So you’ve scrimped and saved, whipped your investment portfolio into shape and now you’ve finally saved up a decent-sized home deposit. That’s the hard bit done, right? Well, not exactly.
Don’t get us wrong, saving up a home deposit is no small feat – but when it comes to the process of buying your first home, it’s just the tip of the iceberg. Now it’s time to think about all the other things you should know when making your first property purchase.
We’ve asked Steve Jovcevski, property and home loan expert at comparison site mozo.com.au to share some of his top Dos and Don’ts when it comes to taking your first step on the property ladder.
Consider the home loan features that suit you
Once you have a home deposit, the next step in your finances is to go shopping for a mortgage. There are a heap of different home loans out there, and they all offer a slightly different set of features, so knowing what you want can really help narrow your search down and find the right one. Things like having an offset account or being able to make fee-free extra repayments will help you cut down on the interest you pay, but the more features a loan includes, generally the higher the rate or fees. The key is picking out an option that includes features you will use, but isn’t packed full of extras you don’t need.
Get pre-approval on your home loan
As a first-time home buyer, you might make the mistake of talking to your bank and assuming it’s a done deal when you’re told you can borrow a certain amount. But until it’s formalised in writing, nothing is set in stone and the last thing you want is to agree to buy a house, only to find your mortgage application is then rejected.
Going through the application process and securing official pre-approval means you can head off to a house sale confident that as long as the inspection and valuation don’t turn up any problems, you’ll likely have the funds to backup a purchase. Keep in mind that you still have to get the property valued before you’re fully approved, which I’ve covered in more detail below.
Do your due diligence
Covering all your bases before you commit to buying a home is very important. This means having all the necessary inspections of the property done, getting a solicitor to look over the contract, and talking to your bank about financing options. These things might cost you a bit upfront, but could save you from any nasty – and expensive – surprises down the track.
It’s also important to be upfront with your lender about anything that comes up during this process – if the house inspection turns up a problem that you think you can fix or live with, keep your lender in the loop about that, because it could affect the amount they’re willing to let you borrow.
Have your deposit ready at the sale
One thing to be prepared for and that many first-time buyers often don’t realise, is that when you go buy a home, whether it’s at auction or private treaty, you’ll usually need to have at least a 10% deposit available when you sign the sale contract. If you were planning to borrow with a Loan to Value Ratio (LVR) of 95%, and so only saved a deposit of 5%, this can be a bit of a problem.
To get around this, you have the option of securing a deposit bond, but you’ll need to show borrowing approval from your bank.
Assume the price guide is set in stone
Unfortunately, when real estate agents set a guide for what they think properties will sell for, they’re often wrong. Personally, I’ve seen houses sell for $1.15 million when the price guide predicted $900,000. As you can imagine, many first-time home buyers went home disappointed that day. Instead of taking these guides at face value, it’s well worth doing your own research into property values in the area and local market trends to see whether the property and area you’re looking at fits your budget.
Borrow more than you can handle
You’ve done the hard work of saving for a home loan deposit – the next thing to remember is not to overextend yourself and work out what you can reasonably afford to borrow on your home loan. One important thing to keep in mind, other than meeting repayments, is your Loan to Value Ratio (LVR). Your aim should be to borrow no more than 80% of the property’s value.
So for example, if you’ve saved up a home deposit of $100,000, you can borrow $400,000 in order to buy a $500,000 property without going over an 80% LVR. This is ideal, since it means you won’t pay Lender’s Mortgage Insurance and you may snag a lower rate than if you’d had to borrow with, say, a 90% LVR.
Forget to think long term
Keep in mind that you’ll probably be paying off a mortgage for the next 25-30 years of your life and you need to be reasonably certain that you’ll be financially secure during that time. One thing many couples forget to think about is that if they’re planning on having a family, there may be a number of years where one parent stays home with the kids and the family is living on one income.
Ask yourself if you’re still going to be able to make repayments if and when something like that happens. If the answer is no, you may have to adjust your estimate of how much you can borrow, or set up another ongoing source of income to bolster your finances.
Head straight out to auction
Buying at auction is something of a controlled risk – you agree to the sale before you’re fully approved for a loan and you generally don’t get a grace period to pull out of the sale if your bank decides not to lend to you. It’s also easy to wind up going over your budget when you’re swept up in bidding at an auction.
So it’s not always the best idea to head straight to an auction for your first ever property purchase. Instead, you may want to look around for private sale opportunities, which come with the benefit of a slower pace, including a three-day pull out period after a sale which allows your bank to inspect the property and approve your finances.