Buying your first home.

Hi, I’m Bron Lawson from Westpac’s Davidson Institute here to talk to you about “Buying your first home’. If you are watching this video, I’m assuming that you are thinking about, or are already in the process of, buying your first home. If so, congratulations! This is an exciting time but can also be a daunting one for many people. There is so much information to take in and so many decisions to make about what is potentially one of the biggest purchases you will make in your lifetime.

Our video aims to take some of the mystery out of the process and highlight some of the important things to be aware of.

Buying your first home is a big step and for many people the first question is simply “Where do I start?” This is often quickly followed by “How much deposit do I need?” Then comes the challenge of Applying for a home loan. So, where do I start? Buying a home is a long-term proposition so it’s a good idea to take your time to think through very clearly what it is that you want, and to get to know what’s available in the market.

So, start with your own personal goals. Are you a career-oriented person who is likely to spend a good chunk of your own time either studying or working, rather than cleaning a large house? Or are you a homemaker who loves to create a warm living space where the family can grow? Or are you an adventurer who would rather spend their time and money on travel rather than bricks and mortar?

Your goals, of course, are very closely related to the lifestyle you want to enjoy. So, make sure you’re very clear in your own mind what you want out of the property.

For some the location will be dictated by where they work, family commitments, or even financial capacity. Others may have more freedom to choose. When selecting the location though think about not only the current situation but how things will change in the future. This includes thinking about what facilities the location offers, how that may change over time, and whether that is going to suit the future you have planned.

The type of property you want comes into these considerations too. From studio apartments to double storey mansions … there are so many choices. But what is going to suit you, your personal goals, the lifestyle you want to have, and your financial capacity? The next step then is to do your research. There are lots of ways to do this.

Property reports are a great tool. From general information about the state’s property outlook to detailed information on particular properties they are available from a number of sources, including your Home Finance Manager. Online is a great place to do your research too. Real estate websites such as realestate.com.au or domain.com.au not only provide you with information on properties on the market but you can also compare recent sales in the area and price trends over recent years.

The process of purchasing a house can be quite complex. Therefore, it makes sense to engage professionals who can help you with the purchasing process. There are 3 key professionals who can help you on your home ownership journey. Real estate agents or buyers’ advocates can be a useful source of information, as they know the local market and property values. A word of caution for you as the buyer, however.

Unless you are using a buyer’s agent, remember that the real estate agent works for the vendor and will try to get the best deal for them – not necessarily for you as the buyer.

While you can get a “do-it-yourself” conveyancing kit, it is safer to engage a solicitor or conveyancer for the legal side of the purchase. The conveyancing process can be very technical and requires diligent attention to detail. Those less familiar with the process may overlook things which could be costly in the long run.

Getting your finances right is another important part of the process. You can talk to your bank to get help with financing the purchase, or you may decide to use a mortgage broker. Your financier and legal representative will also prepare the documentation to finance the purchase, complete the settlement of the property, and have the property transferred into your name.

There are a couple of different ways you can purchase a property. Traditionally it’s been by private sale or private treaty as it’s also known, however auctions are becoming more commonplace now too. Whether the sale is via auction or private sale will depend on which method the vendor believes will achieve the best price for them.

The first step in a property purchase is to obtain a finance pre-approval. That way you’ll have peace of mind that when you identify a property you should be able to make a confident offer within the parameters of that approval. A private sale generally involves the vendor listing the property with an agent, who will advertise the property to attract buyers.

Depending on current market conditions, the price expectations of the vendor and the effectiveness of the marketing, a private sale can sometimes take months to complete.

The buying process, once you have identified a property to purchase, involves you making an offer via the agent who will negotiate the contract between the vendor and you, the purchaser. Aside from negotiating on price, other contract conditions that can be negotiated include things such as the required deposit, the property being subject to building and pest inspections, finance approval dates, and settlement dates.

It’s recommended that as a minimum you negotiate the contract to be conditional upon building and pest inspections, and also finance approval.

Once you have signed the contract and paid your deposit it’s important to arrange home insurance as soon as you can. As soon as that contract is signed, and you have paid your deposit, you have a financial risk should something happen to the property. Then organise your building and pest inspections and finalise your finance approval. Once these conditions have been met the contract is referred to as being unconditional.

