How much should I save? How much should I earn? When do I see a mortgage broker? What are the upfront costs?
Buying your first home can be both an exciting and stressful process. On the one hand, you are ecstatic about the idea of having a property of your own.
Then there’s that other side: figuring out if you’re ready for it. Trying to determine when you will be ready. The paperwork..
Luckily, you happened to have stumbled upon this article. We’ll be breaking down what you should prepare to purchase your first home, as well as what to expect, covering some common questions we have observed from our clients over at Next Step Mortgage Broking (hyperlink).
Note that everyone’s home buying experience is different, and that these steps might not be in the exact sequence that suits your journey. This article is instead intended to be a general guide about what to expect when buying your first home.. Let’s get into it.
1. Familiarise yourself with what’s involved
It’s common to begin a home buying journey by thinking about saving up. You might have thoughts such as “I’ll start thinking about buying a home only when I feel I’ve saved enough money”. While this is a great starting point, don’t be tempted to make this your only focus until you feel ready to purchase a home.
Instead, do some research and learn about the process. This doesn’t have to be extensive, but just enough to wrap your head around what to expect. For example, asking friends or family members about their experiences, or familiarising yourself with relevant terminology via internet searches. You might surprise yourself and change your perspective about when you could be ready.
To take things further, many future buyers decide to see a mortgage broker (which is typically free).
2. See a mortgage broker
Mortgage brokers have one main job: they compare different home loan options and suggest which could be best for you. By contrast, some people go directly to a bank to get a home loan. However, this only exposes you to a single set of loan options (the bank’s), rather than comparing different lender options for the best deal.
Additionally, mortgage brokers guide you through the home buying process and help you get the approvals you need.
Technically, it’s never really too early to see a mortgage broker to get a sense of what options you have. This is especially useful during certain circumstances, such as when rates are low.
At Next Step Mortgage Broking (hyperlink), we aim to simplify the process as much as possible, every step of the way.
3. Clarifying your goals
Getting clarity about your goals can make the rest of the home buying process significantly easier. It can also help your mortgage broker determine the best solutions for your situation. Let’s get into some considerations.
Property location
Think about why you want to live in specific areas. Are you looking to move closer to work? Family? The kids’ school? Do you simply just like certain areas? And, most importantly, what are all the areas you would consider living in, versus the ones you would categorically exclude?
Size
Think about how large or small you’d like your property to be. How much space is necessary, and would you be prepared to spend extra on a larger home if having one is your goal?
Budget
Seeing a mortgage broker can help you determine your borrowing capacity. You might not want to buy a home up to this amount, as setting aside extra money can help you pay for other expenses associated with the process. Perhaps, you want renovations or furniture. Or, maybe you would like to spend a lot of your borrowing capacity on the property itself, if that’s what aligns with your goals.
Note that lenders can give you a pre-approval, which gives you an idea of how much you can borrow and helps you determine your budget. It also signals to sellers that you are serious. However, keep in mind it is not a final loan. Final or unconditional approval is granted after you select a property.
Defining priorities and barriers
It’s important to define your objectives in a way that is desirable but still realistic. Try to create a priority list defining what is most important to you. For example, listing all of your locations of consideration from most to least desirable. Additionally, it helps to outline the barriers involved with obtaining your desired property, for example property prices.
4. Saving and finances
After seeing a mortgage broker, you will often gain clarity on your borrowing capacity, as well as what needs to change in order to increase it.
Upfront costs
Upfront costs to buy a home can set you back in the hundreds of thousands depending on your desired property.
Let’s use the following example: you are a first home buyer in Victoria, buying alone, wanting to purchase your first home valued at $600,000. Here are some upfront costs you can expect:
- Deposit. No Lenders Mortgage Insurance required if at least 20%. For a 600,000 home, a 20% deposit is $120,000.
- Conveyancing. Select Legal offers a $990 deal, plus $99 GST and an estimated few hundred dollars for disbursements (e.g. certificates, registration fees, title searches). Let’s say disbursements are $500 for this example.
- Property inspections. This does vary based on the property size, and often involves both building and pest inspections. For this example, let’s just go with an estimate of $500, assuming a pretty average home for our example price.
- Stamp duty. Stamp duty is a property tax imposed on property purchases and varies by state. Luckily for you as a first home buyer, you can face significant reductions or exemptions for stamp duty. For example, in Victoria, if you buy a house valued at $600,000 or under, you are exempt from paying stamp duty. For the purpose of this example, let’s leave the cost at $0.
- Lenders mortgage insurance (LMI). Usually required if your deposit is less than 20%. Can be avoided through some government schemes or guarantors. The higher the deposit, the less LMI costs. LMI is usually 1-5% of total loan amount. It is optionally paid upfront, otherwise it’s added to the home loan with interest. We’ll exclude this from our example, since we’re assuming a 20% deposit.
Total upfront cost example: $120,000 + $990 + $99 + $500 + $500 = $122,089.
Keep in mind these are just estimates to give you an idea, but costs can hugely vary depending on various factors.
What do lenders look at?
Lenders are all about providing services that align with their level of risk.
Some factors that decrease likelihood of approvals include:
- Having high debts.
- Too low a deposit. You should aim to have at least 10-20%.
- Low credit score. Generally credit scores under 650 are considered risky by lenders.
- Employment status. If your income seems inconsistent or you frequently change jobs.
You can still get loans approved if your situation isn’t perfect, however these loan options may be limited and terms might be less favourable.
Some factors that increase likelihood of approvals:
- Stable employment.
- Larger deposits (especially above 20% of the property’s value).
- Having a guarantor (someone who formally takes responsibility if you can’t or don’t repay your loan).
- Joint applicants with a stable financial history (bonus that you can increase borrowing capacity).
Can the government help me purchase a house?
Australia has several government schemes are in place to help buyers secure a home. For example, the First Home Guarantee can allow you to pay a 5% deposit with no LMI.
Your mortgage broker (hyperlink) can inform you about whether any are suitable for you, and the likelihood you can get involved. Keep in mind there are conditions to these schemes, and spots are limited.
Some schemes include:
- First Home Guarantee (currently 35,0000 places annually)
- Family Home Guarantee (currently 5,000 places annually)
- Regional First Home Buyer Guarantee (currently 10,000 places annually)
5. Proceed with the buying process
We won’t get further into the process beyond what we’ve mentioned, as this article is primarily focused on how to prepare during the beginning stages of your home buying journey, rather than the entire process. For further information about the later step of conveyancing, Select Legal has written an article here (hyperlink).
We hope this article has been helpful as a starting point to your purchasing journey.
Warm regards,
Nest Step Mortgage Broking.