This is the ultimate guide to first home buyer loans in 2020.
And let me be clear about something:
This is NOT your average “First Home Buyers” loan post.
Yes, I’ll cover the fundamental first home buyer trends this year.
But you’re also going to see new strategies that are working great right now.
So if you’re looking to buy next year, you’ll love this new guide.
Chapter 1: What Should I Look for in a Loan?
Not all loans are created equally.
Today, lenders often fall into a few different categories.
That is lenders who offer the best interest rates, lenders that provide extras or have a specific minimum deposit amount.
And in this chapter, I’ll cover everything you need to know.
How do I differentiate between loans?
If you’re unfamiliar with the home loan process, then this will all be new to you.
But don’t sweat it, there are a few simple ways you can differentiate between loans.
Simple strategies like looking for the following:
- Does the lender specialise in first home buyer loans? Most don’t, so if you find one that does, it’s quite rare.
- Does the lender offer competitive interest rates? Now interest rates can be a real sting if they’re high. So look for a lender that offers a lower interest rate, leaving you with smaller repayments. Watch out for introductory rates, which often increase a lot once the initial period is over.
- Does the lender offer low deposit loans allowing a deposit of 10% or smaller? Yes! It is possible to find a lender that provides loans for those with a deposit UNDER 20%. Some lenders even allow a loan to value ratio of between 90 to 95%, speak to Hunter Galloway about these types of loans. But don’t forget, if you’re paying a deposit under 20%, you’ll have Lenders Mortgage Insurance which will be added to your loan.
- The lender offers extra bells and whistles. Additional features like an offset account or redraw facility can help you in times of need. While in many cases, the “typical first home loan” doesn’t come with many extras. So this is something to think about.
- Look for principal and interest (P&I) repayments. If you can, try to get a loan that allows you to pay P&I, because often these types of loans provide lower interest rates.
First home buyers assistance: I am still working towards a deposit…
Just like so many Millennials, the idea of having a deposit to buy a home can seem a little far off. If you’re still working hard to save up your full deposit, here are a few strategies. These are the same strategies that have helped hundreds of first home buyers to supercharge their savings.
- Apply for the new, First Home Buyers Deposit Scheme. This new government-supported initiative will be available from Jan 1, 2020, for 10,000 first home buyers. Under this new scheme, buyers will not need to pay Lenders Mortgage Insurance. Deposits as low as 5% can be put down. The best part is, this scheme can be used in conjunction with the First Home Buyers Grant and First Home Super Saver Scheme.
- Gift of inheritance. You will be able to use a cash gift or inheritance as part of your deposit. The lender will still want to see some genuine savings, to show that financially you can support yourself too.
- Sell what you can. Any assets or items sitting around the house should be sold! This will help you boost your short term savings goals.
- Get a guarantor. Your parents are eligible to guarantor you if they own a property and have equity in it. This can be used for part of your deposit and will avoid LMI costs.
Be realistic about what you can afford.
We see a lot of first home buyers overestimate and look at properties beyond their realistic budget.
Start by speaking with your broker about how much you can afford to spend.
Especially if you don’t mind the odd martini on a Saturday, and your lifestyle matters, these extra expenses come into play when figuring out your budget.
There’s a difference between the maximum you can borrow, and how much you can afford. Looking at what you can afford takes into account how your lifestyle expenses will fit in with your home loan.
When it comes to figuring out your home loan repayments, you will also need to add on extra costs. This includes rates, electricity, maintenance, water bills, insurance, and potential body corporate fees. These additional costs can impact your monthly budget much more than what your regular rental payment would.
Lenders Mortgage Insurance (LMI)
That is unless you have applied for the First Home Buyer Deposit Scheme.
It’s protection for the lender if you can no longer pay your loan. While isn’t insurance for you, it merely allows you to buy a property with less money.
And, it doesn’t change your responsibility when it comes to paying off the loan.
What about different loan definitions?
When it comes to buying, there are so many new terms buyers have to learn.
So make it easier with this little cheat sheet.
Fixed-rate or variable rate? Well, what’s the point of being given a choice if you don’t know the difference?
A fixed-rate is when the bank/lender confirms and fixes the interest rate over a specific period.
It usually falls within a one year, three year or five-year timeframe. Over this period, your mortgage repayments will be consistent, because there is no way for your interest rate to change.
