First Home Buyer

First Home Buyer

There is a maze of information out there, we have put together the important bits that you should know.

Buying a property can be a daunting task for most people, especially if it is your first property purchase. It can be stressful at times when you have to rush all weekend going from one property inspection to another on top of all your other regular weekend activities. If you are like most people, when you have found that property you start worrying about how you are able to get the finance to pay for the purchase. Some of you may not have enough savings to put down a deposit for the purchase. Do you know how much the purchase costs are that you would incur? These are the additional cost on top of the purchase price of the property.

You are about to purchase something that would most probably cost several hundred thousand dollars. It is likely to be the largest purchase you will ever make. Don’t you think it is wise to arm yourself with some knowledge and also to seek advice before taking the plunge?

Most banks will only lend up to 80% of the purchase price or property valuation value (whichever lower) without the borrower incurring Lenders Mortgage Insurance (LMI) premium (see example A). In order to purchase a $280,000 property in Victoria, you will need to have approximately $72,800 for settlement to cover the 20% deposit and 6% purchase cost. This is a sizeable amount of savings for most Australians.

** Lenders Mortgage Insurance (LMI) is usually charged as a one-off premium and is calculated on a sliding scale. That is, the greater the percentage of the property value you borrow and the more money you borrow, the higher the premium payable on the mortgage insurance. LMI premium could be as much as several thousand dollars. Each lender has different LMI premium rates.

It is important that you understand that Lenders Mortgage Insurance protects the lender, not the borrower in the event that you default on your loan and the outstanding value of your loan is greater than what the lender would receive from selling your property. Where a claim for loss is paid to the lender, the Lender Mortgage Insurer may seek recovery from the borrower, or any guarantor, for the balance of the loss outstanding.

If you are a first home owner you may be entitled to receive one or more of the following:

  • First Home Owner Grant (the Grant)
    • The First Home Owner Grant provides eligible first home buyers with up to a $10000 grant. This grant is not means-tested nor is it restricted by the price of the property for contracts entered into prior to 1 January 2010.
    • For contracts entered into on or after 1 January 2010, the grant will only be payable where the price of the property or construction of the home does not exceed $750,000. An exception to this requirement is where the contract relates to a home that is on, or to be built on, primary production land.
    • Established homes will not be eligible for contracts entered into on or after 1 July 2013.
  • Stamp Duty Reduction for First Home Buyers

Contract Date (1 July 2013 Onwards)

Conditions

First Home Owner Grant (FHOG) First Home Bonus First Home Owner Regional Bonus Total

Established homes only

N/A

N/A

N/A

N/A

Newly constructed homes in Metropolitan Victoria only

$10,000 #

N/A

N/A

$10,000

Newly constructed homes in Regional Victoria only $10,000 # N/A N/A $10,000
# To qualify for the Grant, the price of the property or construction of the home must not exceed $750,000.

 

50% Reduction Stamp Duty Savings to First Home Buyers

Value of Property

Normal Rate of Stamp Duty (Principal Place of Residence)

50% Reduction (Duty Payable)

50% Reduction (Savings)

$200,000

$6,370

$3185

$3185

$300,000

$11,370

$5685

$5685

$400,000

$16,370

$8185

$8185

$500,000

$21,970

$10,985

$10,985

$585,000

$28,970

$14,485

$14,485

$600,000

$31,070

$15,535

$15,535

The information in these tables is to be used as a guide only. For more information, please go to www.sro.gov.au and choose First Home Owner articles.

Where to obtain deposit payment for your future Property?

