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 entire 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 explained). 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. In last week’s edition, we focused on finance – specifically borrowing, deposits, and pre-approval (see First Time Home Buyers – Guide To Buying Your First Home Part 1).
This week we’ll provide a summary of home loans and delve into how to find the right property. Again, it’s important to remember 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.
What home loan is best for our situation: interest-only, principal and interest, fixed rate, or variable rate?
When considering the many home loan products in the market, there are two important terms you will need to understand – principal and interest. Principal is the total amount of money you borrow from a lender, and interest is the price you pay to the lender to borrow that money.
Almost all home loan products will work on a “principal plus interest” basis which means, over the entire term (i.e. duration) of the loan, you repay principal as well as the interest charged on the outstanding loan balance. Let’s take a look at some of the specifics.
Variable rate loans
The interest rate on a variable loan will move in line with market interest rates as controlled by the Reserve Bank of Australia (RBA). Currently, interest rates are at historical lows, which is fuelling the property market. Should interest rates change, your loan repayments will change too. Within your household budget, it’s prudent to allow for possible future rate rises.
Fixed rate loans
Unlike a variable rate loan, a fixed rate loan locks you into a specific interest rate for a set period of time – this could be one to five years. During this time, your repayments are consistent and will remain the same each month, regardless of how the market rate moves. However, interest rate movements are sometimes hard to predict and a fixed rate could work against you, if the market interest rate suddenly drops. There are also expensive break costs if you have to opt-out of a fixed rate, such as when you sell your home suddenly, and pay out your home loan.
Split rate loans
A split rate loan divides your loan into both a fixed and variable rate portion – you decide how much of your overall loan amount gets divided into each portion – and this can be the best of both worlds.
This allows you to enjoy the predictability of repayments on the fixed rate portion, while being able to enjoy the savings of possible future rate decreases on the variable portion.
Interest-only
This is a loan type where, for a set period of time (one to several years), your loan payments comprise only of interest payments. During an interest-only period, you will not repay any of the principal amount. Many property investors prefer interest-rate home loans, from a cash flow and tax deductibility perspective.
The overall repayments with an interest-only loan will be lower each month, however keep in mind that you will not be repaying any of the principal during this time. Once the interest-only period expires, the home loan will automatically revert to principal and interest.
Important home loan features
While you may think the interest rate is the most important element in a home loan, it is in fact the loan features that may help you pay off your loan faster. Some home loan features popular with first home buyers are:
- Fee-free extra repayments – This home loan feature allows you to make extra repayments off your loan (at no extra charge). Even paying $10 a week extra off your loan will mean big savings in the long term.
- Mortgage offset account – This home loan feature allows the balance of your savings to be deducted from the loan principal when interest is calculated, resulting in you paying less interest each month. More of each repayment will go towards reducing the principal loan balance, allowing you to pay off your loan faster.
How do we search for and find the right property?
As we’ve highlighted, the first property you buy will be the most important. It will form the foundation for your property journey, and can help you get into your second property sooner.
Buying a property is an emotionally charged journey. It is important to have clarity on why you’re buying, and what type of property you ideally want to live in.
Think clearly about your ‘must-have’ requirements – do you need 2, 3 or 4 bedrooms, how many bathrooms do you need, how many parking spots do you require? Next, think through the features that are nice-to-have, such as a north-facing aspect, an en-suite, or a large kitchen, garage or backyard. Also consider, what land size do you really require, how many living zones do you need, and are you looking for a “ready-to-move-in” property, or are you prepared to do some work to the home yourself?
Think about the lifestyle you want to live too, and what potential suburbs can provide that lifestyle. Are you looking for a more vibrant ‘village-feel’, or a calmer ‘family-friendly’ environment?
Make a list of everything you want in a property and its location – schools, parks, transport, amenities, shopping, recreation facilities etc. That way, as you view and inspect properties, you can remain objective about which one or two, best suits your needs. According to www.domain.com.au as more supply comes onto the market, it’s critical to determine which few properties you will actively target.
Then start to search online (if you haven’t started to do so already!). Select your “must-have” requirements, your chosen suburbs, and your purchase price guide into the search parameters to browse suitable properties. Create an account and sign into the major search platforms, such as www.realestate.com.au and www.domain.com.au, and set alerts so you’ll be notified when new properties are listed that match your requirements.
You may also like to call local agents to enquiry about any ‘off-market’ listings. Then, create a shortlist of properties that tick your boxes so you can start inspecting. Try to understand the key metrics in these suburbs, including median sales prices, rental yields, auction clearance rates, days on market and vacancy rates. Then, speak with local real estate agents in those suburbs to get an understanding of what the market is doing in the suburb, and surrounding suburbs.
Remember to look for things such as:
- Local primary and secondary schools, and specifically where the school zones are.
- Transport options and freeway access.
- Access to local amenities and facilities such as cafes, shops and parks.
Try visit the suburb at different times of the week, to get a good sense of how quiet or lively it is. By taking your time and doing the necessary groundwork and research, you’ll be less likely to overpay for a property.
When you’ve found a house (or houses), you’re genuinely interested in, it’s time to attend some open home inspections. Get a copy of the sale contract and have it reviewed by a licensed conveyancer or solicitor as soon as possible. Also ensure you have a building and pest inspection completed and check all appliances too.
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 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.
