#1. What are the costs of purchasing

When you buy property you need to put down a deposit (skin in the game) and cover the purchase costs, the main being:

 

Stamp duty

The strategy tax on transferring property

Typical Cost: between 2% and 5% of the purchase price

 

Legal representation

Conveyancer or lawyer to advise you on the contract and keep you out of trouble

Typical Cost: $1,500 to $3,000.

 

Lender costs

Application and valuation fees

Typical Cost: $0 to $1,500.

 

Inspections and searches

To make sure you’re not buying a lemon (pest and building report, strata search etc) 

Typical Cost: $0 to $3,000.

 

Lender’s Mortgage Insurance

A once off charge which protects the bank if you go bad 

Typical Cost: 0.5% to 4.5% of the loan amount.

 

Adjustment

Reimbursement of the water and council rates paid in advance by seller

Typical Cost: $0 to $1,500.

 

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#2. Government grants available in your state

 

First home buyers in most states and territories are eligible for grants and stamp duty exemptions.

 

Most grants are linked to buying new or building. Stamp duty exemptions are state based and may either apply for first home buyers, property types or both.

 

ACT

The ACT First Home Owner Grant has been replaced by the Home Buyer Concession Scheme, which provides a full stamp duty concession for eligible applicants.

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For more information, visit: ACT Revenue Office

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NSW

Grant: $10,000 for buying or building

• A new home valued up to $600,000

• A new home valued up to $750,000 if you enter a contract to build or are an owner-builder

 

Other exemptions or concessions: From August 1, 2020, first home buyers in NSW are exempt from paying transfer duty on new homes valued less than $800,000 and existing homes valued less than $650,000. Transfer duty concessions apply to first home buyers of new homes valued from $800,000 up to $1m, and existing homes valued between $650,000 and $800,000. For first home buyers who purchase vacant land on which they plan to build a home, no transfer duty applies on vacant land valued less than $400,000. Concessional rates apply on land valued between $400,000-$500,000.

 

For more information, visit: Office of State Revenue New South Wales

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QLD

Grant: $15,000 for buying or building new up to $750,000.

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Other exemptions or concessions: Stamp duty concessions are available for first home buyers of properties valued up to $550,000. These amounts vary depending on the purchase price. 

 

For more information, visit: Queensland Government

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NT

Grant: $16,000 for buying or building new.

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Other exemptions or concessions: There are a range of government grants, concessions and rebates available for first home buyers and other Northern Territory home buyers.

 

For more information, visit: Northern Territory Government

 

SA

Grant: Up to $15,000 for new homes valued up to $575,000

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For more information, visit: Government of South Australia

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TAS

Grant: $20,000 for new homes or off-the-plan properties only

 

Other exemptions or concessions: Fifty per cent discount on property transfer duty for first home buyers of established homes that have a dutiable value of $400,000 or less.

 

For more information, visit: Tasmania Government – Department of Treasury and Finance

 

VIC

Grant: $10,000 ($20,000 in regional VIC) for buying or building new up to $750,000.

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Other exemptions or concessions: Victorian first home buyers are also exempt from paying stamp duty on properties valued up to $600,000, while a concession is available for properties valued between $600,001 and $750,000.

 

For more information visit: State Revenue Office Victoria

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WA

Grant: $10,000 for buying or building a new home

• Up to $750,000 for new homes purchased south of the 26th parallel

• Up to $1m for new homes purchased north of the 26th parallel

 

Other exemptions or concessions: Stamp duty concessions are available for first home buyers of properties valued up to $530,000. These amounts vary depending on the purchase price.

 

For more information, visit: Government of Western Australia

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Qualifying for the grants

Typically you or a spouse must not have owned a property in Australia before. Often restricted to buying or building a new home/apartment.

 

Follow this link to learn more about grants and exemptions applicable to you and your state.

 

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#3. Interest rates explained

 

Interest rates determine the cost of your home loan and what you pay back each month.

 

Even a small difference in interest rates can make a big difference to your repayments.

 

Reserve Bank of Australia (RBA)

The Reserve Bank of Australia sets the ‘cash rate’ (the he interest rate charged on overnight loans between banks), which is reviewed every month.

