Tips for first home buyers to be ready to buy in 2022.

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Rapidly rising property prices across Australia may mean that some first-home buyers looking to get a foothold on the property ladder stretch their finances to the limit. This could be detrimental to their long-term financial wellbeing. Couple this factor with the potential for interest rates to rise from their current record lows, and many prospective first-home buyers could find the affordability of their dream home beyond their reach.

Home loan interest rates are influenced by several factors, including the Reserve Bank of Australia’s (RBA) cash rate, overseas funding costs, as well as the state of the economy, nationally and internationally. Experts are tipping that interest rates may rise. In January 2022, Westpac Economics team stated, “we moved to the view that the RBA would begin its tightening cycle earlier and hike rates further, the cash rate forecast to begin rising in August 2022 to a peak of 1.75% in March 2024.”

Irrespective of property prices and interest rate rises, buying a home can be exciting and life changing. Here’s what savvy first home buyers should consider to be ready to buy their first home.

Saving for a first home deposit

Time, effort, and preparation are also important to get to the point where you can buy your first home. Buying your first home is an exciting time but saving for a deposit can be a challenge. Many Australians consider accumulating enough money for a home loan deposit as their biggest financial challenge. Understanding the options available to build up your home deposit, what help is available and having a plan can make all the difference in saving for your first home.

How much deposit do you need for a home loan?

To be able to start saving for a home, firstly you need to get an idea of how much you need to save. This really depends on where you want to live and if you’re buying an apartment or a house.

Most lenders require a 20% deposit to secure a home loan and avoid the cost of Lenders Mortgage Insurance (LMI). To buy a property worth $600,000, you’d need at least $120,000 plus upfront costs. It’s no small feat accumulating this amount of money.

If you have a smaller deposit, your bank or lender may charge you LMI. It's a one-off payment made by the borrower at the time of loan settlement. This insurance protects the lender, not you.

What options are available to save up for your home loan?

There are many things that can help first-home buyers save for a deposit, including:

  • Understanding your current financial situation, analysing your current spending and using a budget planner to help establish a budget that suits you and supports you achieving your financial goals, including saving for a deposit.
  • Repaying in full credit cards debts, loans and hire purchase agreements.
  • Consider consolidating multiple short-term debts to help you to combine your outstanding debts into one convenient loan potentially at a lower rate than you currently pay. Simply put, that’s one loan, one regular repayment, one interest rate and one set of loan fees.
  • Creating a dedicated savings plan. You could consider using a separate, high-interest account to put savings into, and setting up regular automated payments. You can build your savings in an account such as Westpac Life which makes it simple to manage long and short-term savings goals in just the one account.

What help is available to first home buyers?

First Home Owner Grant.

As a first home buyer, you may be eligible for the First Home Owner Grant (FHOG) scheme. This is a scheme that makes one-off grants to eligible purchasers when buying their first home.

Different rules apply in each state and territory, but you can receive up to $20,000 in some states.

For the latest information on the First Home Owner Grant in your state, take the time to visit the First Home Owner Grant website.

First Home Buyer Assistance scheme (NSW)

Great news for first home buyers in NSW, who may be entitled to a concessional rate of transfer duty or even an exemption from paying it altogether under the First Home Buyers Assistance scheme (FHBAS).

This scheme applies to buying an existing home, buying a new home, and buying vacant land with the intent to build. Visit NSW Government’s FHBAS for further information and particulars.

Other states and territories may also offer a stamp duty concession to first home buyers.

Learn more about your state or territory:

 

First Home Super Saver Scheme.

Under the First Home Super Saver (FHSS) Scheme, first home buyers aged over 18, who make voluntary super contributions of up to $15,000 per financial year into their super, can withdraw these amounts (in addition to associated earnings / less tax) from their super fund to help with a deposit on their first home. Voluntary contributions include before-tax contributions, such as salary sacrifice, and after-tax contributions.

If you’re eligible, the maximum amount of contributions that can be withdrawn under the scheme is broadly $30,000 for individuals, or $60,000 for couples. On the condition, of course, that this amount or greater has already been voluntarily contributed to your super. It does not include your employer’s Superannuation Guarantee contributions.

For the latest information and further information on eligibility for the FHSS scheme visit the ATO.

It is recommended that you speak with a professional financial advisor before making any changes to your super to understand the impact of the proposed changes.

First Home Loan Deposit Scheme.

The First Home Loan Deposit Scheme is designed to get eligible first home buyers into their first home sooner without having to pay lender's mortgage insurance.

Eligible applicants will receive a limited guarantee from the Australian Government to buy their first home with a deposit of as little as 5%.

Also, eligible applicants will be able to use the Scheme together with other government programs such as the First Home Super Saver Scheme, state and territory First Home Owners Grant and stamp duty concessions.

Under the FHLDS, there are a select group of participating lenders and mortgage brokers who will assess a first home buyer’s Scheme eligibility alongside other standard home loan considerations including their serviceability (borrowing power) and credit checks.

