It’s a well known saying that mistakes make the best teachers. When it comes to buying your first home, does the saying still apply? We’re pretty sure there are other ways to learn without giving up a considerable portion of your savings and time paying for the mistakes. If you’re a first time home buyer, you should know that securing your dream home is possible without stress or any heartache of realising you may have made mistakes with finance which may cost you a lot more money.
Common Mistakes First Time Australian Home Buyers Make
Ideally, when securing home loans in Australia, a first time buyer should get pre-approval to better gauge their purchasing capability. While this is a best practice, you need to ensure that the bank you are dealing with is fully assessing your application for a pre-approval.
Why is this necessary?
With increasing home loan volumes, many lenders are not fully assessing applications. This means as a borrower, when you buy a property, you may be in for an unpleasant surprise.
You may not want to get pre-approved for something you may not qualify for using calculator inputs.
Many banks do not deploy assessment of your pre-approval application and it is often purely based off your credit score.
How do you know your bank is fully assessing your application for pre-approval?
Saving and Making the Largest Possible Deposit
Banks traditionally require a 20% deposit plus Government fees for home loans. With soaring property prices saving for example $120,000 for a $600,000 purchase can be challenging and may take time. Property prices and cost of living are forever increasing, and having a 20% deposit available may prove to be a challenging task.
If you’re a first time home buyer asking, how much deposit do I need for a home loan? You’d be surprised to know that you can actually get away with just placing 8-10% for your deposit. There are even lenders who can go as low as 5% in deposit, you may also have to pay Lenders Mortgage Insurance which will protect the bank from loss should you default on your home loan.
But isn’t a lower deposit going to make my future payments higher?
Yes, but given the rising property prices saving 20% may be a challenge. You’re in the market for your dream property. Would you rather let a good property go because you don’t have 20% on hand, or purchase with a smaller deposit?
Ultimately, your financial capacity should dictate the decisions you will make. Whatever it is, just make sure you don’t let a good opportunity go for a slight difference in deposit amounts. This is where your independent mortgage broker can help.
Delaying Purchase Until You Have Genuine Savings
Genuine savings refers to the money that you have saved over a period of time. Banks use genuine savings as a proxy to determine if you are a borrower they wish to lend to. Generally, financial institutions want to see if you can hold around 5% of the property purchase price in your account for at least 3 months.
But what if you don’t have genuine savings? Does that mean you can’t get the property of your dreams? No.
There are several options you can focus on. You can ensure you have a strong and consistent rental history. A strong rental history (at least 6-12 months), can mitigate the need for genuine savings. If you have a 10% deposit plus Government fees then a number of banks do not have a genuine savings requirement.
Is Rent Money Wasted Money?
One of the most popular first time home buyer tips and advice that pushes them to make a purchase as soon as possible is the saying that rent money is dead money. This often is a controversial topic as it depends on your lifestyle needs and the type of property you are buying.
Buying a home you live in can lead to tax-free gains which outperform other investments and also you have the home that you live in and can use this to support your lifestyle. Ultimately you are also paying off your own home and not the “landlords” property.
Most people renting see this as an opportunity to save for their deposit.
Believing Online Calculators Are Accurate
First time home buyers commonly rely on online calculators to get a better idea of the possible amount they can borrow.
However, you need to keep in mind that there are very few online calculators which may give you an accurate estimate of borrowing power. Banks have complex rules around income for example some banks may not use overtime income or bonus income and this often leads to some buyers overestimating their borrowing capacity.
If you need an accurate estimate of your borrowing power, consider talking to a mortgage broker. Not only can you expect accurate calculations, but you can also ask your questions real-time so you’ll know better once you’re ready to finally make the big move.
Assuming You’re Buying Your Forever Home
The first time you buy a home is an exciting stage in your life, and understandably so. The first property under your name is a symbol of your hard work, so it’s normal to feel like you’re going to spend the rest of your life living in it, but statistics show that’s unlikely.
On average people may live in their first home for 5 -7 years.
People may change homes because of changes in their family situation, work, school zones and ultimately want to upgrade their homes.
The key point here is to keep an open mind and have regular conversations with your mortgage broker.
