For most of us, a house will be the most valuable thing we own during our lifetime. The right house is also your first rung on the property ladder, should you want to climb your way to financial freedom. The wrong house could leave you financially and emotionally stressed, wishing you had never embarked on this adventure in the first place.
But we haven’t even started yet! A lot of jargon is thrown around by those in the property industry. For a first home buyer, hearing Agents and Banks using phrases like “leaky buildings”, “stamp duty”, “Lender’s Mortgage Insurance”, “Loan to Value Ratios” and “First Home Owners Grant” is enough to make you sit back and wonder whether you will ever know enough about this industry to dip your toe in without accidentally choosing that ‘wrong’ house.
So how are people in Queensland buying their first home and what do you actually need to know? Over the next few weeks we will outline a road map which covers the basics. Today, let’s focus on what your goal is and the first step – getting that deposit!
- Determine your Objective
This is the most important (and most boring) part of the exercise. But without knowing what your destination is (the objective), how can you know how to get there?
An objective must be a defined thing. You must be able to determine whether you have arrived at your destination. “Being really rich” is not sufficiently defined, while having five positively geared rental properties is. So is owning that dream family home with no mortgage.
For now, let’s assume your objective is to purchase your first home at an affordable price which does not ruin your existing lifestyle.
The remainder of this series therefore maps out how you can get to your destination. But first lets work out how to get started: how to get that deposit!
Unless your parents are extremely rich or you made some very, very smart saving decisions when you were a child, you are most probably going to have to borrow money to buy your first house. Let’s assume you need to borrow from a bank.
Regardless of whether your objective is to own a hundred rental properties, or one mansion for yourself to live in, you must contribute to part of the total cost of buying that first property.
Historically banks required you to save 20% of the price. But given the median house price is Brisbane is now $580,000.00, it might take you a while to save over $115,000.00.
Banks have therefore relaxed their 20% requirement. It is now possible for your deposit to be as little as 5% of the price. Some banks will even not require you to have saved the entire 5% yourself, provided you meet certain criteria. However, once you have less than a 20% deposit, banks decide that you are risky to lend money to. Banks therefore charge you Lender’s Mortgage Insurance (LMI), which is a fee quite often charged when you first borrow the loan. All of a sudden that $50,000.00 deposit you saved up over a year or two is down a few thousand dollars and we haven’t even delved into the realm of transfer duty (“stamp duty”) yet!
So how can you avoid LMI? Well three ways, or, hopefully a combination of all. Firstly, when calculating your deposit, banks will take into account the First Home Owners’ Grant (up to $20,000.00 until 30 June 2017). Are you eligible? To find out, here is a link to the relevant website.
Secondly, a relative can also guarantee part of your loan without even giving you any money! Emphasis on “part”. A guarantee is where a relative (often a parent) promises the bank that if you cannot make your loan repayments, they will pay instead. The bank usually requires this relative to use their property as security. This can be an awkward conversation to have: “hey mum, if I borrow money from the bank and can’t pay, are you ok with the bank selling your house?”. However, the best way to frame this request is to make it clear that the relative is only guaranteeing whatever part of the 20% you have not yet obtained. Once your loan is less than 80% of your home’s value (i.e. you own 20% of the property), your relative is released from their guarantee. If you have chosen the “right” property (more on that later), the value of the property might increase so that even if you do not pay the loan off quickly, you might reach that 20% mark within a couple of years.
Thirdly is – putting it simply, you need save some money yourself. However a few banks won’t even require you to have saved 5% of the price. Provided you have 5% made up of a combination of savings, First Home Owners’ Grant and/or a relative guarantee, some banks will take into account the fact that you have been paying rent while saving for your deposit, so will not require you to have saved 5% yourself. This is an exceptional circumstance and banks must comply with strict lending requirements to ensure they are lending to you in a responsible way. Given I am not a qualified financial advisor, if you wish to go down this route, I suggest teaming up with an experienced broker and financial planner.
Remember that unless you have a total of 20% made up of these three factors, you will be paying thousands of dollars of Lender’s Mortgage Insurance which really eats in to the money you have saved. It’s wasted money.
With house prices increasing faster than our incomes, Buyers need to be creative when obtaining a deposit. However as soon as you are on the property ladder with that “right” property, its value should increase and you are then well on your way to financial freedom, that dream home, or both!
Next week – Minimising entry costs
Disclaimer: Andrew Pine is a property solicitor practising in Queensland. Andrew is not qualified to give accounting or financial advice. This article is written solely as an opinion of the writer. This article should not be relied upon for legal, accounting or financial advice. You should always seek advice which is tailored to your individual circumstances.