New Scheme places are limited and are released at the start of each financial year.

For the latest information on the First Home Loan Deposit Scheme, visit the National Housing Finance and Investment Corporation.

‘Bank of Mum and Dad’

Rising house prices are making it increasingly difficult to enter the market. For some lucky Australians looking to buy a first home, their parents may help by providing funding, in whole or part, possibly with the expectation of repayment; or acting as a guarantor to assist with the property purchase.

A guarantor home loan allows a close relative (often a parent or sibling) to use the equity in their home as security for part or all the buyer’s loan, promising to be responsible for the home loan’s repayments should the borrower struggle. With Westpac’s Family Security Guarantee, a family member can act as guarantor to secure the home buyer’s loan, enabling a bit more borrowing power. This can reduce the Loan to Value Ratio (LVR) to under 80%, which may mean the buyer can avoid paying Lender’s Mortgage Insurance (LMI) on top of their deposit.

For parents who guarantee their children’s loans, it is important to understand how this can impact the parents’ retirement or investment plans. Any parent considering this option should go in with their eyes wide open. The risks of guaranteeing the loan are:

  • depending on the structure of the guarantee, the parents could be liable should the borrower default on the payments, either by taking over the repayment schedule or handing over a full repayment.
  • if the borrower defaults on the loan, the lender is likely to sell their home first and if there's a shortfall, it may be the lender will look to sell the parents’ house.
  • it may affect the guarantors ability to get a loan in the future, as they will have to tell future lenders they're a guarantor on a loan.
  • in the event either the guarantors or the borrower can’t pay back the loan, it will be listed as a default on their credit reports. This will impact their ability to borrow money in the future.

Term Deposits.

Term deposits are a low to medium risk way to invest your money and earn a fixed rate of interest. Term deposits let you invest your money for a set amount of time and with the certainty of getting a fixed interest rate. They can be useful when saving for bigger items like saving for a property or investing when you want to be certain about the interest you'll earn.

Of course, there is a flipside to having your money locked away for the agreed term. If you need to access your money sooner, you’ll likely have to pay a penalty fee and, in many cases, you’ll need to give up to 31 days’ notice. Therefore, it’s important you’re sure you won’t need to access your money while you have it locked away in a term deposit.

When a term deposit matures, access restrictions that applied during the term are lifted, allowing you to re-invest your money in another term deposit, invest it elsewhere, or simply withdraw it to use however you like. It’s important to consider fluctuations in rates when the term deposit matures so that you can make an informed decision on which option to choose.

Investing in shares for a home deposit.

In addition to savings, grants, and schemes to help you towards your first home deposit, some people may consider investing in shares to accelerate the time it takes to save up for a deposit.

Lenders look for proof of genuine savings, including regular deposits into a savings account. They may consider any shares you have held for at least three months as genuine savings, so holding shares may help to increase your borrowing power.

The share portfolio can't count as security or form part of your deposit. However, the dividends can be treated as income when the lender assesses your application.

If your plan to buy your home is longer, perhaps over three years or more, then you may want to consider investing for income.

Shares provide the potential for both capital growth (via an increase in share value) and income (via dividends). As longer-term investments, they can be subject to volatility. Beyond investing in shares, those wanting to gain exposure to the stock market, could consider other options like ETFs (Exchange Traded Funds). ETFs allow investors to track the performance of an entire index or asset class at once. ETFs also let people access lots of different investments such as global shares, emerging markets, bonds, and gold.

Regardless of the investment options you choose, diversifying your investments enables you to better manage the risk associated with each investment option. You can diversify by asset class, investment security or investment manager

When you start looking at investing options, it’s easy to become overwhelmed by all the information. Therefore, it helps to get expert advice. The more informed you are about the market and your options the more confidently you can make decisions based on that knowledge. Choosing the right financial planner and working together can be critical to the success of your investments and achieving your financial goals.

Further help for first home buyers

For first timers, the key to a smoother experience is often as simple as knowing what to expect.

This information is general in nature and has been prepared without taking your objectives, needs and overall financial situation into account. For this reason, you should consider the appropriateness for the information to your own circumstances and, if necessary, seek appropriate professional advice. © Westpac Banking Corporation ABN 33 007 457 141 AFSL and Australian credit licence 233714.

 


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Lali Wiratunga

Lali Wiratunga believes in encouraging positive financial behaviours to boost people’s financial confidence. He also advocates for the role of innovation, creativity and entrepreneurship in helping people and organisations deliver social impact and financial sustainability. In 2016, Lali was recognised for creating a positive impact through Pro Bono Australia’s Impact 25. Following a career as a corporate lawyer and management consultant in the UK, he's had 14 years experience in roles across financial services in Australia. He has served in the community as a Board member of a disability services organisation, and as a member of the Alumni Advisory Board at UNSW Business School.

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