A guide to buying your first home
It’s the dream of many Australians to buy their own home. As far as big life goals, for many people it’s up there with getting married and/or having a baby. As such, it requires a considerable amount of thought. And, as many first home buyers will attest, they wish they’d started saving yesterday. But how much deposit do you actually need to buy that dream home, and what’s a safe amount to borrow from the bank? Let’s take a look at some of the big questions.
- First home buyers grant qualifications
- Stamp duty for first home buyers
- How much deposit do I need to buy a house?
- Tips on saving for a deposit
- Using superannuation as a deposit
- Buy vs rent
How much will I need for a house deposit?
In Australia, most banks and lenders will require you to have saved 10% of the property’s value before you qualify for a home loan. This means if you’re eyeing a pad listed for $600,000, you’re going to need a deposit of at least $60,000. The more you have, the better off you’ll be – for a number of reasons, which we look at below. First things first, decide where you want to buy and do your research on the property market. Speak to real estate agents about how much properties are selling for in the area you are looking to buy and work out if you can afford to buy there.
What is lenders mortgage insurance?
Most lenders require you to have a deposit of 20% if you wish to avoid paying Lenders Mortgage Insurance (LMI). Lenders take out LMI to protect themselves in case the borrower defaults on the loan and is generally paid by the lender if their Loan to Value Ratio (LVR) is 80% or higher. The cost of LMI usually depends on your LVR, the amount of money you borrow and the lender but in the example above you should expect to pay somewhere between $10,000 and $15,000.
What is my loan-to-value ratio?
The more deposit you have saved, the lower your LVR will be. The LVR is worked out by dividing your loan amount by the value of the home you wish to buy. Anything over 80% automatically puts you in Lenders Mortgage Insurance (LMI) territory. For example, if you want to buy a $600,000 home with a 10% deposit your LVR will be 90%. If you have a deposit of $150,000 for the same home, the loan amount will drop to $450,000 which in effect drops the LVR to 75% and means there is no LMI payable.
The lower your LVR (under 80%), the higher you are valued in the eye of the lender, meaning you may be eligible for a greater variety of home loan rates. The lower the rate you pay on your home loan, the less interest you’ll pay back to the lender over time.
What if I only have a 5% deposit?
The smaller your deposit, the more rigid the regulations are on it, however some lenders will accept a deposit of only 5%. If you only have a 5% deposit, be aware that this needs to comprise “genuine” savings. Genuine savings are savings you have in the bank that show up on your bank statement – not “oh but my brother owes me $10,000 which I’m getting any day now” savings. Money from a parent or third party can also be put towards your deposit, but this is referred to as a gift rather than genuine savings.
If you’re buying an investment property, lenders tend to be more strict, with most requiring a deposit of at least 10% of the property’s value.
Can I buy a property with no deposit?
If you haven’t saved a deposit at all – not even a teeny tiny one (seriously, did I really spend that much on New Year’s Eve tickets in the nineties?!), you’ll need to qualify for what’s known as a guarantor loan. A guarantor is usually a family member who is legally responsible for paying back the entire loan if you can’t – as well as any fees, charges and interest.
You can read more about guarantor loans here.
How much can I borrow?
Once you’ve worked out how much deposit you have, you can start working on how much you can borrow. The amount you can borrow is determined by a number of factors, including your income (and whether you work full time, part time or casually), marital status, the number of dependents you may have, your credit score and expenses.
uno’s range of calculators are designed to help you figure out your borrowing power, the funds required to buy a certain home and the cost of other things like stamp duty.
Let’s say you’re a single person earning $80,000 a year. You hold a credit card with a $5,000 limit, and your living expenses amount to around $1600 a month. uno’s home loan borrowing calculator will estimate your borrowing capacity somewhere between $400,000 and $500,000.
Now let’s say you’re a couple with two children, with a combined salary of $200,000 and living expenses of $2500 a month. You also have a credit card with a limit of $15,000. Your borrowing capacity now is somewhere between $1,000,000 and $1,250,000.
Have a go with the uno calculators or speak to one of our qualified mortgage brokers to find out how much you can borrow.
How much should I borrow?
