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First Home Buyers

First Home Buyers: Before launching head-first into buying your first home, you should be sure that home ownership is actually something that you want. 

While owning your own home brings plenty of joy and satisfaction, there are some down-sides to getting rid of the landlord.

Here are some questions you should consider before taking the plunge:

• Are you planning to 'stay put' for at least the next seven years?

• Is your job (or your partner's job) likely to require travel or relocation within the foreseeable future?

• Can you afford the home that you really want, or will you have to settle for something second-best?

• Are you able to service a mortgage, as well as all of the other costs associated with owning a home (rates, insurance etc)?

• Are you able to save an adequate deposit, and then some?

• Are you planning to start a family in the near future, and if so, are you prepared to buy a home suitable for a child's needs now?

Those questions you should ask yourself revolve around your future direction as well as the issue of paying for your home. Don't brush over these questions in the rush to move from tenant to owner-occupier - many a young couple has come unstuck when employment promotions have required relocation and the abandonment of a newly purchased home!

If you decide to go ahead with buying your own home, you have lots of good things to look forward to:

YOU WILL SLOWLY BUILD EQUITY IN YOUR HOME INSTEAD OF THROWING MONEY AWAY WEEK AFTER WEEK.

When you make a payment on your mortgage, part of that payment is applied to the monthly interest on the principal amount borrowed. The remaining portion of your payment reduces the principal balance owing. Each month you own a little bit more of your home, effectively building your personal savings through the equity you gain in your home.

YOUR HOME WILL BECOME AN IMPORTANT PART OF YOUR RETIREMENT PLAN

Building a strong asset base is the core of any worthwhile retirement plan. Your home will be a major part of this core.

APPRECIATION IN YOUR HOME'S VALUE ADDS UP TO MORE EQUITY

As your home's value increases, and your mortgage debt decreases, you are widening the belt of equity that you have in the home. If you sell the home, the returns will comprise any payments you have made off the principal loan amount, as well as any increase in value of the property.

OWNING YOUR OWN HOME PROVIDES YOU WITH A SENSE OF PRIDE AND SATISFACTION.

When you own your own home, you are free to make the home a statement of your personality and lifestyle. You can enjoy increased living space and privacy as well as the freedom to enjoy your home as you choose.

OWNING YOUR OWN HOME PROVIDES YOU WITH STABILITY AND PERMANENCY

At last, you will call the shots deciding how long you'll stay!

The downside of leaving tenancy status includes:

• You will have more financial responsibilities as a home owner, to pay rates, insurances, and maintenance of the home and property;

• You will also be responsible for the upkeep of the property and grounds in a reasonable condition according to Council regulations;

• You won't be able to complain when something breaks down. You'll have to fix things yourself;

• You will lose the flexibility of relocating when it suits you. Finding yourself stuck in the same location, at least for some reasonable length of time or until you can sell the home, can be a problem if things aren't working out!;

• You can't easily 'downsize' the cost of your housing if your finances take a turn for the worse. Unless you can renegotiate your mortgage terms, you are stuck with a payment plan that may be beyond your budget.

STILL INTERESTED?

Then it's time to move on and take a look at what you need to do first. Contrary to what you might think, the first step is NOT TO GO HOUSEHUNTING! 

Unless you're sitting on a goldmine, you'll need to do some research on borrowing enough money to finance the purchase of your home. This includes finding out whether you will qualify. This is a good time to do the preparatory paperwork – get your house in order by making sure all your 'financials' are up to date.

You'll probably have a reasonable idea already of what type of package your dream home comes in, as well as the price tag attached. Begin a cautious investigation into locations, styles and prices, but make sure that no party to the purchase becomes attached to any particular property at this stage!

While you're gaining an estimation of the price bracket you'll be interested in, you should also take a look at your savings, your savings patterns, and whether you will qualify for a loan. Take a look at these tips for saving a deposit. Remember that the accumulation of an adequate deposit is really STEP ONE.

PLEASE LEAVE A DEPOSIT

Most people are aware that they'll need to have a deposit saved before buying a home. 

Some people are surprised to find, however, that how the deposit was saved is almost as important as how much has been saved. If you're thinking about buying a home in the near future, say twelve months' time, take note of the following tips if you want to make sure that it's all plain sailing on the day:

• Make sure you have plenty of cash in your account. Sounds like commonsense, but you'll be surprised at how a deposit, closing costs, insurances, removalists and so on can deplete your reserves so quickly;

• Make sure you have a good history of regular saving. Lump sums appearing in your account the day before you lodge your loan application are not viewed by a Lender as favourably as accumulated savings over a long period of time;

• If you know that a relative is planning to 'help out' financially when you buy your home, broach the subject well in advance. Make sure that any deposits (gifts) are made long before mortgage contracts are discussed, and that your regular pattern of saving continues;

• Pay off 'scattered' debts - smaller credit cards, store accounts and the like. Consolidate any loans that you might have and work at paying the debt off faster; and

• Get hold of your Credit Report from the CRAA (the Credit Reference Association of Australia). You may be charged a small fee for the report, but if your credit rating is good, this document will be worth its weight in gold. If your credit report shows some minor indiscretions, work at cleaning it up long before you apply for a loan.

