August 26, 2009
Don’t lose your head in the rush to find the right house and the best mortgage before the government’s Boost payments are reduced after September 30. Jackie Pearson investigates tips to finding your first home loan.
You still have time to apply for a home loan and receive the elevated levels of government payments under the First Home Owners Boost before the September 30 cut-off date but the worst thing you can do right now is panic.
Be careful not to buy the wrong home or take out the wrong mortgage just to get into the market. Buying a home is a costly exercise and you only need to sign the contract of sale and have your finances confirmed by September 30 to be eligible for the full boost, you don’t have to complete settlement.
Manage the pressure
While your focus is on finding the right property, there are some steps you should take to give yourself plenty of time to compare mortgages and get the best deal.
One trap to avoid is signing a contract “subject to finance” because if your home loan is not finalised before October 1, you will miss out on the extra government boost.
You should allow at least 20 business days to have the loan confirmed and the property valuation completed to ensure you leave enough time to receive the boost.
According to the office of the Minister for Housing, Tanya Pilbersek, “…You are only eligible [for the First Home Owners Boost] when you become entitled to possession … entitlement to possession would not occur until finance had been approved.
“As such any contracts that were still subject to finance and not finalised before October 1 would not be eligible for the full amount of the relevant FHOG boost.”
David Airey, President of the Real Estate Institute of Australia, says he expects the amount of “first home buyer” properties going to auction will increase between now and the end of September. “You can’t buy subject to finance at an auction because auctions are cash sales,” he says.
Some auctioned properties have been recently selling for well above their reserve so you will need to be extremely disciplined to ensure you don’t pay an inflated price.
Kevin Sherman, managing director of MyRate says the availability of suitable properties may become an issue as the deadline gets closer.
“We have seen more people who are formally approved for a loan subject to the property valuation but they can’t find a suitable property in their price range,” he says. “A year ago most people would have found a property that met our criteria within the 90 days.”
If you do miss the September 30 deadline, bide your time as you may find a better deal. Remember that the more savings you put towards the purchase the less loan costs you incur, such as lenders mortgage insurance.
Beware of home loan restrictions
Many lenders have climbed aboard the Boost bandwagon by offering special mortgage deals targeted at first home buyers but be careful that you don’t get starry-eyed over a cheap rate offered in the first 12 months, only to be stung for the next 24 years.
Sherman says make sure you don’t trade off important features for a discounted honeymoon rate. “The most important features are the ability to make unlimited additional repayments and then access those repayments, fee free.”
Scrutinise the deals
A few of the “discounted” home loans currently available, including Reduce Home Loan’s Discount 1 Year Fixed Fee-Free Loan, can represent good value over the long-term. It has an introductory rate of 3.49 percent p.a. and its comparison rate on a $275,000 mortgage is only 4.86 percent. The total cost of the loan is $467,885.
Other introductory rate loans have much higher comparison rates, so they become much more expensive once the honeymoon period is over and are actually less competitive than some standard variable home loans.
For example, you might find a loan with a one-year discount advertised rate of about 4 percent p.a. but the comparison rate for the life of the loan is as high as 5.49 percent p.a., so the total cost of the $275,000 loan over 25 years blows out to $506,421 and your monthly repayments would increase by $200 at the end of the honeymoon period.
Don’t let the impending Boost deadline blur your judgement when it comes to taking the time to thoroughly compare home loans. Offers providing low-rate “easy-entry” for first time borrowers may have a sting in their tail if the rate they revert to at the end of the honeymoon is too high.
Shop around because ending up with the wrong home loan could cost you many thousands of dollars more than the additional first home owners boost payments are worth.