From one First Home Buyer to another
As a short introduction, my name is Emma and I’m just your average 90s born, fast-approaching 30, HECS debt up to my eye balls, avocado on toast eating, young(ish) woman. I earn a modest salary, receive more texts from Afterpay than I do from my own fiancé and have recently moved out of my beach front rental property and back (to reality) in with my parents in the same humble suburban family home we have lived in since before I was born (said fiancé in tow).
Why? Because I’m trying to pay for a wedding I never set a budget for (can’t go over your budget if you never set one, right?), a Hawaiian honeymoon and a house deposit so my fiancé and I can purchase our very first home together.
Like so many Australians, the dream of owning my own home is a big one. Purchasing your own home, whether it be the home you want to raise a family in, a stepping stone property, or your second investment property - it’s a big milestone in one’s life and something most of us strive toward.
Bringing the dream to reality can be a difficult time for a lot of us who are only just starting to make sense of market trends, home loans, lenders, credit criteria, and the rest of what can sound like mumbo jumbo.
So, where to start?
If you are at the very start of your home buying process, then you’re not alone. If you’re at the point where you want to make those dreams a reality, then hopefully this first home buyer’s series might be the insight you need to get you started.
It is a confusing process if you are not financially literate and you’re doing this for the first time. The influx of information out there can be both overwhelming and daunting.
I mean, how much do you need for a house deposit these days? Is it 5% or 20%? What is LMI? Do I still pay stamp duty? Can buy now, pay later services hurt my credit rating? Can I borrow as a single? What are genuine savings? What is the new government scheme to help first home buyers? What happens if I want to go down the house and land package road?
It appears the deeper you go into the process; the more questions will arise, and the more people will offer unsolicited advice and information about it all. We’ve all got that friend or even that family member who thinks they know all there is to know about buying a home or an investment property, but after dumping what can often at times be kind of dodgy information, you’re still left none-the-wiser about it all.
This First Home Buyer series is for you
Selfishly, I’m writing this for me too. As someone in the same boat as you, I just want a place to go when I’m looking for answers. I’ve spent days pouring through articles, blogs, government websites and even stalking brokers to find the answers to some of the most common questions asked by first home buyers (FHB), so you can start your process with hopefully a little more clarity than before you started reading this.
I reached out to one of ALI’s authorised mortgage brokers, whose clientele is predominately first home buyers and I asked if they could shed some light on the top questions FHB are asking her in their appointments.
From their experience, the biggest things FHB are struggling with is understanding how much of a deposit they need to have to buy or build their house,
“This can change from house to house and even from bank to bank. I sit with my clients and give them scenarios so they understand exactly what they will need to settle on the house or build their dream home”.
Deposits, deposits, deposits
This was an area that stumped me too. Recently, I threw the towel in trying to understand it all and I booked an appointment with my local Aussie Mortgage Broker. The broker difference is you will have someone to sit down with, who has access to a range of lenders and has worked with a variety of people in all types of situations, wanting to buy all different types of properties and homes.
What I learnt from that first meeting was there are multiple ways to buy a home without the standard 20% deposit.
There are lenders who will lend you up to 95% of the property value, meaning you might only need a deposit of 5%. However, there is a catch. A little thing, called Lenders Mortgage Insurance or LMI – something which pops up a lot but again, is one of those things the laymen on the street might not know much about.
We will discuss LMI in detail in the next article of this series.
For now, LMI is how the lender or bank protects themselves when a loan amount is in the higher range i.e. when you’ve borrowed 95%. You see, if your Loan to Value ratio or LVR is on the high side, you could be a higher risk to the lender. To mitigate the risk, the lender will add LMI to your loan.
Another low-deposit option is borrowing with a guarantor. If you’re renting and are really struggling to save your deposit and you have parents or in-laws who are willing to go guarantor on your loan – then this might be the option best suited to your situation.
