Questions First Home Buyers ask 

 

It all starts with Deposit

1. Do you have to have 20% Deposit?

   1. NO! Doing so helps you avoid Lenders Mortgage Insurance (LMI) (and there are some other ways of avoiding LMI also)

2. What is the minimum deposit I need?

   1. ‘About’ 5%-6% deposit and ‘enough’ to cover your ‘finishing costs’ – although this will give you a narrow range of lenders

   2. If you can get to 8% deposit + ‘enough’, the range widens, interest rates get more attractive and mortgage insurance is lower

   3. If you can get to 12% deposit this improves again…

   4. All the way to 20%

   5. Or you can use the a Family Pledge to cover the necessary deposit and costs and have no Lenders Mortgage Insurance and low interest rates.

3. Would I be better off saving a bigger deposit and avoiding LMI?

   1. This is a tricky question, different markets perform differently – and at different times. Capital city markets, when they are booming, move faster than you can save – so for the sake of perhaps $20,000 in mortgage insurance (and it may not be that much, it could be half that or less) then it’s a great tool to secure your property and avoid a $100,000 price jump (as an example).

   2. If the market is slower or static you may have more time to save and then it makes more sense to do so.

4. But what about ‘Deposit Bonds’, don’t they cover the deposit?

   1. Deposit bonds are like insurance policies that promise to pay the deposit at settlement, handy if you’re borrowing the lot (using a guarantee) but we don’t have any lenders doing 100% loans anymore *the only Asterix to this is very rarely in certain professions

5. Oh – But I also heard about using my rent as savings?

   1. Using your rental history, in certain circumstances, replaces the need to prove a ‘genuine savings’ history – but it still doesn’t replace any actual cash deposit necessary.

6. OK, what about the First Home Owners Grant (FHOG)?

   1. Yes! This can be used towards your deposit – be mindful it won’t be available at the land stage if you’re buying land so we juggle the timing of paying deposits. Note, the FHOG does not tick the ‘genuine savings’ box either.

 

Summary

- You don’t need 20% deposit

- The more deposit you have the better your options are and cheaper your interest rates are

- Family guarantees also work really well

 

 

Next up – what else do I need to allow for when I am buying a home? 

 

We call these the ‘finishing costs’?

 

There are a couple of things you need to include in your budget along with your deposit;

• Stamp Duty – each state has different concessions and exemptions for First Home Buyers, visit their office of State Revenue to find out what it might look like for the specific property you’re considering (or ask us, it’s part of our job )

• Registration and transfer duty – again a government charge that varies between the states

• Your solicitor or conveyancers fees – around $1500 for a standard purchase

• A pest and building inspection, or strata report – around $500

• A deposit bond, if you need one – is around 1.3% of your deposit amount. To work this out do the following math

  • Purchase price x 10% x 1.3%, for example

  • $600,000 x 10% x 1.3% = $780

• A loan application fee – this might be from $150 - $1,000 for a more complex loan application (think guarantee situation)

• Rates & water adjustments, disbursements at settlement – things that need to be paid when your purchase goes through, we generally allow $1200 as a rough figure

 

You may also want to allow for

• Removalists costs

• Mail diversion

• Initial insurance premium

• Connection / disconnection of your services (ask us about myconnect free service)

 

Summary

- As an example, in NSW a typical cost for most of the above is $4,000 + your stamp duty (if any)

 

 

What Grants and Benefits are available for First Home Buyers right now?

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• First Home Owners Grant (FHOG) – a cash grant paid for purchasing or building brand new properties – has property price caps (different for land + house to finished houses/units)

• First Home Owners Stamp Duty Concessions – discounts or exemptions on stamp duty for established and new land and houses, again has different value caps

• Home Guarantee Scheme – Limited to 35,000 per financial year, and from 1 July 2023 available to citizens, PR's and people who haven't owned property for 10 years, has both property value and income caps – allows for 5% deposit and the government will essentially guarantee the loan.

 

All of these schemes have strict compliance programs and fines for failing to meet the approval criteria – which usually involves living in the home within a certain time frame, and living is often confirmed by power bills, running typical electrical appliances will consume a typical amount of power evidenced via your power bills so definitely change your address with your phone, bank, licence etc – and keep your power bills aside in case you need to evidence you are living in the home.

 

 

What do lenders look for?

 

• Lenders are looking for primarily – Capacity – that you can afford the loan. This means they are looking at home much of your income is left over (according to their stress tests) after meeting all of your existing commitments… and your current spending. This is where the ‘uber eats’ argument comes in and we encourage you to pull back your discretionary spending before applying for a loan. 

 

• They will look at your last 3 months spending history and assume this is what you will spend moving forward… 

• They will look at ALL your current loan repayments and credit limits, assuming you could spend all of it at once…

• They look for evidence of your regular ongoing income, in whatever form that takes – the key being evidence.

 

• They’re also looking for Character – is your credit history satisfactory? Are your current commitments up to date? Have you shown a capacity to make the proposed repayments (via ‘genuine savings’ + your current rent, or advanced repayments on another loan)?

• Have you stayed in your current job a while or do you tend to change often with gaps in between (the concern being you might be unable to meet your repayments while out of work)?

 

• And finally, Collateral – literally your deposit – but also, do you have more debts that assets? What is the picture you present overall.

 

Summary

- Thinking about the above can help you prepare for a loan application – and therefore buying your first home. Cut expenses, solidify regular income, cancel unnecessary credit, reduce card limits, pay off any loans you can & put deposit funds aside in a separate account.

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Do I need to borrow money to establish a credit history?

No... and yes, but mostly no.

