Great news from the recent ABS Housing Finance data reveal that the number of first home buyers as a percentage of total owner-occupied new housing loans has reached a six year high of 18.3%. If you are looking to buy your first home this year, you should be getting your finances in order first. In order to reach a suitable deposit, plus additional purchase costs, you will need to know what the target is and commit to a savings plan.
Recent Canstar research found one in five Aussies under 35 are saving less than 10% of their after-tax income and 17% are saving nothing at all. With 59% of all new home loans written through accredited mortgage brokers, it only makes sense to seek quality advice from an established mortgage broker before you consider purchasing your first home.
An accredited mortgage broker will help you to become aware of how to avoid the mistakes that could impact your ability to buy, and also affect your loan application.
Here are four mistakes new buyers can’t afford to make and tips to help avoid them.
1. Not having a broker complete a borrowing assessment for you
While house hunting can be exciting for first-time buyers, it can also be a waste of time if you don’t know how much lenders are willing to lend to you. Before getting hung up on a dream home, you need to have a clear picture of your purchase power.
How to avoid this: While using an online home loan borrowing power calculator is great to give you an indicative figure, to find out exactly how much lenders are willing to loan it’s best to seek advise from a good mortgage broker. They can provide you with quality advice and complete the picture of how much deposit you will need, how much you can borrow, and which lender will most likely provide the finance for your specific circumstances.
2. Underestimating the upfront costs
Not only do first home buyers have to save a substantial deposit, they should be mindful of additional buying expenses and unexpected costs.
A broker can clearly identify the additional costs to consider when purchasing your first home, include stamp duty, government fees, building and pest inspections, loan application fees, lender’s mortgage insurance (for those with less than 20% deposit), solicitor/conveyancer fees, moving costs and more.
How to avoid this: It’s important to research before buying so that you understand the upfront costs for any particular property. Set a buying budget so you can tally up any associated costs. Your broker can provide you with a good estimate of all these costs, and also see if there are some Government incentives such as Stamp Duty Waivers and First Home owners Grants to assist you with your first home purchase.
3. Not looking for a loan that offers flexibility
It’s a good idea to look for a loan that gives them the flexibility to make extra repayments and pay off the loan ahead of schedule. As unlikely as it seems to them now, the time will come when buyers can afford this and it will help them get ahead financially.
The loan should come with a redraw facility, meaning homeowners can take the early payments back out of the loan if needed. This gives peace of mind to stretch and make maximum payments into the loan.
Another way to do this is with an offset account, which is a savings or transaction account linked to a home loan account.
Interest is not charged on the balance in the offset account, meaning more of the monthly loan repayment goes towards getting the outstanding loan balance down. Down the track the savings will be available to clear the loan.
In both cases buyers want to find a loan that does not charge extra fees or penalties to give this flexibility. And if you want the certainty of a Fixed rate as well, there are lenders that either offer the flexibility of a variable rate with the certainty of a fixed rate, or a split loan that allows you to have the best of both worlds.
How to avoid this: Speak to a qualified Mortgage Broker about this and make sure you ask the right questions to cover these very important issues.
4. Don’t borrow too much that it will get you into trouble
The hard work doesn’t stop once buyers have forked out the deposit and upfront costs – then come the loan repayments.
As a general rule of thumb, homeowners are determined to be in mortgage stress if their repayments are upwards of 30% of their pre-tax income.
Unfortunately though, an experienced broker will usually tell you that it is generally not the home loan that causes the stress on you finances, it is often the other loans taken out after the mortgage that will impact your ability to meet all of your commitments. Car loans, Personal Loans and credit cards all have an impact on your cash flow, and are often easier to obtain than a Home Loan. Beware of biting off more than you can chew, and keep in mind future life events that may lead to a change in your income or expenses such as having children or going back to one income.
How to avoid this: In order to steer clear of stress territory, you need to work out what your repayments will be and ensure they are affordable, even if interest rates increase. Also, avoid consumer lending wherever possible, and if you are going to take out a car loan, ensure that you will still be able to afford it if your interest rates on your home loan increase.
First home buyers don’t just use a mortgage broker to get the cheapest rate, they use them to provide quality finance advice, access to choice, and a range or different lending policies from a range of different lenders.