First Home Buyers loan options

Congratulations! You’ve decided to make the leap and buy your first home, but where do you start? Here’s a complete rundown of what you’ll need to take into account, and the choices available to you.

How much deposit do I need?

The minimum amount required is generally 5% of the purchase price, but you will also need to be able to cover the costs such as stamp duty, solicitor fees, rates, removalist costs and others. First Home Buyers should allow approximately 1-2% of the purchase price to cover these extra costs. So in total you should aim to have access to min 7% of the purchase price.

Genuine or Non Genuine Savings defines whether or not you have genuinely saved the deposit yourself or if it was gifted to you. If you have worked hard and saved your deposit up over many months or years then this would be considered genuine savings. If a family member gives you a gift equating to 7% then it is considered non genuine savings. Having non genuine savings will limit your options to the number of lenders you can deal with so it is preferred you have genuine savings however it’s more important you actually have access to the deposit instead of whether it is genuine or not.

Lenders Mortgage Insurance. If you have less than a 20% deposit, you will need to have Lenders Mortgage Insurance. This is a once off premium charged at the start of the loan and covers the lender in case you default on your loan. You must pay it regardless of the lender and some lenders will add the premium to the loan but some require you to pay it separately therefore increasing the amount of deposit you will need. The mortgage insurance premium can range from few hundred dollars to tens of thousands of dollars depending on the amount you borrow and the amount of deposit you have. The less deposit and the higher the loan amount the higher the mortgage insurance premium.

How long do I need to have a job for and how much income do I need?

As a general rule, if you started a new job in a different industry or occupation to your last one, then you should aim to be in your new job for 12 months however if you have recently changed employment but have remained in the same industry in the same type of occupation, once you are out of the probation period, there is no minimum timeframe to be in the new job however you must demonstrate 2 years continual experience working in the same industry. This applies to Full Time and Part Time employees. Casual employees generally need to be in their current role for 12 months regardless of industry experience.

Note, this is a guide only, employment requirements can vary significantly between lenders depending on many different factors. If you are unsure, please contact APF for further guidance.

For self-employed applicants, you need to have held your ABN for a minimum of 2 years and have 2 years tax returns you can provide. There are a few lenders who will consider an application if you have only held an ABN for 1 day however you may need to have a minimum 30% deposit and 2 years PAYG employment history in the same occupation to be eligible.

How much income you need is also subject to many different factors but below is an example which may help give you an idea:

Combined Net Monthly Income $7,000
Proposed Loan repayments @ 8% $2,354
Existing personal loan repayments $418
Credit Card (3% of Limit) $90
General Living Expenses $2,500
Total expenses $5,362

As a general rule, as long as your net monthly income is greater than 120% of total expenses then you should be ok. Remember this is only a rough guide and you will need to discuss your situation with APF before determining how much you are able to borrow.

What Government Grants am I entitled to?

Qld no longer has the First Home Owners Grant however this has been replaced by the Great Start Grant. The Great Start Grant will provide you with a $15,000 cash payment but only in the following circumstance:

  • Both applicants are first home buyers; and
  • You will be living in the home; and
  • You are constructing a brand new home; or
  • You are purchasing a home that has never been lived in before; or
  • You are purchasing a home that has been substantially renovated

Full details can be found on the First Home Owners Grant website.

APF can help you with the application as they will be submitted to the lender along with your home loan application. You are also entitled to a First Home Buyer Concession on the Qld government stamp duty. If entitled you do not need to pay stamp duty on properties up to the value of $500,000 which is a saving of up to $8,750. Refer to the Queensland Government website for details.

Any stamp duty payable is paid through your solicitor and is generally payable prior to the settlement. You will need to discuss payment options with your solicitor as a good solicitor will allow you to pay the stamp duty at the time of settlement.

The Home Buying Process

The first step in the home buying process is to arrange pre-approval on your finance. An APF pre-approval will check your credit history, employment and income and the bank will approve your loan subject to you signing a contract on a house in the price range that was approved. This allows you to shop around with some level of certainty your finance will be approved.

