400,000, the contribution required for a first home buyer borrowing 95% plus 2% capitalised LMI will be as follows:
Stamp duty: $8,185
5% deposit: $20,000
LMI (above the 2% capitalised): $5,880
Total contribution required at settlement: $34,865* with a loan amount of $388,000.
We also recommend an extra amount of ~$2,000 to cover legal expenses and pest/building inspections, meaning in the above example the first home buyer would require almost $37,000 to contribute at or just before settlement.
The best resource for understanding how much stamp duty will cost is the SRO website (in Victoria), with LMI differing depending on the amount borrowed, LVR & lender selected. Contact us at A&C Finance Group if you require any assistance with calculating these figures.
Gaining pre-approval
Once the desired savings amount is within sight, it is time to get a pre-approval. A good broker will understand your objectives and compare the products available on the market that align with your long term vision. Following this exercise, you will gain a pre-approval with the relevant bank and can start searching for a property comfortable in the knowledge of what your maximum purchase price looks like.
Making an offer
Once you have found a property, it is then time to put in an offer. This will either be at an Auction or via private treaty. When the offer is accepted, your broker will ask for all the relevant paperwork in order to move your pre-approval to unconditional – Contract of Sale from the Real Estate Agent & the Transfer of Land from your conveyancer.
A&C Finance Group’s Home Buyers’ Guide will assist with understanding each step involved in the process.
Settlement
It is necessary for all first home buyers to engage a conveyancer to represent them at settlement. Your conveyancer will need to confirm your eligibility for the first home buyers’ stamp duty discount and ensure this is prepared prior. Once settlement occurs, you will have the keys to your first property and can start making it your home.
Summary
Much of the work for first home buyers needs to be done well before the home itself is purchased. Saving enough deposit will make the process far less stressful and enable a clear path towards home ownership. An understanding of how much needs to be saved, how to break this down into a weekly or fortnightly amount and engaging the right specialist support – broker, conveyancer and real estate agent – will help make owning your first home a reality.
* Please note, the figures above are indicative and likely to change. This also assumes stamp duty discounts available for first home buyers purchasing an established home that will be their principal place of residence. The example used is relevant for Victorian purchases.