A guarantor will offer the equity in their own home as security for your loan. This way you can enter into the property market sooner, without the 20% deposit and it’s also a way to avoid the cost of LMI.
This option can make people feel a bit uneasy, especially if you think you’re gambling your parents’ home to buy your own and even though there are risks associated with any large debt you enter, it’s may not be as dangerous an option as some first think.
If something unexpected were to occur after you took out a mortgage, like if you were to lose your job, fall seriously ill, or even pass away, and repaying the mortgage repayments became difficult – then yes, this could impact on your guarantor loan. If you default on your loan, then the bank or lender will look to your guarantors to make the repayments.
However, there are ways to mitigate these risks, for instance, a loan or mortgage protection plan. You can read more about ALI’s Loan Protection Plan,here.
What does the process actually look like?
My broker contact also says the biggest thing they believe FHB struggle with, is understanding the actual process and what it entails.
“FHB take up a lot of time in my day, they need constant contact with updates as to where things are at”.
Buying a home or property isn’t an average everyday purchase transaction. There is much more to the process than people know about. This is why it could be a smart move to speak with a mortgage broker, who will be there with you each step of the way, so you’re never left in the dark about what happens next. They will also be the conduit between you and lenders, ensuring they find a loan suited to you and your situation.
At a glance, this is what the process can look like:
What you’re doing now – understanding the process and your savings plan, thinking about what will suit you and your financial situation. How much house you can really afford?
You should have all your ducks in a row, ready to submit your application for pre-approval. Your mortgage broker will most likely suggest you have all your debts paid, open lines of credit closed (things like Afterpay or Zip Pay which can be a red flag to lenders). You will also have a good idea of how much you can borrow to suit your financial situation.
If you’re at this step – congratulations! Pre-approval will generally last for around three months and is a good indication of what the lenders are willing to lend you to purchase a home or property. It does expire after the set term though or if your circumstances change before then.
So, you’ve found ‘the one’ and you’re ready to buy? Make sure you have a trustworthy and reliable real estate professional helping you at this stage. Stay true to how much house you can really afford and don’t get blindsided by pretty furnishings (guilty).
The lender will organise an independent view of your property to establish its value or worth. This is when you will start dealing with conveyancers too. They will help you from purchasing until settlement.
If your loan has been approved, then everything is coming up Milhouse for you and you’re almost at the end of the process.
What you need to consider to safe guard what is yours. You have worked so hard to buy your dream home or slice of land, now it’s time to protect it, so if something were to happen, you can keep a roof over your head. This includes insuring your home with home and contents insurance, but also insuring your ability to meet the mortgage repayments, in the event something unexpected were to happen to you.
Finalising your home purchase. It’s time to pop the bottle of bubbles and have your obligatory photo in front of the ‘sold’ sign. You’ve worked hard for this, you deserve it!
Need more assistance?
There’s no shame in needing help. Reach out to your local mortgage broker today and set up an appointment to talk about your financial goals.
You can search for an ALI authorised mortgage broker by using our ‘find a broker’ page.
Find your local mortgage broker here.
In the next article of this series, we’re going to talk about LMI and spell out some of the industry jargon which gets thrown around quite a bit.
We’ll also look at the Australian Government’s First Home Buyers’ scheme, stamp duty, hidden costs associated with purchasing a home and dispel some of the myths floating around.
Until then, I’ve listed some recommended reading for you:
Common regrets for first home buyers
What is conveyancing?
How to save for a deposit in 2019
About Emma Flanagan
Emma is the Senior Marketing and Communications executive at ALI Group. After completing a Bachelor of Communication with a Major in Journalism, Emma spent a couple of years living, travelling and working abroad before making her way home to Australia. Now, with firm roots back in her home town of the Central Coast in NSW, her and her husband just bought their very first home with the help of their mortgage broker. Now, Emma is here to help FHBs just like her by providing informative and educational content and to keep them abreast of what’s what when it comes to buying, refinancing and protecting themselves and their family from financial hardship.