 

Bus according to ASIC, lenders set their own rates and can choose to increase or decrease the rates in line with the cash rate our outside of movements by the RBA.

 

Variable rate

Your interest rate goes up and down in response to changes in the cash rate or by your lender.

 

The advantage of variable rates is that they usually (but not always) go down if the cash rate decreases. Conversely variable rates usually go up if the cash rate is increased and they may also increase even if the cash rate does not.

 

There are usually less restrictions on making additional repayments if your home loan has a variable interest rate.

 

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Fixed rate

A fixed rate allows you to lock in an interest rate on your loan, typically for 1 to 5 years. This safeguards you against future interest rate rises and helps you plan your finances.

 

The disadvantage is you won't benefit from falling interest rates and there are usually restrictions on making additional repayments or adding an offset account.

 

In addition, you may have to pay a large fee for ending the fixed rate period on your loan early, particularly if interest rates have fallen since you fixed your rate.

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Pro tip:  Ask your adviser about options to split your loans with a portion fixed and a portion variable.

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#4. What is compound interest?

Compound interest is interest paid on the initial loan amount as well as the accumulated interest on money you have borrowed.

 

Compound interest is like being taxed... then taxed on the tax... and tax on the tax on the tax (and so on).

 

It means that for a standard mortgage you’ll end up paying about as much in interest as the original property price.

 

69% of your first year’s loan repayments are lost on interest!

based on a $450,000 loan over 30 years at 4% p.a.

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On the other hand it is why property prices are 60X higher than just 50 years ago. Small things you do up front can have a massive impact overall.

 

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Pro tip: Little things you do up front have a big impact down the track.

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Example

Increasing your loan repayments by just 2% ($50 a month) on a $450,000 mortgage will save you $31,300 in interest and take more than a year off your loan term.

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#5. Lender's Mortgage Insurance (LMI) explained

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Lender’s mortgage insurance is the policy which you pay to protect your bank against loss if you default. 

 

LMI is a once off payment and is calculated as a percentage of the loan amount.

 

​That percentage increases the higher the loan amount and the higher the percentage of the purchase price you want to borrow (known as loan to value ratio or LVR).

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The three things you should know:

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1. Thresholds

LMI is calculated base on whole percent LVR thresholds and loan amount bands. This means that small changed in LVR or Loan amount could have a big impact on the amount of LMI payable.

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Example LMI Table:

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LVR Band          Up to$300K         $300K - $600K

90% to 91%            2.15%                          2.79% 

91% - 92%​               2.15%                         2.79% 

92% - 93%             2.40%                         3.14% 

 

Example only. LMI is calculated by applying the applicable % rate above to the loan amount requested.

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Consider the difference just $5,000 extra deposit could make if you were purchasing a $325,000 property at either 91.5% or 93%.

 

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Loan at $297,500

91.5% LVR

LMI = $6,397

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Loan at $302,500

93.1% LVR

LMI = $9,259

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In this example, borrowing just $5,000 more would increase your LMI premium by almost $2,900.

 

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2. Mortgage Insurers have their own policy

If a loan is in LMI territory, it is likely that your lender will also have to seek mortgage insurer approval. This means that they have the final say, even if the lender says yes the. Mortgage insurer could say no.

 

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It also means that just by changing lender, you could still get the same answer.

 

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3. Not all LMI is the same

There are three insurers in Australia and some of the big banks also self-insure. They all have their own policy and they all charge their own rates. This means a difference of potentially thousands between lenders and insurers.

 

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LMI has had a profoundly positive impact in Australian property. For the economy LMI is another layer of protection for our banking system and for consumers a method of being able to borrow greater than 80% of the value of a property.

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Pro tip: Get advice upfront on which lender/insurer is best for you and check your thresholds.

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#6. The loan application process

 

1. Seek Professional Advice

To make sure you are in a position to apply or get a plan to be ready in a given time frame

 

2. Get Pre-Approved

A credit approval by the lender subject to finding a suitable property. This lasts 90 days and should give you the confidence to start hunting seriously.

 

3. Property Valuation

Once you have found a property the lender check that you aren’t overpaying for the property that they will use as security if you default.

