April 19, 2016
Buying your first home is often the biggest purchase you’ve ever made. But you shouldn’t let the process overwhelm you.
With the right preparation and knowledge, you can save yourself a lot of stress (and money on your loan). Here are ten useful things to know before you take the plunge.
1. Mortgages are different to other loans
While most people are familiar with the term ‘mortgage’, many don’t completely understand how a home loan actually works. Unlike other loans, a mortgage is taken out specifically to buy property or land.
Given that mortgages span such a long period of time (generally 15–30 years), they have a number of unique features such as redraw facilities and offset accounts. These allow you to better manage your money and provide you with a back-up plan for situations when you may need to access extra funds.
To give the bank a financial guarantee, a mortgage is secured against the value of your home until it is paid off. This means that if you are unable to meet your repayments, the lender has the right to sell your property.
Repayments are usually made on a monthly basis and the amount will depend on how your mortgage is structured. To save money on your mortgage, opt for fortnightly payments instead.
2. You have a number of home loan options
These are the most common types of mortgages you will need to choose between. Understanding the differences between them will help you to make an informed decision when you see a lender or mortgage broker.
Variable rate: The amount of interest you pay on this loan varies depending on market fluctuations. Variable-rate loans are popular when interest rates are low and less popular when rates are high.
Fixed rate: This loan allows you to fix your interest rate for a set period of time. This means that even if rates rise or drop during this period, you will always pay the same amount.
Interest only: When taking out a loan, you can opt to just pay off the interest for a certain period of time. When this period expires, you must then commence paying off the balance of what was borrowed. These loans are most popular amongst property investors.
Partially fixed rate: Also known as a split loan, this mortgage lets you pay a fixed rate on part of your loan and a variable rate on the remainder. This set-up allows you to take advantage of fluctuations in interest rates, but does provide some security should rates rise suddenly.
3. There is a difference between lenders and mortgage brokers
The most common lenders are banks, however you can also obtain a home loan via a building society, credit union or online lender. Each lender will offer different rates, services and loan features, so make sure you do your research before choosing a loan.
Independent mortgage brokers are not directly affiliated with banks or lenders, and they help you to assess which lender and loan is the best option for your situation. Mortgage brokers also provide assistance with your application and other paperwork.
4. The first home owner grant is only for new properties
In Queensland, the first home owner grant changed its name to the Great Start Grant in October 2012 (although most people still refer to it as the first home owner grant). This is a one-off payment of $15,000 towards a new home.
The eligibility criteria is as follows:
- The property must be worth $750,000 or less.
- You must be purchasing a newly constructed or substantially renovated home (not eligible for an older established home).
- You must move into the home within one year of settlement and live there for six consecutive months.
For more information, head to the Great Start Grant website. It is important to note that the first home owner grant does differ from state to state.
5. You should aim to have a 20% deposit
Most lenders recommend a deposit of 20% of the purchase price, however it is sometimes possible to be approved with a minimum deposit of 5% (plus costs). This may vary from lender to lender, so make sure you ask upfront what is required. We recommend saving more than the minimum if you are able to, as this will reduce the amount of interest you pay on your loan.
6. You can use a guarantor as loan security
A common way for first home buyers to have their loans approved without a full 20% deposit is to have it backed by a guarantor. A guarantor is a third party who provides a guarantee allowing the equity in his or her own property to be used as a form of security.
7. Lenders mortgage insurance is an option if you don’t have a full deposit
Lenders mortgage insurance (LMI) is applied if you are unable to put down a deposit of 20% or more. This security gives the lender confidence in offering you a home loan. With LMI in place, some lenders will allow you to borrow up to 95% of the purchase price. The amount of insurance you will have to pay depends on how substantial your deposit is.
8. There are many extra costs associated with a mortgage
Under budgeting is a common mistake that many first home owners make. On top of your deposit, be prepared to pay the following:
- Stamp duty (sometimes known as transfer duty)
- Surveyors’ fees
- Legal fees
- Mortgage registration fees
- Pest and building inspections
- Property insurance
- Loan application fee
These costs do add up and we recommend setting aside approximately 5% of the property’s purchase price to cover these. There are concessions on stamp duty for first home buyers, depending on the value of the property you are purchasing.
9. Rentvesting is becoming increasingly popular
Rather than saving for years to purchase their dream home, an increasing number of first home buyers are turning to rentvesting, where they invest in property and continue renting where they want to live. Once the equity in the investment property builds up, you can then purchase a property in an area where you would prefer to live.
10. Knowing your market will help you to buy well
It pays to have a good understanding of the market in which you plan to buy. Understand what is a fair price for property in your area and where the market is at in the property cycle. Knowing these things will help you to negotiate a fair price.
0419 733 862
Your Garden City Mortgage Broker, Brisbane