  • First home saver account (FHSA) The FHSA will be abolished on 1 July 2015. From this date, all existing FHSA will be treated like any other account held by a financial institution and the withdrawal restrictions will be removed. For more information, go to www.ato.gov.au.
  • No Genuine SavingsSome lenders have a no genuine savings policy which allows a borrower to borrow up to 90% of the purchase price or valuation value (see example B on the following page). This helps to lower the deposit amount required for settlement. Your 10% deposit and purchase cost do not have to come from genuine savings. It can be from the sale of assets or investments. It can also be a gift from a family member as long as they provide a statutory declaration stating that the gift is non-refundable. However if you borrow more than 80 per cent of what the lender considers to be the value of the property (known as the loan-to-valuation ratio or LVR) they will ask you to pay mortgage insurance on their behalf. What this means is that you as the borrower will have to pay for mortgage insurance that the bank takes out to minimise their risk in lending you the amount above their normal lending guidelines.It is important that you understand that Lenders Mortgage Insurance protects the lender, not the borrower in the event that you default on your loan and the outstanding value of your loan is greater than what the lender would receive from selling your property. Where a claim for loss is paid to the lender, the Lender Mortgage Insurer may seek recovery from the borrower, or any guarantor, for the balance of the loss outstanding.
  • Genuine SavingsThis is a genuine savings lending policy that is available with some lenders. You may borrow up to 95% of the purchase price (see example C on the following page). The lender will require proof of genuine savings for the 5% deposit. You will have to show that you have saved the 5% over a period of 3 months. It cannot be a gift or a sale of assets. The 5% can be held in a savings account, deposit account or share investments. As the loan amount will be greater than the standard 80% lending guidelines, you will have to pay a Lenders Mortgage Insurance (LMI) premium. For a full explanation of what LMI is, see the Non Genuine Savings section above. Premium rates will be higher still for a 95% loan. Again the rates differ for each lender.
  • GuaranteeIf you do not wish to pay Lenders Mortgage Insurance premium, you may still be able to obtain finance if your parents or an immediate family member is willing to use the equity in their own home to guarantee a part or the entire home loan. If the guarantee is only for part of your home loan, they have the peace of mind of knowing that the guarantee is limited to a specific amount.For more information about types of guarantees, refer to the Types of Guarantee section. Only some lenders will accept a guarantee. In cases where the proposed guarantor may include a partner of a sibling due to the ownership of the proposed security, a Credit Officer can consider these requests on a case by case basis.

Types of Guarantees

  • Guarantors for Security Support Only
  • Eligible Borrowers / Guarantors
  • Guarantors for Security and Servicing Support
  • Eligible Borrowers / Guarantors

Types of Loans available in the market

  • Introductory loanBorrowers may not be consciously aware that they are ‘locked in’ to these types of loans for X number of years where loans are converted to the standard variable rate when the honeymoon period ends, whereby they end up paying the standard variable rate for 3 years after the honeymoon period.
  • Discounted ‘No Frills’ LoanNo frills loan products are often lower than the standard variable loan by up to 0.51%. It might not look as ‘cheap’ as the Introductory Loans but this discounted rate is available for the life of the loan term and not just the first 12 months. It might not offer all the same facilities as the standard variable loan where you may have an offset account, credit cards, or a reduced redraw fee but if you don’t use those facilities why pay more for things you don’t need?
  • Loan PackagingLoan packaging offers by some of the larger banks also provide a discounted rate to borrowers who meet the qualifying criteria set by the individual banks. There are usually a minimum loan size and a minimum income requirement to qualify for a loan package. The discount on offer is usually on a sliding scale, whereby the larger the loan size the larger the discount rate. You will not have to pay an application fee but there is an annual loan package fee.
  • Asset Lend or Non-Doc LoanIf you currently own your property outright or have substantial equity (own a large portion) in your existing property, you could apply for an Asset Lend. Most lenders have loan products that can advance to you a loan of between 60% to 75% of your existing property value. Asset Lend are also sometimes referred to as No-Doc Loans. You can use the loan proceeds to fund your investment such as another property purchase or share investments.

 

Which to choose?

