Sooner or later the time will arrive for you to wave goodbye to your parents, flatmates or landlords and venture forth into the responsible world of mortgages and home ownership.
If you’ve made the decision to buy your first home, it’s probably a safe bet that you’re more than a little confused and daunted by the whole process. After all, you are about to embark on what will likely be the biggest purchase of your life!
So to help simplify the process, RateCity has put together a simple step-by-step guide.
Step 1: How much can I borrow?
Before you go to inspect a multi-million dollar home worthy of MTV’s Cribs, you’ll first need to know how much you can borrow.
Lenders will determine how big a mortgage to lend you by assessing the amount of monthly repayments you can comfortably afford, among other factors. You will need to provide information such as recent payslips, a tax return and be able to demonstrate any ongoing savings.
Michelle Hutchison, spokeswoman for RateCity said when you’re looking at your dream home, it’s hard to stop and think about costs over the next 20 or 30 years.
“But the payoff from saving longer, and owing less, when you do buy your first home, is almost always worth the wait,” she said.
Step 2: the deposit
There are three big reasons to knuckle down and save for a big deposit before entering the property market.
The first seems obvious, but a smaller deposit means you will owe a lot more money.
Second, you’re likely to face an additional cost called lenders mortgage insurance (LMI) – an insurance policy which protects your bank (not you) if you default on the loan.
LMI isn’t cheap; LMI provider Genworth estimates that a 5 percent deposit on a $400,000 property will require LMI of over $10,000. This can be “folded” into your loan – so if payable over 30 years, it means over $14,000 of additional interest payable. If you had a larger deposit – say 20 percent – then this cost wouldn’t apply.
And finally, owing more money creates more risk. If you have a larger mortgage each rate rise affects you more than someone who had a larger deposit and borrowed less. RateCity’s home loan calculator will help you see the impact of a rate rise on different amounts owed.
“There’s nothing bad that can come from entering the housing market with a larger deposit. While a bank offering you a loan on a smaller deposit is tempting, it’s may not be the wisest course of action,” she said.
Step 3: First home buyer incentives
You may be eligible for a whole range of government incentives as a first-time buyer. To see if you are entitled or to obtain more information, visit firsthome.gov.au or moneysmart.gov.au.
Step 4: Finding a home
Now that you have a better understanding of the costs of buying property, and also how much money you can afford to borrow, it’s time for the fun part: house hunting!
Make a checklist of things you want in a home and view as many propertis as possible that meet your criteria. Don’t be afraid to have a good look around and ask the selling agent as many questions about the market and the neighbourhood. The more research you do, the better.
Free suburb and property reports can be accessed through sites such as Australian Property Monitors and RPdata.com, so take the time to do your homework because it will really pay off!
The same is true of your home loan, so be sure to compare at least three mortgage options before you sign up, said Hutchison.
“There’s a wealth of competition in the mortgage market and lenders are hungry for your business. Just a few basis points difference between rates could add up to tens of thousands of dollars over the long term, so it’s worth comparing,” she said.