First home buyers in Perth have it tough when shopping for their first property with most looking for a 4 bedroom, 2 bathroom home in a good location. There are a few different options for first home buyers looking to get into the market, which we discuss below.
The 20% Deposit Rule
In general, lenders require borrowers to put down a deposit equivalent to 20% of the property’s purchase price in order for the client to be granted a loan. If you’re looking to purchase a property for $500,000, for example, you’ll need a deposit of at least $100,000. This is a very daunting figure for first home buyers, however there are simple steps that you can take to put you in the right direction.
If you’re serious about getting the money for the deposit, it’s worth looking at your budget first. Work out how much money you’re earning and what your most common expenses are. If there are expenses that you can do away with temporarily (e.g. fancy dinners, shopping for clothes regularly), then do so as this will put you much closer to reaching your deposit and owning your first home.
Unless you’re in a hurry to purchase a property, then it may also be a good idea to give yourself ample time to save up for your deposit. It may mean delaying having your dream home, but getting the financing you need to acquire that may become much easier and will serve you better in the long run. The reason is that one of the areas lenders look into when deciding to grant you a loan or not is your savings history. If you can show them that you spent a lot of time saving for the deposit, it’s a plus for you because it shows that you’re prudent with your finances and will be more likely to repay your mortgage on time.
Then there’s the First Home Owner Grant (FHOG), which can provide you with up to $10,000 to purchase your first property. However, as at 3 October 2015, first home buyers may only use the grant to purchase or build a new home.
Can’t Meet the 20% Rule? There is still a way.
What if you want to purchase a property, but you don’t have enough funds for the 20% deposit? There are lenders that may lend you money to purchase your home with as little as a 5% deposit.
If you cannot come up with the 20% deposit, you will likely have to pay Lender’s Mortgage Insurance (LMI) if you borrow with a deposit of less than 20%. This is an insurance that covers the lender if you default on your loan. The cost of the LMI depends on the size of your deposit, but typically costs several thousands of dollars. Depending on the lender, you may have to pay the LMI upfront or it can also be factored in to the total loan amount.
When you’re deciding on whether or not to save up for the deposit, ask yourself which one is more important to you, paying as little as possible for the property while deferring your purchase until you have money for the deposit, or buying one immediately but paying the LMI.
Some lenders may allow you to pay less than the 20% deposit (or even borrow up to 110% of the property’s purchase price) and forego with the LMI. In this case, however, lenders will typically require you to take out a guarantor home loan.
As the name would suggest, this type of loan requires you to have a guarantor. A guarantor will use the equity in his or her own home as security for their family member to purchase their home. The guarantor will be released from the loan once you have built equity on the property you purchased.
The Importance of Finding a Suitable Loan
Whether you buy a property with a 20% deposit, pay for the LMI, or use your family’s property as security, what’s important is that you take out a loan that is truly suited to your specific needs. The worst thing you can do is take out a generic loan that may look good on paper but may not suit your lifestyle and payment schedule or lead to pay fees and charges you can’t afford or lock you down to the product longer than you’re comfortable with.
A mortgage broker will take the time to ask the right questions and consider all your options when finding the most suitable loan for you and which method will lead you to owning your first home. This will greatly benefit you even years down the track as you will hopefully have a loan that you are comfortable repaying. Whether you are saving for your first home or are ready to purchase your first home, speak to one of our mortgage advisers about your options and look forward to owning your dream home.
Written by Cale Walsh.