Engage a solicitor or conveyancer to complete all the property searches and prepare the documentation for the transfer of the property into your name. Your bank and legal representative will then arrange ‘settlement’ with the vendors representatives. It’s important to ensure in the lead up to settlement that you have money available to pay your upfront costs as well as any balance of deposit.

The benefit of a private sale to you as the buyer, is that you have more time to consider the deal that is on the table and have none of the immediate pressures involved in an auction. Another benefit is that there is often a cooling off period so if you change your mind you can withdraw from the contract without penalty within that period. The auction process on the other hand, while similar, has a couple of notable differences.

An auction can be viewed as a bidding competition where people interested in the property bid for the right to buy it. Properties being auctioned typically have a ‘reserve price’ set, which is the minimum amount that the vendor will sell the property for. Once this price is reached, the auctioneer then pronounces the property ‘on the market’ and bidding begins in earnest because at this point the vendor now must sell to the highest bidder.

If the reserve price is not met, then the property is ‘passed in’ as no bidder was successful. The vendor and agent then need to reconsider their strategy to sell the property. Often auctions are held at the property being sold and can be over very quickly – sometimes in as little as 10-15 minutes - meaning there are no long drawn out negotiations. While this is considered to be a buyer advantage, there are also disadvantages of bidding at auction.

For example, it’s easy to get caught up in the emotion of the auction and then outbid your own budget. Also, there is no cooling off period – if you are the winning bid, you must follow through with the purchase.

That’s why it’s recommended that you obtain finance pre-approval prior to identifying the property and bidding at auction. Once you have identified a property you are keen to bid on its also good practice to undertake some research prior to the auction including obtaining a copy of the proposed contract and checking that you are comfortable with any special conditions and the required deposit; get your conveyancer to undertake property searches;

do as much research as possible on future zoning changes or developments in the area; and be satisfied the property is sound from a building and pest perspective so you’ll be confident there’ll be no surprises if you are the successful bidder at auction. Once you’ve signed the contract and paid your deposit the process then continues much the same as private sale. The biggest difference lies in the actual auction itself.

No matter whether you purchase by private sale or at auction there are a number of other costs to consider above and beyond the purchase price – and all of which will impact your affordability. Stamp duty is potentially the biggest additional cost. Stamp duty is collected by the state government and is calculated based on the purchase price of the property. The rate differs from state to state, and states have different discounts for first home buyers.

Your legal representative will advise you of the amounts or you can find the information online from your state government website.

Other government fees include registration fees for changes to the Land Titles register. Again, these differ from state to state but your legal rep or financier will be able to provide you with specific information. Your solicitor/conveyancer will charge for their time and recover any costs they incur, such as property searches.

It’s advisable to have at least a building inspection, if not a pest inspection as well, and of course the relevant inspectors will charge for their services. There are likely to be finance costs such as a loan application fee, and you may require Lender’s Mortgage Insurance or LMI. As I said previously, it’s very important that when you sign a contract on the property you insure the property.

There will also be your relocation costs, utilities connections, furnishings and so on. It’s also useful to take into account the ongoing maintenance costs for your home. If there are things such as a pool that will require regular upkeep, ensure you factor this into your ongoing budget as well. I highly recommend researching each of these costs and factoring them into your planning

Moving on, the next questions was “How much deposit do I need?” As well as covering the costs that we have just spoken about there is your contribution to the purchase price to consider as well. One of the biggest challenges for first home buyers is saving the amount of deposit required. The amount will depend largely on the value of the home you are looking to purchase.

Most banks will lend up to 80% of the value of a property in a prime location. This is known as the Lending Value Ratio or LVR. The remaining 20% is your deposit or contribution.

This 20% can come from a number of sources as well as your savings. You may be eligible for your state’s First Home Owners Grant, or you may have parents willing to help by providing a Parental Guarantee. For example, if you wanted to purchase a home worth $500,000. The bank’s usual lending value at 80% would be $400,000; meaning you would require a deposit of $100,000 plus enough to cover your up-front costs.

But let’s see how the first home owners grant or parental guarantees can help to reduce this amount.

The First Home Owner Grant (FHOG) is a national scheme but it is funded by the states and territories so each state has different amounts and eligibility criteria. Under the scheme, a one-off grant is payable to first home owners that satisfy all the eligibility criteria. In recent years, changes to the scheme have included that most states now require the home being purchased to be ‘new’, not an established residence.

