7 STEPS WHEN BUYING YOUR FIRST HOME
In this article, we’ll look at the essential steps first home buyers should take to secure their new home, to include working out a budget, organising a home loan, taking advantage of the First Home Buyer Grant, and more.
Buying your first home?
Buying your first home, the ‘Great Australian Dream’, is a very exciting time. But it can also be daunting as there’s so many things that need to be considered. This ‘7 Steps to Buying Your First Home’ guide has been developed to help make the process a bit less overwhelming. Here’s an overview of what should be on your radar:
Step 1: What is your budget?
There are a few areas to think through when it comes to how much you can spend on your new home, and how much you can afford to repay on a home loan, to include:
- Your household budget: This is your total household after-tax income (including you and or your partner), and any investment income you may earn. Then you must calculate ALL your total living expenses, including groceries, dining out, entertainment, the cost of running your car(s), gym membership and even your Netflix subscription. Use a spreadsheet or find an online calculator from a lender to help with this. The difference between your after-tax income and living expenses is how much you can put toward your home loan. Tip: be sure to leave some ‘rainy day’ contingency plan money to make sure you’re not completely stretched in the event of an unforeseen circumstance, such as a redundancy or unexpected medical expense.
- Your savings or deposit: How much do you have for a deposit? This is a major factor in calculating how much you can spend on a home, with most lenders looking for at least a 20% deposit. With than less than 20% deposit, you will often need to pay Lenders Mortgage Insurance (LMI), which can cost thousands of dollars. If you are like around half of all first home buyers in Australia, you may be able to lean on the ‘Bank of Mum and Dad’ for some help with your deposit.
- Don’t forget stamp duty: All states in Australia charge stamp duty (the cost to transfer the property into your name). This is generally calculated using a sliding scale based on purchase price and can add around 4% to your purchase cost.
- First Home Buyer Grant: There is a range of schemes and grants available to first home buyers from both the Federal and State Governments (note these differ between states). The First Home Loan Deposit Scheme (FHLDS) is an initiative of the Australian Government to support eligible first home buyers build or purchase a home sooner. This scheme allows for a smaller deposit (say 5%) with the Government guaranteeing the difference up to 15% to help borrowers avoid LMI. In NSW, for example, you may be eligible for a $10,000 grant to build a new home, or a variety of concessions to build new homes or purchase existing homes. Full details on grants, concessions and how to apply in NSW are here.
Step 2: Find the right home loan
There are many types of lenders that provide home loans (otherwise known as first mortgages). Besides the traditional big banks, there are new non-bank lenders, private lenders and fintechs, such as Mango Credit who all offer mortgage products.
Here are a few tips for first home buyers to keep in mind when considering a lender:
- Get your finances in order: You need all your paperwork handy and in good order, including current payslips, last two year’s tax returns, six months of bank statements and details of any other loans (such as a car or personal loan) and credit cards.
- Check your credit score: A ‘credit score’ is a number between 300–850 that depicts a consumer’s creditworthiness. The higher the score, the better a borrower looks to potential lenders. A credit score is based on credit history: number of open accounts, total levels of debt, and repayment history, and other factors. Lenders use credit scores to evaluate the probability that an individual will repay loans in a timely manner. What this means in real terms is that the higher the credit score, the more options you’ll have available to you (and the cheaper the interest rate will be).
- Your capacity to pay: Your after-tax income, less living expenses, will tell you how much you can afford to pay on a mortgage. It is prudent to consider the impact of interest rate increases, and if you can afford to meet your repayments if rates rise. If your capacity to cover rate rises is limited, consider fixing the interest rate for all or part of your loan.
- Shop around: Don’t just talk to your current financial institution or bank. You can talk to a broker or look online to compare the products, rates and fees of a large number of lenders that include the traditional big banks, but also a growing range of non-bank lenders, private lenders and fintechs who all offer mortgage products for first home buyers.
Step 3: Find your new home
This is the fun part, but it can also be a lot of legwork… Here, the internet is your friend and can give you a good idea of the price guides of homes in areas you are interested in, as well as previous sales in these areas. Try Domain or realestate.com.au, the two largest real estate sites in Australia.
Nothing beats seeing a home in person, so once you have a shortlist of homes in the areas you like and within your price range, attend open homes to inspect the ones you are interested in.
You can also let real estate agents in your preferred suburbs know that you are actively looking, what you are looking for, and your price range. Ask the agent to let you know about new listings and even off-market properties they have on their books.
Step 4: Have a closer look
Don’t commit to purchase a home before you look under the covers (or more accurately, behind the walls). It’s critical to conduct thorough professional inspections prior to purchasing a home, to include pest and building/ electrical inspections. For any strata purchases, it’s wise to request strata minutes from the last few years to ensure there are no major problems in the building. This will cost money, but will ensure no nasty surprises after you buy. And if you find urgent repairs are needed, or there are larger structural issues, you can factor this into the purchase price and your offer, or walk away.
Step 5: Make an offer
Most homes are offered either by private sale or treaty, or they go to auction. Typically, they are sold via a real estate agent, but some vendors sell directly. Once you know this is the home you want, make an offer within your budget. Be careful with so-called price guides provided by agents, particularly in a ‘hot’ property market. Often, they are less than what the vendor really wants or hopes to achieve at auction, so your initial offer may be unsuccessful.
Note that private treaty sales have a cooling-off period for inspections etc., but auctions don’t usually provide this option. So, it is crucial if you are bidding at an auction to have pre-approved finance and have done all the necessary inspections.
You may consider engaging a buyers’ agent to help you with the negotiation process, or even to bid on your behalf at auction. While it costs money to engage a buyer’s agent, they can also save you time, stress and potentially tens of thousands of dollars by securing a better price than you might have on your own.
Once your offer is accepted, contracts will be exchanged, and a deposit (usually 10% of the purchase price) will be paid into a trust account.
Step 6: Over to the lawyers
Property contracts are large documents full of ‘legalese.’ That’s why there are many specialist conveyancing firms that work solely in the area of property. You will also find many suburban law firms that offer a range of legal services, including conveyancing. This investment ensures there are no surprises once you have completed the purchase process.
Typically, the process from contract exchange to settlement is six weeks, but the timing can be negotiated between you and the vendor. During this time, your conveyancing solicitor will liaise with the vendor’s solicitor, council and various government departments to ‘tick all the boxes’ and support a smooth transfer of ownership to you.
Step 7: Settlement and time to celebrate!
On settlement day, and in exchange for the purchase price less the deposit you have already paid, you receive the title and keys to your new home. Congratulations, you are now a proud home owner! All that remains is for you to move in and turn your new house into a home.
Buying your first home is a huge commitment. If you understand the steps involved, and have considered all the important factors, the process will hopefully be faster, less stressful and a lot more enjoyable. Good luck!