  • To Be ‘Fixed’ Or Not To Be ‘Fixed’There isn’t a right or wrong answer to this one. No one can accurately predict which way interest rates are moving or how much they are going to move in the future, it is all about timing.
  • Rate LockIf you do apply for a fixed loan, remember that the ‘fixed’ rate is not actually fixed until settlement. In the event that a rate rise occurred between the time you submitted your loan application and when the property settlement occurred, you would be charged the new increased rate. If you want to prevent this from occurring, you could apply for a ‘rate lock’ when you submit your loan application. However, a rate lock is generally only available from the larger lenders. You will have to pay a rate lock fee if you wish to have the comfort of knowing that the rate will be the same when settlement occurs.
  • Split LoanIf you are still undecided on whether to fix or not to fix, perhaps you may consider taking a product with a split loan whereby you can have part of the loan fixed and the remainder as a variable loan.

 

How to save thousands?

  • Choose fortnightly repaymentThis will help to pay off your loan faster because each year you are making extra 1 month repayment.
  • RefinanceThroughout each year the home loan and financing requirements of people change. Therefore it makes financial sense to review your position at least once a year. There are many new products that lenders release each year and these newer products can help some people to save many thousands of dollars on their traditional “set and forget” home loans.
  • Utilise offset facilitySome loan products offer full or partial offset facility. If you have an offset facility on your loan account, the lender will set up a saving account attached to you loan account. The interest rate on the offset account is the same as on the loan. Any money you put in the offset account is deducted from your loan balance before interest is calculated. It operates like a transaction account and typically has a cheque facility and a cash card. The interest rates on offset accounts are usually higher than other savings and transaction accounts. All this helps to lower your interest repayment if you use it properly and take advantage of the offset facility. If you have an offset facility on your loan account, you should put your savings and salary into the offset account to reduce your interest repayment.

 

Before you start

If you have ever applied for credit in the past, chances are you will have a credit file or credit history kept on you by the Credit Bureau. They could hold information on your credit history on their database for 5 to 7 years depending on the type of information being kept.

  • Your Credit FileWhen you apply for credit whether it may be for a home loan, credit card, personal loan or car finance, the lender will have obtained your permission to access your credit file to ascertain that you have a clean or clear credit history. They could tell whether you have defaulted on your past loans, missed your credit card payments, car repayments or have not been paying your utility bills. They may be able to obtain information about any loan that you may have applied for, including the loan amount, even if you did not go ahead with the loan.To get a free copy of your credit file or for more information, please visit www.mycreditfile.com.au
  • The ‘Black Mark’It is most important to avoid getting a ‘black mark’ on your credit file, this include even the insignificant phone or other utilities bills. Most major lenders will not approve any further credit to you if you do not have a clear credit history.
  • Already In The ‘Bad Books’?You may still qualify for a home loan with a non-conforming lender. These are non-bank lenders that have a less stringent lending policy. They do charge a higher interest rate and fees, depending on the level of credit impairment, the loan to valuation ratio (how much you are borrowing against the property valuation value) and how recent the credit impairment was.

 

When should I apply for a loan?

  • Before you sign a sales contract, be it an Auction, Off the plan, or House and Land, it is always a good idea to obtain a Pre Approval.
  • Pre Approval letter. For a start, you will not have to waste a lot of time looking at properties outside your price range. You will also feel a lot more confident at bargaining the sale price with the vendor or agent if you know exactly what you can afford. If you are buying at an auction, you have a good idea of the maximum bidding price that you can bid at.
  • The actual lodgement of your loan should be made 1-3 months prior to property settlement.

 

Your loan process at a glance

1. Enquiry And Your Application

A loan application can be lodged with the lender once your lending manager or mortgage broker interviews and understand your needs, then helps you to find a suitable product. They will help to prepare an application for submission to the lender.

2. Approval In Principal

Once the lender has received all the necessary information, you would normally receive an approval in principal within 48 hours.

3. Property Valuation

Your lending manager or your mortgage broker valuation of the security property. You will need to satisfy any conditions that are attached to the loan pre-approval.

4. Formal Approval

Once all conditions are met, the lender will formally approve the loan application. Their solicitor will be instructed to prepare the loan contract documents.

5. Loan Contract Documents

The lender’s solicitors will prepare your mortgage documents and mail them to you. The documents will clearly indicate all the fees and charges, your repayment amount and how the funds will be disbursed on settlement.