To see if you are eligible or to obtain more information about your state’s First Home Owners Grant, go to firsthome.gov.au and select the state or territory in which you intend to purchase your home. Another way to reduce the amount of deposit required to be saved is if the borrowers’ parents have equity available in their property and they are prepared to provide a guarantee for the borrower.

As an example of how this might work … let’s say you want to buy a property worth $500,000 but have only saved a deposit of $25,000. This would be outside of most banks’ lending guidelines. However, if your parents have enough equity in their home, they may be willing to offer a guarantee of $75,000 which covers the shortfall in security value.

As a guarantor your parents are then liable for your loan up to the amount of their guarantee. Guarantors are often required to get independent legal advice prior to entering into such a guarantee. Parental Guarantees offer a way for parents to help their children get into a home sooner, without actually lending or giving them cash. The guarantee can be released once the loan amount is reduced to within the usual 80% lending value, once again freeing up Mum and Dad’s equity in their home.

Another way of reducing the amount of deposit required is to use lender’s mortgage insurance or LMI. LMI is used where less than 20% of the value of the property being purchased is available as a deposit. LMI is an insurance that covers the bank in the event of a loan default by the borrower. The cost of that insurance though is borne by the borrower.

There are a couple of reasons why you might choose to have a smaller deposit and incur the LMI cost. The first reason is that it can help new buyers get into the market with a lower deposit or you may be able to purchase a property of a higher value than you might otherwise be able to afford.

Using the same example of purchasing a $500,000 property instead of having to save a $100,000 deposit, using LMI you may be able to borrow up to 95% of the property value meaning that you only need a $25,000 deposit. However, this would significantly increase your upfront costs. The LMI premium in this example could cost in the vicinity of $16,500.

So, how are you going to save for your deposit and up-front costs? We suggest starting by looking at your lifestyle and how you currently spend money. Is there any discretionary spending that you can reduce? Have you got the best deal on utilities and so on or could you reduce those costs? You could use the Spend Snapshot tool on the Davidson Institute website to help you get a clearer picture of where your money is getting spent.

By putting together a comprehensive budget for yourself and understanding what money gets spent where you put yourself in the position of choosing how you want to spend your money and how much you can save. When setting your financial goals, make them SMART goals – Specific, Measurable, Achievable, Relevant, and Time-bound. It’s also a good idea to keep your savings separate from your regular spending money.

That way you’ll be less tempted to use it, and you may also be able to make it work harder for you by keeping it in an account that pays interest.

To me, saving is about creating the financial future that you want but it shouldn’t mean that the present is all hard work … set yourself some regular milestones that you can reward yourself for to remind you why you’re saving in the first place.

For the final part of our video, we are going to look at what you can expect when applying for a home loan. When you apply for finance, your financier will ask you for a lot of information. This is to help with their assessment of your application. Broadly financiers will look at 3 key components when assessing a loan application.

Firstly, the ‘Purpose’. In the case of a home loan this is fairly self-explanatory – to buy a house. However, they will also look to explore with you what your goals are for the property to help with identifying the loan features that will best suit your situation.

They will also explore the ‘Person’, that is, you. Information on your age, address, job stability, asset accumulation, current debt position all helps to paint a picture of whether you are a person of a character that’s likely to pay back their loan. This will include accessing your credit history to see your track record of repaying loans.

Then finally they use financial information to assess the likelihood of the loan being repaid; both from the perspective of can you afford the repayments? As well as, should something go wrong, is it likely that the money could be recouped through sale of the property?

The first question on many first home buyers’ minds is “How much can I borrow?” How much you can borrow is dependent on 2 things. Firstly, how much the property is worth; and secondly, how much you can afford to repay.

As we saw earlier, lenders will apply what is known as a ‘Lending Value’ or LV against a property offered or held as security. Typically, this will be 80% for a residential property in a primary location. So, if the property is worth $500,000 then the value the bank could lend to would be $400,000. However, just because the financier is able to lend to a certain value of the property, the second aspect is how much you are able to repay.

In assessing your ability to repay the lender will consider all the household income, and what other commitments need to be met such as other loan repayments. They’ll also will review past bank account and credit card usage to observe the spending habits of the applicant, and in my experience, banks are now paying greater attention to regular household expenses when assessing applications too.

