From saving for a deposit, to navigating first-home owner grants, and comparing mortgages; our simple guide is here to help you get the keys to your first place.
Buying your first home can be thrilling. With it comes the freedom to paint and renovate as you’d like, a chance to escape that overbearing landlord you’ve been dealing with for years and the space to start a family. But there are a lot of things you should know as you set out on the path to becoming a first-home buyer. The property market can be a confusing – and competitive place. How much do you need to save for a first-home loan deposit? What are first-home owner’s grants? Do first home buyers pay stamp duty?
We’ve got you covered with this real-life guide to buying your first home, which could help take some of the stress out of one of the most exciting experiences of your life.
First things first – saving up for your first home deposit
The first, and for many, hardest, step in buying a property is saving a deposit. How much you need to save and how long that will take depends on several factors, including how much your home might cost, your income and your lifestyle.
Saving up tens, if not hundreds, of thousands of dollars can seem intimidating. That’s why one of the first things you could do is set a deposit target. To get an idea of how much you’ll need, research areas in which you want to buy. It could be a good idea to look at recent sale prices of homes that are similar to ones you have your eye on, and check out average year-on-year percentage price increases. This should give you a good idea of how much your first home could cost.
You might’ve heard that the recommended deposit amount to set your saving sights on is 20% of your new home’s cost. While that is a good target to set, it may not be the right move for you.
While there are positives to saving a 20% deposit, sometimes jumping in with a 10% deposit and paying LMI or a risk fee might be an alternative, as you could get on the property ladder sooner than waiting to save a 20% deposit. LMI or a risk fee is a one-off payment lenders may charge to protect themselves against the risk of not recovering the outstanding loan balance from a borrower who defaults on their loan. It is generally calculated using the loan amount and property value, you can find out more about LMI and other home loan risk fees here.
In the early stages of saving, make sure you do your research and ask lenders about their policy when a borrower has less than a 20% deposit – how much do they charge depending on house price and deposit amount? That can help you consider your savings target options.
Here are a few of the possible pros and cons for you to consider before deciding on how much to save up for your home loan deposit.
Lower amount could be easier to save
Less cutting back on lifestyle
Can buy property faster, potentially taking advantage of market conditions
May be limited loan options
Lenders Mortgage Insurance (LMI) or a risk fee is likely to be payable
Borrowing more, which may mean more interest paid in the long run
Could be more loan options than with a 5% deposit
Can make a loan application more attractive to lenders as it can show financial discipline
Fewer loan options than with 20% deposit
Lenders Mortgage Insurance (LMI) or a risk fee may be payable
Borrowing more than with a 20% deposit, which may mean more interest paid in the long run
Usually, no LMI or risk fee is payable
Could provide access to more competitive loan options and interest rates
Borrowing less which may mean less interest paid in the long run
Takes longer to save
Potential to miss out on current market conditions
Can require more lifestyle changes
Hints on how to start saving for your home loan deposit
Here are some things you may want to consider when looking to get your deposit savings on track:
Create a budget and see what non-essential purchases you may want to cut out or reduce.
Set your savings target and make a realistic timeframe with some checkpoints along the way.
See if you can consolidate or pay out any existing debts so you spend less of your potential savings on these.
Set up an account for your first home deposit with automatic deposits from your pay – and don’t transfer the money out.
Consider downsizing temporarily – potential short-term rental pain for long-term home ownership gain.
A heads up on other first-home buyer’s fees
Your deposit isn’t the only thing you have to take into account as a first-home buyer. Regardless of how much you need to save for your deposit, you also need to factor in additional costs to finalise the purchase of your home, including the following:
Also called establishment fees, these are costs that some lenders charge for the application and settlement home loan process.
Council and water rates
You’ll need to ensure you’ve got enough to cover these.
If you’re buying an apartment or townhouse, then there will be a strata fee that you’ll need to pay, usually quarterly.
This is a big one. Stamp duty is a fee that is charged by the government. It varies depending on the State or Territory and is a percentage of the purchase price of the property you are buying. That means the more expensive the home, the higher the stamp duty will be. However, most states and territories offer a stamp duty waiver or concessional grant for first-home buyers, depending on the purchase price and whether the property is a new build home. To get an idea of how much stamp duty you might have to pay, you can use each state or territory’s stamp duty calculator, click on the following links NSW, Queensland, Victoria, WA, Tasmania, South Australia and the NT.