6. Settlement Of Your Property

Your loan is drawn down on the day of the settlement and is in place from this time.

7. After Settlement

Depending on the product that you have chosen, you may be provided with an ATM or credit card, your online and phone access code.

Things to do before you sign a contract

  • Do your homework, find the right property for you:
    • Choose the right area
    • Understand the value of the property
    • House, townhouse or unit
    • Building and maintenance
  • Obtain a Vendor Statement, or Section 32 Statement. The vendor is required by law to provide the Section 32 to the purchaser before contract of sale is signed. Usually the Section 32 is prepared by the vendor’s lawyer, and delivered to the real estate agent. The estate agent then makes the Section 32 available to intending purchasers. Section 32 contains information about the property being sold. For example; title details, particulars of any mortgage or charges over the land, services connected to the property, statutory warnings to the purchaser, and vendor’s details are just a few of the things that must be disclosed in a section 32 statement.
  • Have a solicitor examine the contract and Section 32 Statement.
  • Measure the property.
    • Check the position and dimensions of the property to ensure that they correspond with the position and dimensions as appears on the plan of the title.
    • Contact your solicitor if there is any discrepancy.
  • Determine the availability of services.
  • Examine the property for illegal structures.
  • If necessary, ensure that your contract is conditional upon finance approval.

 

Things to do after you sign a contract

  • Pay residue deposit, whether or not your finance has been approved.
  • Take out insurance coverage for any buildings on the property for its replacement value. You should also note on you insurance policy the interest of the Bank or the financial institution as the mortgagee.
  • Ensure you make immediate application for finance if you have not already done so.
  • Advise the vendor if finance has not been approved by the approval date as outlined on your contract, or has been declined.
  • If you do not advise the vendor that finance has not been approved, the usual finance clause will allow the contract to become unconditional.

 

Dealing With Solicitors or Conveyancer

Every time a property changes hands, the process is called conveyancing. This transfer from one owner to another has to be done in a certain legal way. You can do it yourself or with help of either solicitor or conveyancer.

Basically, the difference is that conveyancer can only give you legal advice about the property, whereas a solicitor can advise you about the property and many other legal matters as well.

What Your Solicitor Or Legal Representative Will Do

  • Check your contract of sales and let you know of any concerns or issues.
  • Arrange, or advise you regarding pest and building inspections.
  • Coordinate your exchange of contracts and payment of deposit.
  • Review your mortgage documents.
  • Coordinate and attend the settlement of your property.

Some Things To Ask Your Solicitor, Conveyancer Or Legal Representative

  • How much do you charge?
  • Are incidental costs included?
  • Do you charge a storage fee for documents?
  • Does the title (e.g. Strata, Torrens) of the property influence the cost?
  • Are you licensed to do this type of work?
  • Do you charge for advising on the mortgage document?
  • Do you handle all correspondence and enquiries? Will I be dealing only with you?
  • What are your working hours? Can I contact you outside working hours?

Dealing Real Estate Agents

Some Things To Ask Your Real Estate Agent

  • Recent sales in the area?
  • Are there any heritage orders for the home?
  • What is the likely rental return?
  • What are the current annual council rate?
  • Are there any approved plans for renovations or alterations to the property? To a neighbouring property?
  • Have any building or pest inspections been undertaken recently?
  • Are there any reports that detail the state of the plumbing and wiring?
  • What is the vendor’s desired settlement period? How flexible are they?
  • Can you confirm that the council has approved additions or changes?
  • Does the agent receive any commissions from conveyancers or lawyers?
  • What is the floor space ratio (allowable ratio of building area to total land area)?
  • How much of the floor space is currently used?
  • Is the unit a company title and if so, can I rent it out?
  • Is the building fire rated for safety?

 

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Copyright © 2017 J.A.S.Q Investment Pty Ltd ACN 082 508 049 t/a Mortgage Zone. Australian Credit Licence Number 456786
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