Affording your first home
Affording a property is the first barrier many would-be first home buyers will come up against. Saving for a deposit is an important first step, but you should also keep in mind your borrowing limits and any fees that might crop up during the process.
Aim to have saved around 20% of the value of the home you want to buy. Your deposit can be as little as 5%, but there are lots of benefits to having more cash at the outset like better interest rates and lower loan payments each month.
If your deposit is less than 20%, you’ll need to pay Lender’s Mortgage Insurance (LMI), which is a one-off cost to protect the lender if anything goes wrong later down the line, which could be thousands of dollars. Plus, you may need to find a guarantor where a parent or family member promises to pay your mortgage if you default on a payment.
Before you start looking at the cost of homes, research your borrowing capacity. Speak to a financial advisor about borrowing options available to you. Remember that a bank will often tell you your maximum borrowing capacity. But by speaking to a financial advisor, you will discover how much you should borrow, not simply how much you could borrow.
Over-borrowing is a common mistake among first time buyers. Be sure to future-proof your purchase against unforeseen events such as interest rate rises or if your circumstances change.
There are some different kinds of home loans you should become familiar with:
Variable: interest rates will rise and fall with market changes
Fixed: interest rates are agreed at the outset and won’t change
Capped: rates can fall but cannot rise above a fixed cap
Split: interest is fixed on part of the loan but variable on the other
Fixed period: interest rates are agreed for a set period, e.g. 2 years, 5 years and then change to variable
Stamp duty is a tax that you need to pay to the state government when you buy a property. The total cost depends on the purchase price and differs in each state but it can be a significant cost – in many cases tens of thousands of dollars.
The good news is, you may be entitled to a stamp duty discount or exemption depending on where you live and the property you buy. Different states also have different rules and due dates for when you must pay, so speak to an expert to find out exactly how much you’ll be expected to pay and when it’s due.
First home buyers across Australia can benefit from offers and grants from the government to support them buying their first home. The First Home Owner Grant, or FHOG, is a national scheme funded by states and territories to support first home buyers to get on the property ladder. Each state has slightly different eligibility criteria and available funding, so ensure you research the First Home Owners Grant in your area.