With pre-approval in place, it is now time to start searching for your new home. There are three types of methods in which you can purchase property:

  • Private Treaty
  • Auction
  • Sale By Tender
Private Treaty

This is the most common form of contract and it involves a negotiation of the price and conditions privately between a buyer and a seller. This form of contract provides you with cooling off periods and allows for the conditions such as finance clauses and building and pest inspections and other useful clauses such as the vendor leaving the ride-on lawn mower behind.

All terms are negotiable and anything is possible providing both buyer and seller agree. The usual conditions on a Private Treaty sale are:

  • 5 day Cooling off period. You can withdraw from the contract without reason during the cooling off period but you may pay a small fee.
  • Finance. Usually 14 days from contract date. You must have unconditional finance approval by this date. If finance is declined, you can withdraw from the contract without penalty but if you do not let the sellers know finance has been declined by the due date it is deemed that finance has been approved. The usual wording on this clause is ‘14 day from date of contract’, Financier is ‘any Bank’ and amount is usually ‘Sufficient to Complete’.
  • Building & Pest. Usually 14 days from contract date. You will need to arrange the inspection at your own cost. This inspection will let you know if there are any building defects in the property and if there are any pest concerns such as termites. The wording on this clause is usually ‘Subject to buyers satisfaction’ which allows you to withdraw from the contract if there is something wrong with the property you were not previously aware of.
  • Settlement. Usually 30 days from contract date. This is the date in which money changes hands and you are given the keys to the property and can move in. It is important your finances and your solicitor are well and truly sorted by this date as any delays in settlement could be very costly for you.
Auction

All the prospective buyers come together in a public place at a set time and location and bid against each other for the property. The person with the highest bid will become the new owners of the property.

Auctions do not have any cooling off periods and do not allow for any clauses such as finance and building and pest to be included. Once the hammer falls, and the property is sold, the buyer cannot walk away from the contract.

This has implications for buyers as finance can never be unconditionally approved at the time of Auction and building and pest inspections will need to be arranged prior to the Auction which is a large expense to have not knowing if you will be the successful bidder or not.

Buyers who bid at Auction without unconditional finance approval are taking on extra risk, however with expert advice and a good Auction plan those risks can be minimised. If the house you want to buy is going to Auction, speak to us first for more detailed advice on how you can come out the winner at Auction time.

Sale by Tender

This is not seen very often in Australia but it is a cross between a Private Treaty and an Auction and is often used for properties that has many buyers.

As the buyer, you submit your tender on or before a due date. The tender will detail the price you want to pay and any conditions you would like to have very similar to a private treaty. You place your tender in a sealed envelope and hand it to the real estate agent. On the due date of tenders, all envelopes are handed to the vendor who will then decide who the successful buyer is.

Tenders are interesting in that the highest price may not be successful but instead the vendor may choose a lower price that has less conditions. The problem for buyers is that there is no negotiation process as you only have one go at buying the property and you have no idea as to what offers the other buyers are putting forward but you are able to buy with the comfort of finance and building and pest clauses.

Fixed or Variable?

Variable rates can change at any time. During the life of your loan, the amount of interest you get charged can go up and down depending on the rate the banks charge. As a result, your monthly repayment will also change in line with the change of interest rate.

Variable rate loans offer you the flexibility to make extra repayments including large lump sums, change between different product types and close the loan early without any penalties. Variable rates are good in the following circumstances:

  • You have high disposable income and want to make extra repayments when it suits you
  • You are expecting a large sum of money which you want to deposit into the loan
  • You are intending on selling the property in the near future
  • You are intending on refinancing or closing the loan in the near future

Fixed rates are set at the start of the loan for a chosen term, the most common being 3 years. Regardless of what interest rates do, your interest rates will remain the same for the period of your chosen fixed rate term. This approach is good at protecting you from rising interest rates however you are limited with the amount of extra repayments you can make and closing the loan early may incur extra penalties. Fixed rates are good in the following circumstances:

  • Budget is tight and you cannot afford fluctuations in your repayments
  • Interest rates are likely to increase in the near future
  • You want certainty in knowing what your expenses will be for the period of the fixed rate term

Which option to choose is a personal preference and neither will impact on your loan approval. APF can discuss the pros and cons of each option so that you can make an informed and educated decision on which rate option to choose. It is also a common strategy to split your loan with a portion variable and a portion fixed however some lenders do charge extra fees for this functionality.

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