Searching for and buying your first home is an extremely exciting time. However, if you are unsure of where to start or what to expect during the process, it can also be a very daunting time.
It is essential you understand the home buying process and real estate terminology, see our article on Key Terms and Jargon Explain. According to www.realestate.com.au, with property prices high and rising in many parts of Melbourne and Regional Victoria, buying a home, even a modest home, can be a very expensive exercise. It is therefore imperative, to get your purchase right.
We have put this guide together to answer the most common questions we hear from clients – from finance, what to buy, and how best to purchase at auction and private sale – so you can be informed when it comes to purchasing your first home. In fact, your first home is probably the most important home you’ll buy, as it will set you on your property journey. So, let’s delve into it.
How much can we borrow?
As a first-home buyer, it is likely your budget will be based on how much you can borrow from a bank. While it’s tempting to base your purchase price and budget on properties for sale in your favourite suburb or location, you will ultimately need to consider your initial deposit and borrowing capacity when determining your overall budget.
Speak with your lender or mortgage broker to understand how much you may need for a deposit for the purchase price you are ultimately considering. Even if you do not have a large deposit already saved, this will allow you to form a goal and savings target to strive for. Remember, your borrowing capacity will be based on your income, savings, assets, debts or other loans, any dependents, expenses and your credit history.
While lenders will inform you of the maximum loan amount you can borrow, this doesn’t always mean that you should borrow up to your maximum limit. Remember, that other costs of owning a home, such as council rates, general maintenance and building insurance can add up very quickly.
Ask yourself, could you cut back on some expenses and live more frugally for a period of time? If you were to suddenly lose your job, do you have enough “rainy-day funds” set aside to make future mortgage repayments for 2-4 months? While your job may seem secure today, anything can change in the future – so it is advisable to always be prepared.
How much do we need for a deposit when buying our first home?
The deposit is the amount of money, usually in the form of savings, you will contribute towards the property purchase. These days, the typical deposit is 20% of the purchase price, so if you are looking to purchase for $600,000, that equates to a deposit of $120,000. However, it is possible to buy a home with a deposit as low as 5%, but you are likely to then pay Lenders Mortgage Insurance (LMI) – more on this shortly.
If you’re able to contribute a larger deposit, you can then take out a smaller loan – with smaller repayments – and you will generally be able to negotiate a better interest rate, saving you money in the long run. A larger deposit also means you will have more equity within the property, which is important when it’s time to upgrade or potentially purchase an investment property, see our article on How to Buy an Investment Property.
However, if your deposit is less than 20%, you will generally have to pay LMI (as mentioned earlier). From a bank’s perspective – the entity lending you the funds – borrowers with a loan-to-value ratio (LVR) of more than 80%, are seem as riskier, than those borrowers with a LVR of under 80%. LMI will protect the lender in case you default on the loan – LMI does not protect the borrower. This cost can either be paid upon settlement through cash, or added to your loan. However, if you choose to add this cost to your loan, you’ll pay interest on that amount over the life of your loan.
While some borrowers will shy away from paying LMI, it’s important to consider that sometimes paying LMI, and getting into the market earlier, can be a winning scenario. Take for example, a property market that is moving quickly with positive price growth each month; similar to the current market. It may be in a borrower’s favour, to pay LMI and purchase a property sooner, rather than waiting to save for a 20% deposit (which could take 12+ months), and not paying LMI, but then having to pay a larger purchase price for an equivalent property.
Is a pre-approval the same as an unconditional approval?
When you are applying for a home loan you will hear the terms pre-approval and unconditional approval, and it’s important to note, they are not the same thing.
Having “pre-approval”, which is sometimes referred to as “conditional approval”, is an indication of how much a borrower can borrow from a bank, based on income, assets, liabilities, dependents, and living expenses.
Usually, the loan is dependent upon certain conditions, such as the selected target property, or a valuation of the property itself. Having pre-approval can also help you establish your budget. It’s important to remember, that even if you have pre-approval, a lender is not obliged to provide a loan to you – so always keep in regular contact with your lender or Mortgage Broker.
Unconditional approval occurs after contracts have been executed between the buyer and seller (i.e. the vendor). To receive unconditional approval, a buyer will need to complete a formal loan application with a lender and may need to provide additional information about a specific property, such as a valuation or proof of building insurance.
Once unconditional approval has been provided to the borrowers, loan offer documents are distributed for signatures and the loan application can progress to settlement. Now the excitement begins!
Always seek advice from a trusted professional.
Purchasing and investing in real estate is exciting and when done well, can significantly transform your life. Your local One Agency specialist, lives and breathes real estate in your area and has insights into exactly what is happening in your community.
Now is a great time to get started on your property journey, or continue climbing the property ladder, as interest rates are at an all-time low. Our agency is also seeing high-quality family-oriented supply begin to come onto the market, and this is set to continue as we progress through Spring and approach Summer.
To learn more about the benefits of real estate investing and what prices may do long-term, please contact us at One Agency. With One Agency being one of Mildura’s most trusted real estate agencies, we are well placed to provide you with our view of the current market based on our local experience. We’ll thoroughly guide you through the process and help you take advantage of this opportune time in the property market.