Mortgage Your Home Not Your Life
What If We Finance seems many buyers who ask what is the maximum I can borrow and often use this as a guide to set their property budget. But the best advice we can give is mortgage your home not your life
Instead of asking how much can I borrow, ask how much you can comfortably afford to pay. Ideally, you should allow for rate rises and have a financial buffer. You should also make sure that you have considered all fixed living costs and are comfortable repaying the loan with your disposable income without causing issues in other areas of your finances.
Not Understanding The Importance of a Bank Valuation
Regardless of your borrowing power many home loan applications are declined because of the bank valuation.
Banks will typically value your home before unconditionally approving your home loan. This means the bank will determine if the home is worth what you paid for it. Banks will always value your home at the lower of the purchase price and market value.
If the market value is less than your purchase price then you may need to contribute extra funds. If you do not have funds available then the bank will not approve the loan.
This is where a skilled mortgage broker will guide you on the best way forward as different banks have different rules and sometimes the type of property may limit your lending options. For example, commercially zoned properties may not be acceptable to a lot of lenders
Underestimating Home Loan Rates in Australia
Home loan rates in Australia are at historical lows at the moment and will eventually increase. A few years ago interest rates were greater than 6.00% pa for some. These means do not expect interest rates to be low forever and ensure you have sufficient savings and a buffer to allow for rate rises and the associated extra repayments.
It also makes sense to consider a part fixed rate and part fixed variable strategy to protect yourself from future rate rises. This is where an independent mortgage broker can help to guide you on the best approach and strategy.
Relying Too Much on the Market
You might have come across several market commentators who will try to give you unsolicited advice regarding your purchase. They’ll probably want to let you in on some trade secrets or some tips on how to game the system, so you can buy your first home at the perfect time.
But do you know what the perfect time is when it comes to buying a property?
There’s no perfect time! The truth is that potential buyers will only know when prices will go down once the prices go down. So don’t gamble on something that isn’t an exact science. Just focus on your goals, and your current financial capacity, and buy a property that matches your lifestyle.
Don’t forget that no one else will suffer the consequences of a wrong decision (influenced by others) but you.
Skipping Property Inspections and Not Having a Lot of Options
Undoubtedly, buying your first home will always be one of the top 10 highlights of your life. Home shopping is exciting and overall, a joyous experience. But don’t let that exhilaration push you into buying the first house that meets your minimum requirements.
We understand that house hunting can be tiring but you are making a long term decision.
The same idea applies to property inspections. You don’t buy fruit without checking for bruising or the expiration date, so why should you buy a house without inspecting and organising a building inspection?
The house you chose is where you will eat, sleep, bathe, and entertain family and guests. Don’t settle for any less.
It would help to bring a checklist so you don’t miss anything and take note of issues that you may want to clarify with the seller.
Being Too Emotional
Feeling rushed is okay, feeling desperate is normal, what’s not good is letting your emotions control and push you into making a rash decision. This home is where you’ll be spending hundreds and thousands of hours. You don’t want to compromise your future because you based your decision on a temporary emotion.
If you’re tired, rest. If you can’t wait to move because you currently don’t have the best living conditions, consider renting for now. Then, once you’ve calmed down, reevaluate your decision and restart your house hunting journey.
The frustration you will feel living in a house you were just pressured into buying will always be worse than the frustration you felt while scouring the market. Do you want to make that mistake? We know you don’t.
Forgetting or Neglecting to Get Insurance From Day 1
If there’s one thing that we would want you to remember from this long list, it’s this one.
In general, it can take up to 90 days before you can pick up the keys and move in. This is also known as the settlement period. Now we have a question for you – when do you think home insurance is necessary?
Most first time home buyers will say the first day you move in. But that’s wrong.
The keys only technically make you the owner on the day you move in. In reality, you have been the owner the moment you sign the contract. That means if anything happens to your home (even though you don’t have access to it yet) you will still be responsible for the damage, so make sure you get insurance as soon as possible.
Legal liability may be determined differently in certain states. In these cases, it’s better to approach the proper authorities for more information or talk to your mortgage broker or lawyer for assistance.
If you’re a first time home buyer in Australia, make sure you work with reputable and trustworthy brokers. What If We Finance can help you with your first home loan. Let’s find you a lender and get your dream home today. Call us for details.