Are you on the hunt for your first home? If so, you've just taken the first step towards setting yourself free from the uncertainty of renting and establishing a financially secure future.
This is likely to be one of the biggest investments you'll ever make, so tread carefully with these simple steps to guide you along the way:
1. What's your borrowing power?
Answering this question is an essential first step before you start the search. Your borrowing power is calculated based on your income, financial commitments and loan details.
Typically, lenders will assess the following:
- annual income – based on pay slips, or your last two to three annual tax statements
- expenses – such as living expenses, debts and medical expenses
- number of dependents – unfortunately your bundles of joy can lower your borrowing capacity
- proven savings – how much you have tucked away for a rainy day
- your deposit – the size of your nest egg. 10 to 20 per cent is usually required - if it's less than 20 per cent of the property's purchase price, you'll need to pay Lenders Mortgage Insurance (LMI). This covers the lender in case you don't make your repayment. In some cases, the LMI can be included in the mortgage, so you may not have to pay it upfront.
You can use a calculator to work out how much you can borrow and what the repayments might be.
Compare the home loan repayment with what you currently pay in rent and discuss whether it's realistic with your partner, family, bank, mortgage broker (and a financial adviser if you have one). Remember to factor in other associated costs, such as stamp duty and the cost of moving.
Search online to work out which suburbs you can afford to buy in before attending inspections – it will save you a lot of heartache in the long run.
2. Master the property market
Now's the time to get moving – the more properties you view, the better understanding you'll have of the current market. While it's a good idea to begin your search online, you'll only really get a feel for a place when you step through the front door. Search online to work out which suburbs you can afford to buy in before attending inspections – it will save you a lot of heartache in the long run.
Once you're out viewing properties, remember to consider aspects beyond the home itself. Make notes of problems that may lead to expensive repairs, such as missing roof tiles, weak toilet flushing, faulty guttering, damp, rotten window frames and cracks in the walls. Then be sure to explore the surrounding area, checking the house's proximity to public transport, schools, shops and services, all of which can significantly influence a property's value.
3. Learn the home loan lingo
Finding the right home loan for you calls for another round of research. Learn the benefits of different home loan features and decide which elements are important to you.
Most people take out a principal and interest home loan, where regular payments are made against the principal (the amount borrowed), as well as paying interest. Another option is an interest-only loan where, as the name suggests, your repayment amount only covers the interest on the loan. But be wary, paying interest only will cost you more in the long run, since you're paying interest on a principal amount that doesn't reduce.
Obtaining pre-approval at this stage would also be a wise move, as it will enable you to enquire about properties with confidence. Pre-approval or conditional approval on a home loan means getting your loan approved in principle, which shows that you have met the bank's initial lending criteria. Be mindful of the fact that final approval will only be granted once your home loan application has been completed and all the information you've provided has been substantiated, including a valuation on your chosen property.
4. Forget me not…
You're on the home straight now, but don't get caught by additional costs and concessions. Prepare your finances to include payments like:
- registration/transfer fees
- stamp duty (a major cost, but as a first home buyer you may be exempt or eligible for a concession)
- lender's mortgage insurance
- conveyance and solicitor's fees
- building/pest inspection reports.
Finally, be sure to check out the government's First Home Owner Grant to see if you might be eligible.