Get some help with a first-home owner’s grant
First-home owner grants (sometimes known as FHOG) can make a difference in helping you get over the line and assist to buy your first place.
So, what is a first-home owner’s grant?
A first-home owner’s grant offers financial assistance from the relevant state or territory government for those looking to buy their first home. The policies differ slightly for each state and territory.
For example, a First-Home Owner’s Grant in NSW offers up to $10,000 toward the purchase of your first place, as long as it’s an eligible brand new home that nobody else has lived in. Meanwhile the NSW First-Home Buyer Assistance Scheme can provide full or partial exemption of stamp duty charges – including full exemption on homes valued up to $650,000 and concessional rates on homes valued between $650,000-$800,000. Meanwhile, the First-Home Owner’s Grant in QLD offers up to $15,000 towards buying or building an eligible, brand-new home. Grants and schemes like these can save you tens of thousands of dollars in up-front costs – and make getting into your dream home a reality sooner.
Finding – and applying for – the right home loan
Finding the right first-home loan for you is just as important as finding the right home. However, choosing the right loan can be about more than the interest rate.
Here are the things you may want to think about.
Fixed or variable interest?
Fixed interest rates stay the same over the duration of the loan and can provide some certainty for easier budgeting. Variable interest rates change with the market, which can be good if rates go down, but can sting if rates go up.
Offset accounts or redraw facilities?
An offset account is an everyday transaction account linked to your mortgage. It might be worth thinking about keeping some of your savings in an offset account, because any money sitting in this account is offset against the amount owing on your home loan which can potentially reduce the balance of your loan and help pay it off faster.
For example, if you owe $650,000 on your home loan and have $30,000 in your offset, the interest charged will be on a loan balance of $620,000. However, offset accounts may come with monthly or annual fees and/or a higher home loan interest rate so you will need to consider whether an offset account makes sense for your own real life requirements.
Redraw facilities let you ‘access’ extra repayments you’ve made on your home loan above the minimum required repayments. For example, if you repay an extra $10,000 into your home loan, but then decide you actually need that money for something, you can access it. Most lenders offer free redraw facilities, but you usually have to be at least one month ahead in your payments, there may be redraw limits, and accessing the funds could take a few days.
Broker or applying direct to the lender?
Using a mortgage broker could be a idea for first-home buyers looking to take that initial step onto the property ladder. It’s important that you understand your home loan options – and be aware of the pros and cons. Just remember that doing your own research and making a decision on what loan is right for you is important even if you do go with a broker.
If you’re going direct, then you’ll need to compare lenders yourself to decide on who you’d like to apply with. This could add some extra legwork, however once you’ve applied, you could have direct contact with your loan application assessor, which could save time rather than dealing with the lender through a broker.
Choose your loan features
Other key considerations when finding the right home loan include loan features such as interest rate and repayment timeframe, repayment flexibility and early payment fees and any other upfront or ongoing home loan fees.
For more information on helping you find the right home loan for you, visit the Moneysmart website.
Other considerations for your mortgage application
Do a deep dive into your credit history
Your credit score and your credit rating plays a big role in determining success with your loan application in the eyes of a lender. While Pepper looks at much more than just this information, it is a piece of the puzzle that helps lenders determine who to offer credit to.
A credit score is a number put together by a credit reporting body or lender that summarises the information in your credit report and provides an indication of how likely you are to pay back the money you owe to a credit provider. It takes into account things like loan repayment history (including credit cards), the number and type of credit accounts you hold and the frequency that you’ve applied for credit. Credit reporting bodies or lenders use a complex algorithm to calculate a credit score, generally from 0 to 1000. While scoring will vary between credit reporting bodies and credit providers, the higher the score the better and anything above 700 is generally good. You can learn more about credit scores in our real-life guide.
It’s important to obtain a copy of your credit report and review it regularly. You can request one free credit report every three months from each of the three main credit reporting bodies. Make sure personal details, including name, date of birth and address, are correct, and review your credit enquiries and repayment information to make sure it’s accurate.
Review your current debts
Having several loans or multiple lines of credit such as credit cards may impact your credit score and credit rating negatively. So, before you apply for your home loan, you may want to see if you can close credit cards you no longer use and lower the limits for others. Also try to consolidate or pay off as much outstanding debt as possible. If you have an outstanding university HELP balance, lenders will take this loan into account when assessing your loan application.