 

4. Unconditional Approval

Once all checks have been done on you and the property, the lender will issue a letter which allows you to confidently sign contracts unconditionally and put down the deposit.

 

5. Documents

Mortgage and loan agreements are issued for you to sign in front of an acceptable witness.

 

6. Settlement

Your broker, lender and legal representation coordinate the settlement and transfer of

ownership to your name.

 

7. First payments

The first repayment will be due the earliest of 1 calendar month after settlement or the nominated date you set. Don’t miss it!

 

Pro Tip: be prepared that the valuation may come in low. This is becoming more common as valuers are cautious to protect themselves. There is little penalty for undervaluing but big problems if overvalued.

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#7. Working out your minimum deposit

THe minimum deposit is independent (if not entirely unrelated) to genuine savings which we touched on earlier.

 

Working out the deposit is a simple equation

 

[Purchase price] + purchase costs + loan costs - first home grant - maximum loan amount

 

Most lenders will lend up to 95% of the purchase price which means you’ll need to source at least 5% then add stamp duty, legal & purchase costs, lender costs and mortgage insurance LESS any government grant.

 

Given that the grant and stamp duty exemptions are often conditional of property type, the kind of property you buy may have a big impact on the minimum deposit you need.

 

Likewise, some lenders allow you you add Mortgage Insurance on to the loan - some up to 97% other up to 99%.

 

Consider the difference between a new and old home with different lenders.

 

New Home Established

Lender A Lender B

Max LVR (inc LMI) 98% 95%

Purchase price $450,000 $450,000

Stamp Duty $0 $0

Legals & checks $1,500 $2,500

LMI $13,500 $12,500

TOTAL $465,000 $466,000

LESS

Max Loan $441,000 $427,500

FHOG $15,000 $0

Deposit Required $9,000 $38,5000

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#8. Raising the deposit

 

Deposits are typically raised the good old fashioned way by spending less than you earn and squirrelling it away somewhere you can’t get easy access to it.

 

The reality is it is harder than ever to raise it. Costs of living, astronomical rent and societal expectations around everything from what you wear to where you eat are all taking a toll on first home buyers’ ability to get their fist nest egg together.

 

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A modern solution for a modern problem

So what’s the solution? Categorise, divide and automate:

 

Step 1

Setup different bank accounts for different reasons and have your employer split your wages to each of them.

1. Bills: work out all your bills and have that amount go in first

2. Savings: What’s your savings goal? Put that amount here every month and don’t touch it

3. Rainy Day: 5 to 10% of your income should go here because trust me you’ll need it

4. Spendings: What have you got left over? This is what you have available for fun and frivolity. 

 

Step 2

Now you know what you have for spendings work out what you can live without and what you can’t. Like avocado on toast? (I do!), that's fine. Use the work coffee machine instead.

 

Step 3

Use technology. Now that you’ve got your budget automated, look for other ways to maximise your dollars. Apps like acorns takes the spare cents in every transaction and invests it for you.

 

Step 4

Track and learn. There are loads of great apps like XXX and XXX to help you stay on track with your finances by giving you real time gamified analytics on your spending habits and where your money goes. They’re surprisingly obsession building and fun.

 

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How much is right for you?

That really depends. For some, raising more deposit means wasting less money on LMI and for others LMI is a reasonable cost which is worth paying in order to get on the property ladder bathe in the currents of capital growth.

 

What’s the best way to raise your deposit.

Here are some legitimate ways you can raise the collateral you need to get a loan for your first home:

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Save: You must already have all the funds required to purchase before you are assessed by the lender (the promise of additional savings is not acceptable).

 

Gift: A gift from a legitimate source (typically a family member) is an acceptable way to raise funds for most lenders. Typically requires a statutory declaration from the giver stating that the loan is non-refundable and not in fact a loan.

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Guarantee: Using the equity in another property is a legitimate way of reducing the overall loan-to-value-ratio down to 80%. In this case you are able to use another property (typically a family member) as security for the loan.

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Sell Something: Shares or other assets can be sold in order to raise funds required to complete the purchase.

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Borrow: In some cases this is an acceptable method for raising deposit funds.

