What first time buyers need to know



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Fewer first home buyers are locking into a mortgage, according to the latest data from the Australian Bureau of Statistics (ABS).

In April, the ABS reported the number of loans for first-time borrowers had dropped by roughly 30 percent since December 2011.

This is a surprising result given that this fall has coincided with a drop in interest rates and lower real estate values. In fact, since November 2011, the Reserve Bank of Australia (RBA) has slashed the cash rate by 1.25 percent, while average real estate values across Australia fell 2.9 percent in the recent March quarter, according to the Real Estate Institute of Australia.

That said, John Tancevski, chief executive of Community First Credit Union, said that while lower interest rates and affordability are good news for aspiring homeowners, there are other hurdles to overcome before fronting a lender for a first mortgage.

“It’s true that Australian consumers have been saving harder than ever before, however cost of living increases and rising rents tend to eat into the deposits of aspiring homebuyers,” he said.

As a general rule, an owner occupier will require a minimum 5 percent of the property purchase price as a deposit. However, the more significant your deposit, the lower your home loan, which in turn reduces the size of the lenders mortgage insurance (LMI) charge you can potentially pay.

Although payment of the LMI comes out of your pocket, it’s designed to protect the lender – not you, in the event that you default on the loan repayments. It is important to note that the smaller your deposit, the bigger the LMI charge will be – although if you have a deposit worth 21 percent of the home’s value, you won’t be required to pay this impost.

A first homebuyer purchasing a home valued at $410,000, can expect to pay $3485 in LMI if they have a 15 percent deposit, compared to $10,672 if they have just 5 percent saved up, according to lender Mortgage Choice.

Ultimately building a bigger deposit requires some work on behalf of the borrower and often means spending less and saving more. The best way to manage your living costs is by creating a budget, which can show you where and how you’re spending money. Once armed with this information, you should be better place to start saving. If you’re new to budgeting, visit the federal government’s Moneysmart website and follow the prompts to its budget planner. And to get a better understanding of the cost of borrowing, use a home loans calculator, such as the one at RateCity, which helps estimate your mortgage repayments.

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