Many financiers will also look at how interest rate increases might impact your ability to repay their loan.

One way to get an indication of how much you may be able to borrow is to use one of the many online calculators available. We’re going to look at the Westpac Mortgage Calculator. In the example on the screen, based on a single applicant, with no dependents living in Sydney … with an annual before-tax salary of $80,000 and no other income … with monthly expenses (such as food, transport etc) of $1,630, a credit card with a limit of $5,000

… and other monthly expenses of $300, you can see the calculator works out that the applicant’s ‘borrowing power’ is $553,269.

Now don’t get too caught up with these numbers, go online and check your own situation. Even a postcode change can change the end result. And remember that this is indicative only and that the full application process may have a different result. So, based on your income and the potential to borrow $500,000, you’ll now want to know what the monthly repayments are on that amount.

It is one thing for someone else to calculate what you may be able to afford but you still need to ensure that your budget will support that level of repayments.

Let’s say we’re going to make fortnightly payments of half the minimum monthly repayment … $2,188 divided by 2 is $1,094 And here we can see that by making fortnightly payment of $1,094 you could potentially shave almost 4 years off the term of the loan and save nearly $40,000 in interest costs.

This will of course vary according to everyone’s individual circumstances but it’s well worth considering the savings you can make by using features such as fortnightly repayments, offset accounts and the like. For more information, watch our video ‘Managing your home loan to get ahead’.

The next important consideration is getting the right home loan. As the loan will take a long time to pay off it makes sense to get a home loan that is going to suit your situation. The most important place to start when deciding on a home loan is with you. Unless you are clear on what you want, you may not be happy with the final product, the features that is has, or how much you will need to pay.

So, always start by knowing what your own financial objectives are. In doing this, it pays take a long-term view; in other words, consider both what you need today, but also what you might need in the future from your home loan. So, think about what features of a loan may be useful in the long run. Consider things such as: “How fast do I want to pay the loan off?”, and “Will I want access to a redraw or offset facility?

“Is there capacity for a repayment holiday, if I decide to take a break from work?”

The answer to these, and any other questions that you may ask, will help you to determine what type of loan, and what features of that loan, makes the most sense for you. Once you know what type of loan you want, you will need to consider how much it will cost you over the life of the loan. Factor in the interest rate and any fees that you may incur during the life of the loan. Also, be prepared to compare.

A lot of home loans look the same, but there could be subtle differences in the way that they work which could impact you throughout the life of your loan.

Banks are required to advertise a ‘comparison rate’ that includes fees and charges as well as interest to help makes comparisons with other lenders. It’s also worthwhile to consider the ancillary products that might come with the loan as well, such as credit cards, transaction accounts and insurance products. Some lenders may package these additional products up for you, offering them to you at a reduced cost.

Home loans tend to stick around for a long time so it’s well worth the effort to do your research to get the right loan for you.

There are a few things that will help you build a strong story to take to a lender when applying for home finance. Starting with demonstrating that you have a stable income, employment, and home life. It’s also important to show a willingness to be sensible with your finances by having a good history of saving and repayments. I know saving can be difficult when you’re renting, but consistent payment of rent is also often taken into consideration by lenders when assessing your saving history.

While a small credit card limit might not seem out of the ordinary, it could cost you an approval of home finance. It’s a good idea to minimise as much debt as you can to help your application. Be prepared to provide the lender with plenty of supporting documentation. They’ll look for payslips to confirm income, bank statements and super statements to confirm savings, verification of household bills, and of course identification.

And finally, it helps to have realistic expectations. Some first home buyers want to jump straight to the big 4-bedroom, 2 garage home with a pool but for many that is outside of their financial capacity. Do your own sums before you see the lender and be confident in your own mind about the level of repayments that you can support.

So, during our ‘Buying your first home’ video we have provided you with some hints and tips around selecting a property, who should be on your home buying team, and the difference between a private sale and an auction. We’ve also looked at the financial side of your purchase; from what other costs need to be paid, to saving up your deposit, and finally the loan application process.

Thank you for watching our video ‘Buying your first home’. I trust that you are now feeling better prepared and more financially confident about buying your first home. I trust you found this information helpful, and I encourage you to check out the other resources on the Davidson Institute website to help build your financial confidence. Bye for now.