AS we move into the spring selling season, many first-home buyers will consider purchasing or building.
It is an exciting time, however they may not aware of all the financial aspects involved in purchasing a home and may find themselves facing unexpected costs or with a loan that does not suit their situation.
Resolve Finance managing director Don Crellin said financial literacy was important for first-home buyers, who were making the biggest investment of their lives.
“Understanding the real costs associated with buying a home, in addition to the purchase price, is imperative,” he said.
“We know how hard people work to save a house deposit, only to find they need to take a string of other fees out of that sum.”
Mr Crellin said they could also be signing off on financial decisions that were inappropriate for their circumstances, ones which could really cost them in the long run.
He said there were several things all first-home buyers should understand before they took the plunge:
1. Lenders Mortgage Insurance (LMI) applies when you have a deposit less than 20 per cent of the purchase price. It is coverage for the lender, not the borrower. It covers the lender in the event of not recovering the full loan balance from the borrower if they become unable to meet their loan payments.
2. There are additional costs to factor in, other than the purchase price of your property. You will potentially need to factor in stamp duty, conveyancing and legal fees, pest and building inspection fees, mortgage registration and transfer fees, loan application or establishment fee, LMI, and council and water rates. You may need to subtract these costs from your deposit.
3. If buying at auction you have the ability to get a bargain if you are lucky, however this is never a “change of mind” purchase. There is no “cooling off” period on an auction buy. You also need to pay a sizeable deposit, usually 10 per cent at the fall of the hammer, so you will require access to tens of thousands on that day.
4. Settlement is the process of transferring ownership of a legal title of land (property) from one person or entity to another. It typically consists of three stages – before contract; before completion; after completion.
It is wise to engage a conveyancer/settlement agent to handle this process for you. They are licensed and qualified professionals whose job it is to provide advice and information about the sale of a property, prepare the documentation and conduct the settlement process.
5. When taking out a loan you may be offered an offset account. This is a savings account or transaction account linked to your home loan account. The account’s balance is “offset” daily against your home loan balance, and as a result you are only charged interest on the difference between the two. When it comes to a home loan, savings – however small – can accrue to a big difference over time.
6. Using a mortgage broker can save you thousands. A mortgage broker helps customers identify the most appropriate lender, which is often a bank, and product for their unique situation. Your broker negotiates the home loan on your behalf, does all the legwork on researching the loan products and supports you through the application and settlement process. In addition, a reputable mortgage broker should guide you on becoming financially literate.
7. Sometimes you may need a guarantor to help you get a home loan. This is when another person (usually mum and/or dad) puts up a property they own, or have equity in, as security for the borrower’s loan, potentially alleviating the need for such a large deposit or the payment of LMI. It is certainly an option that offers the borrower better loan terms, and the guarantor does not give the buyer or the lender any money, however they will have to accept the obligations associated with entering into a guarantee and the borrower will still need to make the repayments. In such an arrangement we strongly recommend seeking independent legal advice to ensure the obligations are understood.
8. The First Home Owner Grant (FHOG) provides eligible homebuyers a nice one-off grant of up to $10,000. There are no income or assets tests to qualify, however it now only applies to new residential dwellings and is not available for the purchase of established homes. This means the property must be a new house and land package or a completed home or unit that is newly constructed. In addition, if you are entering into the purchase with a partner who has previously drawn on the grant or owned a property you will not be eligible.
9. Be aware of all the concessions and rebates you may be entitled to. For example, eligible first-home buyers of new and established homes may not have to pay stamp duty or may only have to pay a reduced rate. You may also qualify for the Home Buyers Assistance Account rebate if you buy through a licensed real estate agent.