Of course, no one wants to overstretch themselves and borrow too much from the bank. You’ll only spend the rest of your life struggling to pay off debt. For this reason, it’s just as important to look at how much you should borrow.
As well as the amount you’ll need to save for your deposit, you’ll also need to factor in the other costs that come with buying a house, including stamp duty, council and water rates, and any repairs you may need to carry out once you move in. It’s a good idea to save for these things along with your deposit.
When factoring in how much you can afford to borrow from the bank, you should also keep in mind that interest rates may rise, and your repayments will go up. You should also think about future plans and aspirations. Do you plan to study in a few year’s time and quit your job – or work part-time? Do you plan to retire at 60? 50? 40?! Do you see children in your future? Are your parents likely to need care and assistance as they age?
While these things cannot be put into a calculator (yet), they should be taken into account. If you don’t want to find yourself thousands of dollars in debt in 30 years time, set your limit and don’t overcommit.
How much is stamp duty?
One of the major hurdles to buying property for first home buyers can be the high cost of stamp duty. On top of the stamp duty fee itself, there’s also the transfer fee and a mortgage registration fee – although these are only a couple of hundred dollars rather than the thousands you’ll pay in stamp duty.
Thankfully, there are a number of stamp duty concessions for first home buyers in different states.
Read Stamp duty discounts for first home buyers to find out if you’re eligible.
Can I get the First Home Owner Grant?
The criteria for each grant and the value of the grant varies from state to state, although the main eligibility requirements are largely the same: you must be 18, an Australian citizen or permanent resident, and you mustn’t have owned property in Australia before.
For a breakdown of key criteria in each state read: Do I qualify for the first home buyer grant?
The pre-approval process
You’ve just received pre-approval for your home loan. Congratulations! You must be feeling pretty excited. Now it’s time to find that dream home.
While you do, here are a few tips to ensure you keep that pre-approval.
Pre-approval does not include assessment of whether the property is acceptable to the lender – because the property most likely hasn’t been found yet. This is why one of the conditions in the pre-approval will be “subject to a satisfactory valuation”.
Avoid these property types
Before you go house hunting, you should know there are certain types of properties that may not be acceptable to some lenders, such as:
- Small apartments or particular apartment blocks deemed harder to sell
- Hobby farms
- Properties in suburbs that are deemed ‘high risk’ by a lender. A suburb is deemed high risk when there are a lot of high rise developments, for example. In areas with high density there is the risk the oversupply will drive the prices down if the market crashes. Lenders need to make sure that if they need to sell the security (the property purchased and held by the bank to sell in case you can’t pay the loan back) to repay their debt they will get the value of the debt back.
- A property with large power lines close to it which could affect the resale value
- A property that is in poor repair
Don’t go changin’… jobs
Once you’ve gained pre-approval, now is not the time to go changing jobs. If your circumstances do change between gaining pre-approval and finding a property you’ll need to advise uno.
Please keep in mind the following changes in your personal or financial circumstances can mean you are no longer able to afford the repayments and the lender may not formally approve your loan.
Examples of changes that could create an issue are:
- Changing jobs
- Going part time or becoming a contractor
- Increasing your number of dependents
- Getting a credit card or personal loan
- Spending your deposit on an emergency expense
- The lender finding out about loans or credit cards you did not disclose
- Interest rate changes. If the RBA increases rates while you are still house hunting it could affect the amount you are able to borrow
- Formal pre-approvals can negatively affect your credit score so beware of obtaining multiple pre-approvals with different lenders.
Hey big spender
Don’t be tempted to spend more than the amount you have been pre-approved for. If you lock yourself into a binding contract before seeking legal advice it could cost you your deposit if you are not able to obtain formal approval for a higher loan.
Understanding home loans
Once you’ve saved your deposit and decided where to buy, you’ll need to apply for a home loan. The home loan process can be complicated, which is why we invented uno – to take the hassle out of applying for a home loan.
Read our article on making loan repayments, which covers different home loan types, rates and features.
And let a uno mortgage broker guide you through the process by calling 133 866.
uno is an online mortgage broker. The information above is general in nature, and you should always seek professional advice when making financial decisions.