A brand new credit file, or one that is very inactive (hasn't had any enquiries for a long time) can "score" unfavourably with lenders. But deposit speaks louder than necessary credit so we would prefer to see you save more than have a loan you don't need. And here's a tip - anyone with a post paid (plan) mobile phone has an active credit file.

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What is this 'credit score' thing anyway?

There are two types of credit scores in action

1. Is the 'score' you find on your credit file which is a measure of the likelihood of you paying or not paying your credit. This is a combination of the number of credit enquiries you have, the number of adverse listings (defaults / judgements - please don't, they will cause you grief), the number of times you are late paying your current credit, if you are self employed or not, and the number of jobs and changes of addresses reported. There are 3 credit reporting bureaus in Australia & a lender may use any or all of them - and their mortgage insurer a different one.

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Slightly off topic, but if you do incur a default, do something about it as soon as you know about it - pay it or fight it and document the fight all the way - lenders can tell if you have chosen to ignore it and this will go against you dramatically.

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2. Internal lender credit scoring, much like the above it combines all of these factors as well as the bureau score and, sadly, the location you live in as well as past performance with that lender & the percentage you wish to borrow.

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Credit Score can be given as a reason your loan is not approved with no further discussion. It's the pits because there is nothing you can do about it. What you can do is protect your credit file to ensure that bit of the equation is as clean as possible - and - if you have history with that lender, consider if you would lend money again in their shoes.

 

 

What is ‘Genuine Savings’?

 

We keep using this term, so what is it?

• Genuine savings are, savings put (ideally) into a separate account, in regular installments over at least 3 months in YOUR name. 

• They can also be money that sits in a separate account for 3 months.

• Very, very rarely it can be advance repayments on a car or personal loan that can be redrawn (not normal repayments – only repayments in advance)

• It can also be shares that you have owned for 3 months or more

• It can definitely be term deposits held for 3 months or more

• And, it can also sometimes verified by rent paid where the lease is in the exact same name as the borrowers (and the cash for the deposit is coming from somewhere else).

 

Genuine savings is NOT

• Tax returns

• Sale of assets

• Gifts

• Money saved in someone else’s account

• Physical cash not in a bank account

• Cryptocurrency (not yet anyway)

• Grants

• Loans

 

The purpose of genuine savings is showing that you can commit to a savings pattern and manage your money. Hopefully; in combination with your current living costs, it also shows that you can afford the repayments. Test running your repayments is a brilliant idea both to give you comfort and demonstrate to a lender that you should be able to meet them (regardless they will test you at an inflated interest rate)

 

 

Can I get a preapproval?

 

Yes! In fact, it’s a really great place to get started. Now, the downside is some lenders aren’t doing preapprovals right now due to reduced staff numbers during COVID

 

Ps – we are pretty good at picking what will be approved and what won’t so if we are really confident then, when speaking with a real estate agent, if we have given you a good idea that you would be approved & they ask you if you are preapproved… smile and nod!

 

Do brokers charge a fee?

Most brokers do not – and if they do, they’ll tell you about it upfront. Two Red Shoes Brokers do not charge a fee.

 

How are brokers paid?

Brokers are paid a commission from the lender who approves your loan, and it is not added to your loan – in fact often brokers are aware of special offers that you may not find by going directly to the lender. 

 

Are all lenders the same?

Absolutely no. Lenders have a huge difference in policies – the amount they will lend you, the deposit they require, the suburbs they may or may not lend in, the employment terms they need… not to mention differences in interest rates. Even Lenders Mortgage Insurance varies between lenders.

 

Do I need an offset account? Should I fix my loan? Should I be variable?

We have a really cool system to work out what kind of loan would work for you based on a number of factors including how you like to manage your money, what plans you have for the property, how the repayments fit your budget – even how often you get paid. It’s part of our job to walk through this with you and work out exactly what will work best for you.

 

Summary

- Brokers are your advocate in the buying process, and don’t charge you a fee to do so – they compare lenders to find the one who will approve you, be the most economic – and show you how to set your loan up to maximise your savings.

 

 

Alright… how does the process work?

 

Here’s where a handy chart helps make sense of everything.

 

1. Gather your information and book a time to meet with your broker

2. Submit your preapproval – bank checks they’re happy with you as a borrower

3. Go Shopping!

4. Find and negotiate your offer

5. Pay a holding deposit – note, in most cases this is not refundable

6. Engage a Conveyancer or Solicitor – we can recommend someone great in your area

7. Let us know the details of the property, agent, and conveyancer

8. Convert to full loan approval – bank does final checks & checks they’re happy with the property

9. Conveyancer does searches and checks and will recommend pest and building inspection or strata report

10. When all is satisfied ‘Exchange’ contracts, and pay the rest of the necessary deposit or hand over the ‘deposit bond’.

11. In a week – documents arrive from the banks solicitor, sign and return

12. At Settlement (usually 6 weeks after purchase date) inspect the property to make sure you’re happy to proceed. You’re checking it is in the condition you agreed to buy it in.

13. Pay the balance of any money you had to contribute and get ready to settle

14. Pickup the keys!

 

 

Summary

- While the process looks complicated – it’s really only a series of steps & with your broker and conveyancer by your side you won’t forget anything & you won’t be left on your own to fill out forms or work out grants.

 

Am I ready to buy my first home?

The answer to this one is answered pretty simply within a 10 minute phone call and an hour meeting with a broker. There are too many twists and turns in income and employment to give a simple if A = X then yes or no answer here, but, even if you aren’t ready its really helpful to have the meeting and work out how close you are so you have a goal to work towards, so why not setup a meeting?

 

Buying your first home should be exciting – and while no one can remove all of the stress, we do our best to smooth over as much of it as possible. Hopefully now you feel confident and ready to proceed.