Once you have stashed away what you consider to be an adequate deposit, you're ready to think about approaching a Lending institution. Ideally, your deposit should be around 20% of the purchase price of the home you intend to buy. Thankfully, some Lenders will accept a lesser amount. Realistically, 20% of a home valued at $240,000 is $48,000! No small change.

If you feel that a 20% deposit is likely to stretch the friendship (and the budget), you should talk to as many Financial Lending Institutions as you can. Try to find one that will accept a deposit that is closer to your mark. Some Lenders will allow borrowings of up to 95%, leaving you to shell out a meagre 5% deposit ($7,000 on a $140,000 home) but almost certainly, these types of loans will attract conditions such as the mandatory establishment of Mortgage Insurance.

Mortgage Insurance is a once only payment made to a mortgage insurer when the loan is taken out, protecting the Lender if you are unable to repay the loan. This can be expensive and (if you borrow extra to pay this premium) adds to the monthly mortgage repayment amount.

Be aware also that while a smaller deposit makes buying a home more attainable, it also means larger borrowings, increased monthly payments, added interest . . .

Give serious consideration to borrowing anything more than 90% of the price of the home - you may be better off saving for a larger deposit in order to lessen the burden further down the track.

Some offer 100% financing on new homes, but there may be added conditions applied to these loans. This type of financing definitely fills a market for people with stable, upper-end incomes but little savings, and could mean the difference between someone realising their dream or not.

Some people opt for a second mortgage to fill the gap between the deposit they've saved and the deposit required.

Again, this type of strategy is effective and can get you into your new home sooner, but be warned: you will have not one, but two mortgages to contend with.

You should not consider this type of arrangement unless you have a stable income that will adequately cover the combined repayments.

Bottom line: don't discount any possibility when it comes to financing the purchase of your home. If you give yourself a thorough awareness by doing plenty of homework first, you've won the first battle (but not the war!).

While you're seeking a Lender who fits in with your level of savings, you'll probably be 'pre-qualifying' for a loan. This is where a Lender gives a preliminary assessment of the likelihood of the acceptance of your loan application, based on details that you provide to the Lender about your income, savings and so on.

When making enquiries it helps to take along a statement from your employer(s) confirming your employment and salary, bank statements indicating your saving history, a list of your assets (motor vehicles, furniture etc) as well as a list of your liabilities. The Lender should give you an idea of the amount of any loan that is likely to be extended, the interest rate that the loan will attract (this figure is subject to change), the term of the loan, and finally, the monthly repayment required.

The amount of the proposed loan is generally based on the repayments (payable under the terms applied to the loan) being around (no more than) one-third of your take home pay. If you can manage that comfortably with your existing level of income, debt and expense, the Lender should be willing to talk further.

If the calculated repayments are over one-third of your take-home pay, or if you have a high, existing level of debt that eats into your disposable income, you'll probably need a larger deposit in order to decrease the amount of the borrowings.

The preliminary assessment that a Lender provides will allow you to 'narrow the field' when selecting a home and its price.

For example, if several Lending institutions concur that the likely borrowings extended to you (based on the information you have supplied) would be $120,000, you have narrowed the choice of properties to that amount. PLUS the amount of your deposit. MINUS any establishment or closing costs involved in securing the loan and the property.

Those costs can include:

• A fee for valuation of the property;

• Mortgage insurance;

• An application fee, which is based on a percentage of the loan amount;

• Solicitor’s fees; and

• Lodgement and stamp duty fees on the mortgage.

A good piece of advice?

Don't blindly accept ANYONE'S assessment of your ability to service a loan. After you receive information from a Lender about the repayment amount under a proposed mortgage contract, CHECK THE SUMS YOURSELF! 

If you are unsure about your ability to pay, put the purchase of a home 'on hold' until you are able to save a greater deposit, or until you feel sure that you can capably service the loan.

While Lenders take every care in assessing a borrower's capacity to service a loan (why would they do otherwise?), no-one knows the personal limitations of the borrower better than the borrower him/herself! It may just be the case that repayments do not exceed one-third of the borrower's take-home pay, however the borrower is not comfortable with a greatly reduced or non-existent 'buffer' in their budget. This is particularly true if the borrower is accustomed to a certain level of lifestyle and is unwilling to compromise on that level.

Consider also your continuing ability to pay. Is there some lack of permanency in your employment? Is your partner likely to cease work for any reason in the future (perhaps the birth of a child)?

While you're talking to people involved in Banking and Finance, you'll be subjected to a barrage of industry jargon and terminology specific to different types of loans. 

No point taking their word for it, let's take a look at a few of the more common types of loans now. Next ...