The 5 things you must know before getting your first home loan.

1.     Purchase Price

The most common question from First Home Buyers, and indeed those seeking to purchase a new property, is “how much can I borrow?” Whilst this is very important it doesn’t answer the critical question of "how much can I purchase for?"

When purchasing a property, you are restricted by: 

• Borrowing Capacity - Pretty straight forward calculation based on your income, living expense and ongoing liabilities – you can therefore afford a home loan of $X.
• Balance of Funds to Complete the purchase i.e. money in the bank.

Cash is king and when purchasing a property, a bigger deposit will make things easier for a number of reasons:

• The bank can see you have demonstrated the ability to save, which shows you have the capacity to repay a mortgage – you’re less risky to the lender.
• A bigger deposit will mean a lower loan amount, allowing you to pay off the home loan sooner and pay less interest over the life of the loan.
• If you provide less than a 20% deposit, you will have additional costs as the lender will hit you with Lenders Mortgage Insurance (LMI).

2.     LVR / LMI

Loan to Value Ratio (LVR) is the amount you are borrowing, represented as a percentage against the lender assessed value of the property being used as security for the loan.

An example is you are purchasing a property for $1,000,000 and have 20% deposit of $200,000 – you therefore need to borrow $800,000. That means your LVR is 80%.

LVR is really important as if you have less than a 20% deposit i.e. LVR is over 80%, you will be charged LMI. This is a fee charged by lender as your application is deemed higher risk – it’s a one off payment per lender, a tiered fee (smaller deposit = a higher fee) and the only fee that can be added onto your loan (the actual fee varies with different lenders and adds to the interest you pay over the life of the loan).

3.     Funds To Complete

Now you know you need to have your deposit, but don’t forget about the other fees and costs involved in purchasing a property. The deposit is the difference between purchase price and loan. Your “Funds To Complete” is the money available to cover the costs, as well as the deposit. 

The costs can include:

• Stamp Duty - is a tax on a property transaction that is charged by each state and territory, the amounts can and do vary (Benefits and waivers for First Home Buyers).
• Government Registration, Transfer & Discharge fees are associated with registering your name on the title, removing the vendor’s and registering lender’s mortgage on the title and discharge existing title.
• Legal & Conveyancing - You can hire a solicitor or conveyancer to help the settlement and title transfer process by ensuring that their client is meeting all legal obligations and that their client's rights are protected during this transaction.
• Inspections – a building inspection will give you an overview of the structural makeup of the building and any damage to the property, a pest inspection will make you aware of any potential pests.
• Bank Fees – some banks will have application, valuation and settlement fees – your broker can work to get this waived or compare to get you the most competitive product. Sometimes fees upfront can mean savings with a lower rate or more features top help you save money on repayments.

4.     Grants 

If you’re a first home buyer, are buying a new property or are building a home then you may be eligible for additional concessions or grants. It’s really important to be aware of what you are entitled to as this can have a dramatic impact on the type of property you purchase, and even the area you buy in. Given I’m based in Melbourne, I’ve included the VIC criteria below (differs depending on State).

Are you eligible for the FHOG?

?       Buying or building a new home

?       Valued at $750,000 or less and be the first sale of the property as a residential premises. 

?       At least one applicant must be an Australian citizen or permanent resident

?       At least one applicant must intend to live in the home as your PPR for at least 12 months, within 12 months of settlement or completion

Eligible first-home buyers of new homes in metropolitan Melbourne will continue to receive the $10,000 First Home Owners Grant (FHOG). 

Regional locations now get $20,000 FHOG.

First-home buyer stamp duty waiver

?       Buying a first home and it is valued at $600,000 or less – regardless of whether it is a new or established property – you may be entitled to a duty waiver.

?       First-home buyers buying a home with a dutiable value between $600,001 and $750,000 will be entitled to a concessional rate of duty, calculated on a sliding scale. The closer the dutiable value is to $600,001, the greater the concession.  

5. The Finance

Now it’s time to secure the finance, the type of loan you get will depend on your ongoing strategy. In the past a one size fits all approach may have worked for a home loan, however with all the recent changes this is a redundant thought.

There are 3 major forces at work; 

1. First, banks have tightened up on investors which impacts assessment on all loans. 
2. Second, government have introduced key First Home Buyer initiatives which is affecting the housing and lending market. 
3. Third, brokers now write over half of all home loans in Australia which improves competition between the banks and allows improved accessibility for lenders.

Real estate has helped thousands of Australians achieve their life goals, once you understand where you want to be in 2/5/10 years you can ensure the finance you have helps you get there. 

For example if you want to flip the property, build an investment portfolio, develop the site in years to come or pay down the debt and live happily ever after; a different loan and structure needs to be applied from day dot based on each end scenario - not every lender, loan and structure will accommodate what you want to do in the future.

To learn more about this and how it applies to you, feel free to get in touch on 0451 526 063 or email your enquiry to: [email protected]