Money & Life contributors draw on their diverse range of experience to present you with insights and guidance that will help you manage your financial wellbeing, achieve your lifestyle goals and plan for your financial future.
Getting ready to buy a property? We’ve put together a simple step-by-step guide to saving and borrowing for first time buyers so you can get your finances ready for buying your first home.
Saving for a house deposit
If you don’t already have thousands of dollars in savings – or parents who can give you a helping hand – your journey to home ownerships begins with saving a deposit. When you’re starting from zero, sticking to a budget to help you save can seem like the hardest part of the whole home buying process .
According to CERTIFIED FINANCIAL PLANNER® professional Jeremy Chiel of Stonehouse Group, it’s a task that’s made easier when you have a clear goal in mind for your budget and savings. “Do you know how much property really costs in the area where you’re looking to buy?” says Jeremy. “Then you’ll determine the deposit needed and ongoing cost of servicing your loan. Having these actual figures in front of you helps put together a complete picture of what different options look like. And based on any surplus income you have, you can put a number on how long would it take to save that deposit. Once you have a concrete idea of your goal, it becomes more real, which motivates you to take action.”
When the time comes to borrow money for your home, having a good savings history and credit score will work in your favour. So as well as helping you reach your deposit goal, getting on top of debts and saving regularly is an important part of preparing to finance your home.
10 of the best articles on saving and budgeting from Money & Life:
So how do you come up with those all-important numbers for your savings goal? You can start by looking at property listings in the area where you’d like to buy to get an idea of what you can expect to pay for your future home. But you’ll also need to keep in mind the many other fees and costs that come with buying property, such as stamp duty, legal and mortgage fees.
Generally speaking, you’ll need to save at least 20% of the total cost of your new home before you’re ready to buy. The more you can put towards your deposit, the less you’ll need to borrow, which will save you on interest over the term of your mortgage. A bigger deposit and smaller loan also reduces the burden of repayments on cash flow once you own your home.
“With higher loan servicing costs, you’ll have less capacity to save or invest money,” says Michael Hayward, CERTIFIED FINANCIAL PLANNER® professional from Capital Partners. “And that could have an impact on other financial goals like saving for a holiday, your children’s education or your retirement. You’ll need to be sure this is a trade-off you’re willing to make to buy your home.”
As a rule, you should be able to borrow up to 80% of the value of your new home, providing you can afford the repayments. In addition to your income, lenders will also have other criteria for assessing your loan application, including your credit score, employment history, household expenses, your dependents, other loans and debts and much more.
As well as having the bank review your ability to repay your home loan for the application process, it’s important you feel confident about keeping up with loan repayments. “Before you decide how much to borrow, you need to have enough surplus income to support higher repayments, even if interest rates start to go up,” says Michael.
In some circumstances you may be able to borrow more than 80% of the value of the home you buy. If this were to happen, most lenders will charge you a one-off premium for Lenders Mortgage Insurance (LMI), an insurance policy that protects the lender if you default on your repayments and they experience costs or losses as a result. Depending on the amount you borrow, LMI can be a substantial amount so you need to bear this in mind if taking on a mortgage with a loan to value (LVR) ratio of more than 80%.
First home buyers’ grants
Stamp duty is the 10% GST amount new owners are required to pay when they buy a home. It’s one of many costs you’ll need to keep in mind when working out what you can afford and how much you need to save. The good news is many first home buyers can benefit from the First Home Owner Grant scheme which provides concessions and discounts on stamp duty. Terms and eligibility are different across the states and territories so check the First Home Owner Grant website to find out what support is currently available for buying your first home.
Next up – find out all about the steps to buying a home