Buying your first home is both an exciting and confusing time. There is so much jargon that it is easy to feel overwhelmed. At Prosperity Wealth + Advice, we decided to put together this guide to help shed some light and demystify some concepts.
What is the minimum deposit required?
5% is generally the minimum deposit you will need to be able to buy your first home. Typically, this comes with a hefty “Lenders Mortgage Insurance Fee” (LMI). However, with the First Home Guarantee Scheme, you can save a 5% deposit for your first home with no LMI.
First Home Guarantee places are limited, so you need get in sooner rather than later.
If you are unable to secure a place in the First Home Guarantee Scheme, a 10% deposit is a good place to start, but can be achieved with as little 5%.
There are lenders like Homestart, who focus on getting first homeowners into the market.
What is LVR and why is it important?
LVR stands for “loan to valuation ratio”. When buying a home, it means how much you are borrowing compared to value of the property.
Example.......
Home Value = $500,000
Deposit = $50,000
Loan Required = $450,000
LVR = 90%
Ideally an LVR at 80% or below is ideal when purchasing a property, however this is not always practical for first home buyers, and you are able to buy properties with an LVR of up to 95%
Which on a $500,000 loan would look like this
Home Value: $500,000
Deposit = $25,000
Loan required = $475,000
LVR = 95%
LVR’s are important because the higher the LVR, the higher the Lenders Mortgage Insurance premium is (LMI is an upfront fee that protects the bank). A higher LVR can also mean a slightly higher interest rate.
Note: This is a very simplified illustration and does not include other variables such as stamp duty and mortgage transfer fees.
What is servicing when borrowing to buy your first home?
Servicing, put simply means can you afford to repay the loan. However, what you think you can afford in repayments, may be different to what the bank thinks.
Servicing for a bank means can you afford a loan with the current interest rate plus an additional 3%. Every bank has a different formula in calculating servicing which is why outcomes can vary wildly between different banks.
When initially looking at a loan application for a client, we can do a servicing calculation with variety of lenders to see who will be the best fit.
Even if you’re a not quite ready to buy, touching base to check your servicing (how much can you borrow), can help you plan and set a target for when you are ready to pull the trigger.
First Home Buyer – Bank statements tips and tricks
When purchasing your first home, lenders will want to have a look at last 3 months of all bank and loan statements. So, what can you do to put yourself in the best position to get your loan approved……
Clean Spending: Banks really don’t like seeing large black holes in your statement such as large cash sums withdrawn at regular intervals and anything to do with gambling. Keep these off your bank statements and it can do you no harm.
Gifted Funds: If gifted funds have been left in your bank account for over 3 months, these will be treated as genuine savings. Which means less scrutiny and no need for statutory declarations from the parties who gifted the funds.
Government Incentive Schemes
First Home Builders Grant: If you have never owned a property before and are looking to build, you may be eligible for the First Home Builders Grant of $15,000. $15,000 can go a long way to increasing your borrowing capacity and getting those “nice to have” features in your new home.
First Home Buyers Guarantee: The First Home Guarantee (FHBG) : FHBG is a government scheme that allows people to buy their first home with only a 5% deposit without paying LMI. This helps first home buyers get a foot on the property ladder sooner by not having to save a huge deposit.
Why Use a Broker?
At Prosperity Wealth + Advice, we are known for our Financial Planning expertise, but we are mortgage brokers too. We think offering a mortgage broking service can help the younger generation build their wealth by buying their first home. Likewise, having a broker who can also provide financial advice can be a huge benefit.
Using a broker has 3 main advantages:
1. No out-of-pocket costs – we are paid by the lender once the loan settles, so it does not cost you a thing.
2. Access to a wide variety of lenders – we can assess your loan needs against a wide variety of lenders to find you the best structure and/or interest rate, depending on your individual needs.
3. We do the hard work for you – once we collect all the initial data, we are off and racing and will deal with the lender on your behalf. We are in your corner!
If you would like us to help you purchase a property or refinance, please feel free to reach out on (08) 7081 9860 or at hello@prosperity-wealth.com.au.
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