Fixing rates is a great way to gain stability around your repayments and lock in a solid interest rate. The downside? If the interest rates fall significantly, you won’t be able to get a better rate until your fixed-rate period is over.
A variable interest rate will change with the Reserve Bank’s cash rate. Other rules and regulations will affect it too.
Being on a variable rate can be great if interest rates drop rapidly, so you reap the benefits. But it also means that your repayments will change according to the current interest rates, which isn’t always in your favour.
Principal and interest repayments:
This type of repayment allows you to pay for both the interest and the principal of the loan. So during the term, you will be paying off both your mortgage debt and the interest. Principal and interest repayments is a typical home loan structure and the recommended set up.
This type of loan charges you just for the interest you are accruing on your loan. So you won’t be making any payments towards your mortgage.
It is the minimum repayment allowed on your loan. When this interest-only period comes to a close, your repayments will, unfortunately, go up. When you sign up for a loan, you will have been given a loan term (usually 30 years). So if you stop paying the principal for let’s say, one year, this outstanding amount will be added to your future repayments. So while interest-only repayments have short term gain, sometimes it can provide long term pain.
Home loan packages
Home loan packages bring together your accounts into one. It combines your mortgage/home loan with your transaction account and any other extras. These types of packages can make life much easier!
Should I get a guarantor?
Guarantors are a great way to help first home buyers enter the market. Usually, parents will act as the guarantor and use the equity from their current property to put towards the child’s deposit.
Getting a guarantor means that the buyer can get into the market sooner and avoid LMI.
We recommend guarantors on a case by case basis. There is no right answer.
While they are a great idea if both parties are in the right financial position, as always, risk comes with this. The buyer will need to be able to prove that they can pay off the loan. Because if they default and can’t pay back the loan, this will cause strain on the guarantor.
Chapter 2: What should I be aware of when buying a property?
Can building and pest reports be a deal-breaker?
Many first home buyers fall in love with a home.
And what does love do? It removes our ability to reason.
Here’s what you need to know.
Don’t just jump into buying; understand that it could take years.
Just because you’re financially ready to buy, doesn’t mean that you should rush into the first property that seems like a fit.
For some people, it can take up to two years to find the perfect property.
My best piece of advice I can give is, don’t rush it!
Even though you’ve inspected and applied for so many, don’t just settle.
When you’ve found the right property, make sure you go through the stages.
– Building and pest inspections! Do not skip out on this stage; it can be a great way to lower the price due to what the report comes back with. And do you really want to be in a termite-infested home, if you’re not aware of it?
Remember that the real estate agent is on the seller’s side, not yours.
So if you need some assistance with the buying process, consider getting a buyers agent.
As the buyer, the ball is in your court. Use this to your advantage and remember that even though it may be the extra $10,000 you’re negotiating over.
Add a 30-year loan term with interest to that and the amount goes up.
Never feel pressured by the real estate agent
You can often be in a position where the real estate agent is pushing you.
They might mention that they been inundated with other offers, but remember that they’re working for the seller.
They want to get a fast sale and land the deal.
So they may put pressure on you. And if you’re feeling rushed, take a step back. It is better to leave it, and move on than make a decision that you may regret.
Chapter 3: This all sounds too hard; what should I do?
Is buying a home the only option? It sure looks like it.
But in fact, I have another solution for you.
That is, rentvesting. Did you know that…
- 71.4% of households owned a home in 1994/1995
- This dropped to 68% of households owned a home in 2015/2016
- Young people are looking for new ways of investing.
This is where rentvesting comes in.
The latest investment strategy for first home buyers is rentvesting.
Rentvesting is where you buy a property to invest, but rent somewhere you prefer to live — giving you the best of both worlds.
But what are the positives and negatives?
- ✅ Buying a property that you can afford, sooner.
- ✅ Investing in an up and coming suburb
- ✅ Using this property to gain equity
- ⛔ You still will be renting
- ⛔ You may need to hold the property for quite some time until it goes up.
- ⛔ You will need to get tenants in right away to help with affordability.
When it comes to rentvesting, research is critical. You will need to figure out the suburbs that are still sitting at a lower purchase price and try to predict the future of the property market.
Be strict about what you’re looking for and take away the emotional attachment.
It is purely an investment.
Our advice is to speak to a mortgage broker and financial planner before going ahead with rentvesting.