Genuine vs. non-genuine savings
Lenders will assess your savings, specifically if they are genuine or non-genuine. Genuine savings consist of money saved up over time – generally any savings you’ve held for at least three and sometimes up to six months. Non-genuine savings include money you’ve received, such as an inheritance or gift from a family member, a work bonus or capital gains from selling an asset. These may be considered genuine savings by a lender after being in your account for three months or longer.
If possible, it’s a good idea to avoid changing careers or jobs when getting ready to apply for a home loan. Lenders generally like applicants who can show stability across not only credit history, but also employment, income levels and career paths. Starting a new business might mean inconsistent cash flow early on, which can raise red flags with lenders. And even if you’re not self-employed, lenders will often check that you’ve passed probation at a new job or see if you’ve had a sustained period of experience in the same industry when assessing your application.
What if you’re self-employed?
If you’re a sole trader or otherwise don’t have regular access to some of these records, there are self-employed home loans you can apply for using alternative documentation.
Other bits and pieces
In addition to understanding your credit score and sorting out your savings, you’ll want to make sure you’re ready to roll with other documentation you’ll need for your home loan application. Print out or download any recent loan or credit card statements, savings records, payslips and tax returns.
Making an offer and negotiating
The time has come. Making an offer can be equal parts exhilarating and terrifying. So it’s important to keep your head and not lose sight of your goals – and perhaps most importantly, your budget. When you make an offer, you may want to slowly work toward the middle ground of what the seller wants and what you want to pay. It’s important to stay calm throughout the process and remember there is nothing wrong in walking away if something doesn’t feel right. Be prepared for your offers to be rejected, or for homes to sell for way more than you’re willing or able to spend. There will be other options out there, so don’t get disheartened.
Tip: Before jumping in and making an offer, make sure you’ve done your due diligence on the property and carried out all the right reports. This include pest and building inspections or strata reports for apartment complexes. They can provide an objective view of the property, and can potentially be used as a bargaining tool if issues pop up. Our checklist of questions to ask the agent can help you get started.
Buying your first property at auctions
To give yourself the best shot of finding – and buying – your first dream home, you want to be prepared to confidently participate in auctions, as many sellers are choosing to sell their house by auction rather than private sale.
Auctions are one of the most popular ways to sell property in Australia and can be attended in-person, or online. With the drama of the bidding contest, it could be a good idea to ensure you're armed with an understanding of how they work and what you need to know before bidding.
As there is no cooling off period when buying under auction conditions, it's important to have unconditional approval on your loan application before you bid. This ensures you bid on a house within your budget and can negotiate with confidence. A pre-approved loan could still be declined if the house you end up buying doesn’t meet the lender’s guidelines or the valuation is lower than the purchase price, so unconditional approval will let you bid with confidence.
Co-owning a home with a friend or family member could be an option to get into the market if you don’t want to take on the financial burden of owning alone. But there are a few important things to think about.
You should obtain legal and financial advice from the start, regardless of who the co-owner is, how long you’ve known them and how close you are. These professionals can help you understand the pros and cons of co-ownership and help figure out the best buying structure for everybody involved, as well as the most suitable split ownership arrangement.
Find out where you stand
Finding and buying your new home can be a thrilling ride. With the information in this guide up your sleeve, hopefully this will help the road to home ownership be a smoother one.
Curious about how much you could borrow with Pepper Money for your first home loan?
Our borrowing power calculator could help you find out where you stand in just five minutes – providing an indicative offer of how much you could borrow and the interest rate you may be eligible for. You’ll then need to speak with a lending specialist to get an application underway. Alternatively, you could kick-start the process and speak with one of ourlending specialiststo talk through your real-life situation.
Disclaimer: Please read
This article provides you with factual information only and is not intended to imply any recommendation about any financial product(s) or constitute tax advice. If you require financial or tax advice you should consult a licensed financial or tax adviser. Neither Pepper nor its related bodies, nor their directors, employees or agents accept any responsibility for loss or liability which may arise from accessing or reliance on any of the information contained in this article. For information about whether a Pepper loan may be suitable for you, call Pepper on 13 73 77 or speak to an accredited Pepper Money broker.
All applications are subject to the credit provider’s credit assessment and loan eligibility criteria. Terms, conditions, fees and charges apply. Information provided is factual information only and is not intended to imply any recommendation about any financial product(s) or constitute tax advice. If you require financial or tax advice you should consult a licensed financial or tax adviser.