Buying your first property can be a whole new world of strange lingo, stress and confusion.
But it doesn’t have to be! To help you get up to speed with the financial aspects of buying property, we have asked our brokers what are the most common questions first home buyers ask AND what their answers are to put you one step ahead.
How much can I borrow?
Unsurprisingly, the most common question that first time buyers ask is how much they can borrow.
There is no one size fits all when it comes to how much you can borrow (also called your borrowing capacity), so it’s smart to speak with an expert who can crunch all the numbers with you.
Mortgage broker Gary Allen from Aussie Morley in WA says how much someone can borrow will ultimately come down to how much they can comfortably afford to repay.
“Lenders will assess your income and outgoings. Even though interest rates are at record lows, borrowers need to show that they can afford home loan repayments at least 2 per cent higher than today in case rates were to increase in the future. Your broker will sit down with you and calculate all these numbers to work out what you can comfortably afford to borrow,” Gary explained.
But there may also be some ways to increase your borrowing power. “If you can reduce your expenses, you can improve your borrowing power. Some examples of how this can be done include creating and sticking to a budget, and looking for ways to save by shopping around for cheaper car/health/life insurance, reducing your credit card limit/s, paying off personal loans or other debts, taking packed lunches to work, and using public transport. These are the same tips I’d give someone trying to save up a larger deposit,” Gary said.
How much deposit do I need?
Just like borrowing capacity, the required deposit will vary depending on a number of factors including the purchase price and the borrowers’ circumstances, says Glenn English from Aussie Carnegie.
Gary agrees. “Generally speaking, a 20 per cent deposit plus your costs of purchasing the property may be enough to avoid Lenders Mortgage Insurance (LMI), although there could be ways to avoid LMI with a 10 per cent deposit for some borrowers like Doctors, Engineers and Accountants).
If you’re planning to live in the property yourself and become what’s called an ‘owner occupier’, there may be other options, says Gary.
“If you don’t mind paying LMI, 5-10 per cent of the purchase price may be acceptable to some lenders depending on the type of home being purchased. Alternatively, if your parents are able to act as guarantors, you mightn’t need any deposit at all,” Gary explained.
What is Lender’s Mortgage Insurance?
Understanding the lingo of buying and financing a property can help make the process less stressful, and LMI is just one of the many acronyms that you’ll become intimately familiar with during the course of buying your first home.
Glenn explains “Going back 50 years ago, if you didn’t have a 20 per cent deposit the banks wouldn’t lend you the money to purchase a home. However, the banks saw the worth in the fact that you’re able to make the repayments on the home loan, so the decision was made to introduce Lender’s Mortgage Insurance (LMI).
“Let’s say that you purchase your home for $400,000 and the lender gives you a loan for $380,000. 12 months later, your home is only worth $360,000, you can’t afford to make the repayments and your home has to be sold. The lender is able to recoup the $20,000 loss from the mortgage insurer. So even though you pay the insurance, the insurance protects the lender,” Glenn explained.
There are ways to protect yourself if you can’t make your repayments, and a good mortgage broker should talk to you about your options as part of the process.
What are the costs involved in buying a home?
Understanding all the costs involved in buying a property upfront is important, and it seems most first home buyers are clued in to ask this question early on when meeting with a broker.
Renee Taggart from Aussie Morayfield says “We show our customers and help educate them about all of the fees and costs that are involved in a purchase and how much at a minimum they would need to contribute.
“Costs of purchasing a property vary by state/territory and also by service provider, so it’s good to get a few quotes before agreeing to go with the first conveyancer or insurance provider you stumble across,” Renee explained.
Costs of buying a property may include:
- Stamp duty
- Legal / conveyancing fees
- Mortgage or loan application fees
- Pest and building inspection reports or a Strata search (for apartments)
- Utility connections
Your broker can help you work out what costs will apply to you based on where you live, the type of property you’re buying and other factors, like the type of home loan you want and the size of your deposit.
While this can all seem quite daunting, Gary says it doesn’t have to be!
“While it may sound hard or if you’re worried that you don’t quite have the cash ready to go, there just may be a solution that your broker can work out with you to get you into your new home sooner, so it’s never too early to meet with a broker. Getting the information you need that suits your individual circumstances as early as possible is the way to go! Sometimes we work with people for months until they get themselves ready, and that’s all part of the process,” explained Gary.
Do you have another question you’d love an answer for? Ask us in the comments below.