Useful Information for First Home Owners

Buying your first home can be daunting with so much to learn about the property market and home loans, so I have provided information below based on the questions I am always asked by First Home owners. If you have any questions that I have not answered below please feel free to contact me on 0414 477 242.

Borrowing Capacity
This is the term for the loan amount that you can borrow. This amount will vary between each Lender as they have each have individual calculators for determining how much you can borrow. Essentially what they look at is the disposable income you have to use towards paying a mortgage, that is how much money you have left after you deduct everyday living expenses, and any liabilities such as credit cards, loans or any other ongoing expenses from your salary.

What expenses are involved in buying property ?
Expenses can vary however you will require a minimum of 5 % of the property purchase price as a deposit (although I suggest you try to have slightly more), and allow funds for other expenses such as stamp duty (First Home Owners may be exempt from paying this depending on the property), legal fees, lender fees, pest and building inspection fees and insurance for the property.

How much deposit do I require ?
Most lenders require a minimum of 5 % (genuine savings) however there are only a handful of lenders these days who will lend with only a small, some will require a minimum of 10%, each lender varies depending on their policies as to how much deposit they require.

Genuine Savings
Lenders want to see that you have accumulated funds over a period of time, which they call Genuine Savings. Generally this will relate to a minimum of 5% savings you have accumulated in a bank account over a 3 month period. Some lenders will consider rental history as genuine savings, or assets such as Equity in property or funds held in share investments for example.

The main advice I provide my clients is to first determine how much money you will need to purchase the property you want, then set up a budget and savings plan to help you reach this goal.

What if I don’t have 5% genuine savings ?
As a general rule this is what you will require at a minimum to proceed with a property purchase. There are some lenders willing to lend based on non-genuine savings, where you may have the required deposit but did not save it yourself over a 3 month period. There is also the option of a Family Guarantee if you are unable to save the required deposit yourself.

Family Guarantee
If you have a family member with equity in their home, willing to use that property as security against your house then you may be able to secure a mortgage by using a family guarantee (NB: lenders use different names for this type of loan).

As long as there is enough equity in the family members property this option may enable you to borrow to purchase your property plus all the costs. It is a good option if you have the income and capacity to repay a loan but are unable to come up with the required deposit.

You may even avoid paying any Lenders Mortgage Insurance (LMI) with this option. Not all lenders provide a family guarantee option, but there are quite a few that do.

Lenders Mortgage Insurance (LMI)
Lenders Mortgage Insurance is a one-off payment made to the lender when you take a loan with them and applies if you take a loan of more than 80% of the property value i.e you have less than a 20% deposit. It can be paid in cash but most clients add the LMI to their loan amount.

The insurance does not cover yourself but rather the lender who is taking the risk in lending the money to you with a deposit of less than 20%. In the event that you default on your loan repayments, and the lender is required to sell your property, the market value of the property may be less than the loan still owing, and this is where LMI protects them.

When you borrow more than 80 % of the property value, where LMI is applicable, lenders tend to place tighter restrictions around credit policy and lending criteria.