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#9. Working out your purchasing power

 

This figure depends on four factors

1. You income

2. Your liabilities

3. Household makeup and living expenses

4. The buffer they set

 

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Your income

All lenders take 100% of full time salaried income but each lender grades different less stable incomes sources like commission, casual income or self employed income.

 

A single person earning the same as a couple combines will have lower borrowing capacity because their tax rate is much higher.

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Your liabilities

 

Lenders will take into account all your liabilities including the repayments of your credit cards at the maximum limit (even if you have zero balance)

 

Other liabilities like HECS, child maintenance and store payment plans (zip pay etc) will also be taken into account.

 

Household makeup and living expenses

A couple will have greater living expenses than a single person, but not double the cost. Children also add to cost of living and those with higher income typically have higher living expense.

 

This is how the Household Expenditure Measure (HEM) Tables are worked out. HEM is the minimum cost of living standard which can be applied to a servicing calculator.

 

Lenders will also look at your actual living expenses and increase your overall cost of living where they see higher spending than the minimum for costs not deemed to be discretionary.

 

A buffer

The net income remaining after taking out tax, liabilities and expenses is what your borrowing capacity is worked out on BUT with a big buffer. So if your rate is 4% they will work out whether you can still afford the repayments at, say 7.5%.

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#10. 8 things you need to know before applying for a home loan

 

In order to qualify for a loan you will need to meet these requirements:

 

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1. Stable Income

Tenure: How long have you been at your job? Changing roles frequently can count against you.

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Type: Permanent roles (part or full time) are highly regarded. With most lenders, casual, contractor or self employed applicants will need to show 2 years income history.

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Probation: Most lenders won’t accept your income if you are still under probation.

 

2. Genuine Savings

Required for loans over 90% of the purchase value. 5% of the purchase price is the minimum you need to have.

 

Genuine savings is demonstrating a savings pattern over a minimum 3 months in the name of at least one borrower on the loan.

 

It can be accumulated savings, funds or shares held for 3 months, after tax bonuses excluded from income for servicing or redraw available from making additional loan repayments.

 

Under certain circumstances some lenders will accept a good rental history as genuine savings.

 

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3. Good Conduct

You will be required to show at least 3 months statements for all your liabilities and 6 months bank statements. The credit assessor is looking to show

• You pay all your commitments on time (rent, loans, utilities etc)

• You are not overdrawn or charged other bad conduct fees

• You pay your credit card down rather than maxing-out your limit every month

• You don’t have bad spending habits (gambling, Zip and afterpay etc)

• You haven’t used payday lenders before (this is a big no no!)

• Your income is steady (no 4 week extended holiday without pay)

 

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4. Credit Rating

It’s not just Santa Clause who knows whether you’ve been naughty or nice anymore.

 

Mandatory credit reporting is a thing now, which means your credit file isn’t just affected by defaults.

 

Now every time you are even late on making a payment your lender notifies the credit agencies.

 

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5. Stable Living Situation

Statistically speaking if you move around a lot you’re probably not going to be great with you credit.

 

We think that’s probably true because moving house means mail goes everywhere and it takes up a lot of brain space which could be better spend on getting ready to buy.

 

Pro tip: More than 2 moves over 3 years isn’t a great look.

 

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6. Living Expenses

Formerly, lenders were able to assign a standard living expense figure scaled by income and household structure.

 

Now lender (and brokers) are obligated to investigate your true cost of living in order to establish a borrowing capacity which meets much more stringent. They do this by checking all this via your bank and credit card statements.

 

The amount you spend on items not considered discretionary (like health care, child care, insurance, telco and food) will be take into account when calculating your borrowing power.

 

7. Net Assets

What is your asset position compared with your liabilities. In other words if you should all your assets would you have money left over or debt.

 

Pro tip: A net negative asset position is poorly regarded.

 

8. Overall Conditions

Your overall position versus the loan you need is also taken into account.

 

For example if you have 20% deposit genuinely saved, the it will count much less that you’ve moved twice this year and are in your last month of probation at work.

 

Conversely, if you have great income and credit but you have limited savings to your name, your lender may consider using rent as genuine savings and use government grants rather than requiring you to have the 5% + costs saved.
 

Pro Tip:  Most probationary periods are 6 months (not 3) these days. Think before you leap is our advice here.

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