Is now the right time to buy a property?
In reality, it’s impossible to predict what the Australian property market will do so perhaps a better question to ask is whether you’re ready for a home loan.
For example, how much money do you need to purchase the property, how do you give yourself the best shot at getting approved and what are you trying to achieve by getting a mortgage in the first place?
Remember, most mortgages are for 30 years so it pays to undertake a little due diligence, especially if you’re a first home buyer.
How much do I need for the deposit?
As a rule, home buyers need to have at least 5-10% of the property value as a deposit.
For instance, 5% of the property value for a home worth $500,000 means that you’ll need $25,000 as a minimum before you can apply for a home loan.
Most banks have a genuine savings requirement that typically requires your deposit to come from savings you’ve accumulated over a period of 3 to 6 months.
In this arrangement, your parents use their property as a security on your mortgage so you not only don’t need a deposit, but you can avoid Lenders Mortgage Insurance (LMI) as well.
How much does a home loan cost?
The first thing home buyers look for when getting a home loan are the interest rates.
Although interest rates are important, buying a property comes with additional costs apart from making principal and interest repayments.
As a general rule, you’ll spend about 3-5% of the property value for these extra costs so if you’re purchasing a $500,000 property then it may cost you up to an extra $25,000 to complete the entire purchase.
So what are these extra fees?
- Purchase stamp duty: A tax levied by the state government on all property purchases. Generally, this is the highest associated cost when buying a home.
- Mortgage stamp duty: Another tax based on the size of your loan (abolished in most states).
- Transfer fee: A fee charged when registering your name on the title of the property and removing the vendor’s name.
- Registration fees: A government fee for registering your lender’s mortgage on the title of your property.
Apart from these government fees, there are:
- Conveyancing costs: A conveyancer or solicitor can help you go through the Contract of Sale to make sure that it’s favourable as well as handle the overall transfer of the property into your name. Typically, you’re looking at about $800 to $1,500 for their services.
- Inspections: The property may need a building inspection, pest inspection or a strata report undertaken( around $600).
- Home loan fees: You may be charged additional fees (usually up to $900) such as an application fee, settlement fee or a valuation fee.
- LMI: If you borrow more than 80% of the property value then you’ll need to cover LMI, a one off fee that protects the bank, not you, in case you default on your mortgage. Work out the cost of mortgage insurance for a property that you want to buy with the LMI calculator.
It’s important to note that these costs may also include repairs or renovations to the property, council and water rates adjustments, as well as costs to hire a removalist.
Speak with your conveyancer to discuss the costs of buying a property or get a pretty accurate estimate with the purchasing costs calculator right now!
Can I get a First Home Owners Grant?
The First Home Owners Grant (FHOG) is a one-off grant designed to help first home buyers get into the property market.
First home buyers need to meet certain eligibility criteria to qualify for this grant and these requirements vary from state to state.
As a general rule:
- Each applicant must be a real person and not a legal entity, such as a company or a trust.
- At least one applicant should hold a permanent visa or be an Australian or New Zealand citizen.
- Each applicant must be at least 18 years of age.
- The total value of the property must be below the cap amount. Each state has different property value cap amounts so it’s essential you check this.
- This must be the first time that you and/or your spouse/de facto will receive a grant under the FHOG Act 2000 in any state or territory.
- At least one occupant will occupy the home continuously for at least 6 months, commencing within 12 months of settlement or construction of the home.
- All applicants must not have owned a residential property in any state or territory before 1 July 2000. This applies to their spouses or de facto as well.
So how much is the grant?
The amount can range from $5,000 all the way up to $25,000 so you’re best visiting your state government’s website or calling the relevant first home buyers hotline.
Some states, for instance, offer additional grants or stamp duty exemptions for first home buyers.
The FHOG calculator can give you some idea of what you may be eligible for.
How much is LMI?
Mortgage insurance is paid as a one-off fee to the lender when your loan is advanced.
The funds are deducted from your principal loan balance when it is advanced but the premium actually has no effect on interest rates.
For example, if you’re borrowing $450,000 for a property valued at $500,000, your Loan To Value Ratio (LVR) would be 90%.
As a rough estimate, this would bring your LMI premium to $5,000 and means that when the loan is advanced, you’ll only receive $445,000.
You may actually qualify for a 90% LVR home loan plus LMI, which is where you capitalise or “add” the cost of LMI onto your home loan in order to avoid this cost upfront.
Speak with your mortgage broker to find out if you’re eligible.
Which documents will I need to provide?
As a general rule, the bank will ask you to provide certain documents when you apply for a home loan as evidence of your income.
You will need:
- Payslips or an employment letter.
- Tax returns or a notice of assessment.
- Bank statements that show your deposit.
- Your ID such as your citizenship, passport or Australian driving licence to confirm your identity.
Lenders may also ask for additional documents such as:
- An accountant’s letter (typical with self-employed borrowers).
- Default explanation letter (bad credit home loans are available through specialist lenders).
- Gift letter (a letter confirming that your parents or close relatives are giving you a gift to use as a deposit to buy the property and that it is non-refundable).
Ensure that all of your documents are up to date and legible and that they support the information you’ve provided on your application.
The lender’s decision to approve or decline your mortgage application depends a lot on the accuracy of these documents.
Which mortgage is right for me?
Although looking at properties is way more more exciting than researching your home loan options, recognising what you need from the loan means you can match yourself with a mortgage that best fits your needs.
For instance, do you:
- want to make extra repayments?
- want to redraw any extra repayments you’ve made?
- want easy access to your funds?
First home buyers really need to do their research on different lenders and their home loan products.
It helps to speak to a broker who can objectively assess your goals and what you’re trying to achieve so you can avoid making a costly mistake.
Best of all, their services are usually free.
How can a mortgage broker help me?
Buying a property means that you’re signing a legally binding contract with not only the vendor but the bank that will hold your mortgage.
In all the excitement, you may end up making a spur of the moment decision and put your dreams of successfully buying a home at risk.
You should take your time to think carefully about your options before simply going to your bank and picking the first home loan you see.
Our mortgage brokers are credit experts and will ask the right questions so you get the right home loan.
Give us a call us on 1300 889 743 or complete our free assessment form to find out how we can help you to buy your first home.