August 13, 2017
Purchasing property for the first time can seem to be a complex process but, provided you do your due diligence and seek professional advice, home ownership can be a rather fulfilling and enjoyable experience.
The top 5 questions that First Home Buyers have in their minds when they consider getting into the property market and achieving their goal of home ownership are:
How much deposit will I need?
Should I buy now or wait until I have a bigger deposit?
What is LMI?
How much can I borrow?
Can my parents help me?
The answers to these questions are below. Or book a meeting with us via the link on this page for more detailed information relating to your personal circumstance.
(1) How much deposit will I need?
Many lenders will require you to have saved at least for a 5% deposit whilst others will ask for a 10% deposit towards the property purchase.
What is equally important is that, in addition to the deposit, you will also need to consider saving for purchase-related costs such as government stamp duties, lenders mortgage insurance, pest/building inspections, conveyancing, valuation, removalists, lender fees and property insurance.
The bigger the deposit - the better. Advantages of a large deposit are that you will avoid lenders mortgage insurance (which can run into thousands of dollars) and you will have to borrow less which means your mortgage repayments & interest costs over the term of the loan will be lower.
(2) Should I buy now or wait until I have a bigger deposit?
With property prices on the rise, there is an increasing likelihood that buying now with a smaller deposit is better so that you are not caught out with an exponential rise in the price of the property in your preferred suburbs.
For example, assuming that the property market is growing at around 7% per year, a $500,000 property today will go up by $35,000. On the other hand, if your savings are $2,000 per month, that means you will have an extra $24,000 towards your deposit after one year – which is much less than what the property price has gone up by.
It is important to remember that this will not always be the case, so researching the property market and working out your savings plan are both critical steps in the process.
(3) What is LMI?
In circumstances where you have less than 20% (plus purchase costs) to contribute towards the purchase of a property, lenders will require you to pay additional fees towards Lenders Mortgage Insurance (LMI). The cost of the LMI premium depends on a number of factors, such as the property value, its location, whether you are self-employed, if it is an investment, and the deposit amount.
The additional one-off LMI cost protects the lender, not you – so getting a bigger deposit towards the property purchase will benefit you significantly.
(4) How much can I borrow?
There are a number of online calculators that give you an idea of how much you can borrow. The figure provided by these calculators should be used only as a guide. Your mortgage broker will be able to give you a more accurate picture of how much you can borrow specific to your own circumstances, especially if your income varies from month to month (e.g. due to overtime income).
As a guide, you should avoid using more than 30% of your net income towards your mortgage repayments – so that you can live your life comfortably and save up for rainy days as well (especially if interest rates go up in the future).
(5) Can my parents help me?
It’s becoming more and more common for parents to help their children get into the property market with a gift of money. When you get a gift for this purpose, lenders normally require a gift letter that states three things
1) the relationship between the parties , ie parents
2) the amount of the gift and
3) statement that the gift money is never required to be repaid. Some lenders require this to be in the form of a statutory declaration, particularly if the funds are from overseas.
Another option is asking a parent to become a guarantor for your home loan by using the equity they have in their property. The primary security for the loan will be your property, but the lender will also take a mortgage over your guarantor’s property. To use a guarantor, you must be able to service the entire loan on your income.
Finally, it is a good idea to get ahead with a loan pre-approval. This will give you a good idea of how much deposit you need as well as your borrowing capacity, and save you from looking at properties that are not in your price range.
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