Buying your first slice of real estate is a big financial commitment. While it can be exciting, it can also be daunting for many. So, before you take the plunge, here are a few things to consider and prepare for.
The 5 things you want to consider before buying your first house
1. How big is your deposit?
As the saying goes, 'the bigger the better.'
When purchasing a property, the size of your deposit will impact your loan to value ratio (LVR) and whether or not you'll have to pay lender's mortgage insurance (LMI). Your LVR may also affect the interest rates you are offered by different lenders.
While you normally need a deposit of at least 5% of the value of the home, many banks and lenders will require significantly more. Lenders typically ask for a 20% deposit to achieve the most competitive interest rates. That's because a 20% deposit usually means borrowers will be exempt from having to pay LMI. A larger deposit (generally 20% or more), also:
- Gives you bargaining power to negotiate a better interest rate along with a wider choice of lenders to choose from.
- Means you could pay less interest. The less you have to borrow means your repayments will be smaller which means you pay less interest over the life of the loan.
Here is an example of what your monthly loan repayments would look like if you were to purchase an $800,000 property with three different deposits.
The calculations are based off of a 30-year loan term at an interest rate of 5.50% p.a.
- Loan amount - $720,000. Monthly repayments with a 10% deposit is $4,088.
- Loan amount - $640,000. Monthly repayments with a 20% deposit is $3,634.
- Loan amount - $560,000. Monthly repayments with a 30% deposit is $3,180.
If you don't have enough to meet the 20% deposit, there are government schemes available such as the First Home Owner Grant (FHOG) that you can apply for to increase your deposit.
However, saving up for a 20% deposit is no easy feat for a lot of people. As a first home buyer you will have to weigh up the benefits of saving for a 20% deposit versus getting into the market sooner with a smaller deposit. Be aware that stamp duty and other costs can eat away at your savings as well.
2. How much can you borrow?
Your income, expenses, credit score, and personal financial circumstance will determine how much you can borrow to buy your first home. It's important to do this in the early stages so you don't go looking for properties that may fall out of your comfortable budget. Use our borrowing calculator to find out a rough estimate.
It can also be beneficial to take rising interest rates into account. While you may be able to afford a 5% interest rate, you should consider the possibility that rates may rise further.
Ask yourself, "Could I still afford the mortgage repayments if rates did rise?
When lenders assess your loan application, they will factor in your ability to repay the loan at a higher interest rate. Lenders assess borrowers' ability to meet their loan repayments at an interest rate that is at least 3% above the loan product rate. This is called the serviceability buffer.
So, if the loan product was 5%, the lender will make sure home loan applicants can repay their mortgage if rates rise to 8%. Although the lender calculates this for you, it's also something you should think about.
Essentially, you want to give yourself some breathing room if rates do rise.
3. What is your credit score?
Your credit score and history can impact your ability to take out a home loan.
A credit score is a number that is calculated by one of Australia's credit reporting bureaus - Equifax, Experian, or illion - to represent your trustworthiness as a borrower. A credit score typically ranges from 0 to 1,000 or 1,200 and is used by lenders to determine your eligibility for certain credit products, as it gives them an indication as to your financial management skills.
Factors that can affect your credit score include:
- Repayment history
- Total amount owed
- Length of credit history
- Types of credit
- New credit
If you have a good credit score, you're more likely to have access to a variety of different lenders and lower interest rates. Whereas with a bad credit score, you'll likely pay a higher interest rate, have limited negotiation power, and even be limited in your borrowing power.
|Credit score range||illion||Equifax||Experian|
|Excellent||800 to 1,000||833 to 1,200||800 to 1,000|
|Very good||700 to 799||762 to 832||700 to 799|
|Average||500 to 699||622 to 675||625 to 699|
|Fair||300 to 499||510 to 621||550 to 624|
|Low||0 to 299||0 to 509||0 to 549|
That said, mortgages are less contingent on credit scores than other types of lending, such as personal loans. This is because mortgages are on the whole a pretty safe lending product in Australia with very low default rates. Home loans are also backed by a hefty security - the home - and borrowers are required to put down a deposit. Generally, lenders will grant competitive rates to borrowers with credit scores rated Average and higher.
4. Do you have any additional debt?
Are you still paying off a huge car loan? Do you have a big chunk of credit card debt? Do you have a buy now, pay later account with money owing? Or maybe a personal loan that still has four or five years left?
Any or all of these examples will reduce the amount of income you have to service a home loan, thus potentially affecting your borrowing capacity and ultimately, your chance of home loan approval.
While having a credit card may not be a bad thing, you should be aware of how having one can impact home loan approval. When it comes to credit cards, lenders will take your entire credit card limit rather than your outstanding balance into consideration when determining your borrowing power. So, if you have only spent $1,000 on your credit card, but the limit is $15,000, your borrowing power will likely be reduced by the $15,000 limit.
This is because the lender needs to make sure you can afford to service the loan even if the credit card is maxed out. Credit card usage can also impact your credit score.
5. Are you eligible for any government grants?
First-home buyers, no matter their age, can find financial assistance from state governments.
At the time of writing, every state and territory in Australia apart from the ACT offers some form of a First Home Owner Grant. You could add up to an additional $30,000 to your home loan deposit depending on the state in which you live.
There is also the Regional First Home Buyer Guarantee that allows up to 10,000 regional homes each year to be purchased by first home buyers with as little as a 5% deposit.
Further, to alleviate stamp duty costs, the different states and territories also offer stamp duty concessions to prospective new home buyers.
These government schemes could help you break into the property market just that little bit easier - it's worthwhile checking whether you're eligible.
Knowing when it's the right time to buy your first home really comes down to if you're ready to dive into a big financial commitment. If you've read this article and are confident you're ready to buy your first home, then read our article on how to apply for a home loan.
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