You’re finally ready to plan your first home purchase, but before you start saving for a deposit, it’s important to understand your spending habits and the extra costs associated with buying a property.
When you buy your first home, you will be making regular repayments to your loan so it is helpful to get into good money habits early.
A simple way to do this is to ‘pay yourself first’. Aim for 10% of your income if you can. Set up an automatic direct debit the day after your pay hits your account to transfer your savings into a separate savings account. You then leave your savings account to grow over time and only spend the money that’s in your everyday account. By separating your money as soon as you are paid, you’re not likely to miss it.
Another effective way to manage your cash flow is through a budget. When creating your budget, be realistic about your spending, don’t underestimate your living expenses and account for the fun activities you regularly enjoy. Once your budget is set up, make sure you regularly cross check your spending habits against your budget to keep you on track. Our Android and iOS Mobile App also have a Savings Goal tool to help you track your progress.
The deposit is money saved, usually between 5 to 20% of the property value you want to purchase. The more money you save for your deposit, the less you have to borrow and the more you save on loan interest. If your deposit is under 20%, Lenders Mortgage Insurance is required. This protects the lender, not the borrower.
When saving for your first home, remember that you’ll need to set aside money for other costs too such as stamp duty. Find out more about the costs associated with buying a home.
The following can count towards your deposit: genuine savings (this is a mandatory requirement), shares and equity, gifts of money, family guarantee and the First Home Owner Grant (if eligible).
Most lenders will want to see a record of deposits into a savings account that were made over at least 3 months to show your ability to save and manage your money.
There are a range of tools available to help you save your deposit, including:
To get you into your home sooner, your family members may be able to be a guarantor on your Home Loan. A Family Guarantee means a family member uses equity (usually their home, but it can sometimes be cash) as additional security on your Home Loan.
There is a risk for the guarantor with this option. If you are unable to pay your loan your family will become liable. The benefit of having a Family Guarantee is that it could remove the need to pay Lenders Mortgage Insurance and some banks (like Victoria Teachers Mutual Bank) offer a lower interest rate if your Loan to Value Ratio is less than a certain amount.
For more information visit Money Smart – Loans involving family & friends.
Apart from saving the deposit, there are additional costs associated with getting a home loan.
Some of these additional fees and costs include:
Some lenders will charge you a fee to submit a Home Loan application to them. Victoria Teachers Mutual Bank doesn’t charge an application fee.
An establishment fee is a one-off payment when you start your loan. It covers the cost of setting up the loan. First home buyers who take a loan with the Mutual Bank will have the establishment fee waived.
While ongoing monthly fees are not payable on all home loans, what seems like a small charge each month can really add up over the longer term. Check if the loan you’re considering has these fees.
A building inspection is normally recommended prior to purchasing a home to help identify any issues with the property such as structural damage, mould or faulty wiring. A building inspection fee is a small price to pay for peace of mind and can even save you lots of money on repairs and replacements in the future.
A building inspection can cost around $400. Some companies combine a building and timber pest inspection into the one inspection for a slightly higher fee.
A pest inspection will assess the property for infestations such as termites and vermin.
Stamp duty is the amount payable to the state government when property is purchased. The duty payable is based on the market value or the purchase price, whichever is greater.
In Victoria, if you’re an eligible first home buyers you can receive a 50% reduction on the amount of stamp duty payable. This offer may differ in different Australian states/territories.
As of 1 July 2017, eligible first home buyers will pay $0 stamp duty on purchases of $600,000 or less. These changes apply to contracts signed after 1 July 2017. There will be a reduction in stamp duty on a sliding scale for purchases of $600,001 - $750,000.
Find out more about the changes to stamp duty for first home buyers on the State Revenue Office website.
Some lenders will charge you for valuation and settlement costs when processing your loan application so be sure to ask whether this is the case. At Victoria Teachers Mutual Bank, these costs are part of our Home Loan Establishment Fee, however first home buyers who take a loan with the Mutual Bank have their establishment fee waived.
The transfer of land ownership is usually undertaken with the assistance of a conveyancer or legal representative, such as a Solicitor. You won’t require their assistance until you find the property you want and are ready to make an offer but it helps to be organised for when that time comes.
When choosing your representative, make sure you shop around because fees for service can vary greatly. Ask friends and family if they have any contacts, as they may be able to make a recommendation. You can also refer to the Law Institute of Victoria website or the Australian Institute of Conveyancers for a list of services.
Fees can include costs associated with the time of a representative, Title searches, preparing documents and settlement fees, including rates and water bill rebates to the vendor. The fees associated with these services can vary, however many Solicitors and Conveyancers will offer a fixed price for simpler purchases.
Lenders Mortgage Insurance (LMI) is generally required when the loan is in excess of 80% of the property value that you are purchasing. It protects the lender in the event that the borrower defaults on the loan and there is still money owing after the property is sold. If it is required, LMI is arranged by the lender on your behalf and requires a one-off payment that can be added to your home loan.
You can determine your Loan to Value Ratio (LVR) by taking the loan amount as a percentage of the home value. For example, if the amount of your loan is $380,000 and the property is valued at $400,000 the LVR is 95% and LMI is required.
Depending on the value of the property and the Loan to Value Ratio, Lenders Mortgage Insurance may be several thousand dollars. However depending on your circumstances this may enable you to get into the property market sooner.
There can be some costs associated with moving house including removalist fees, changing the locks and buying new furniture.
It makes sense to protect one of your biggest assets and your ability to repay your home loan. Find out more about your insurance options.
An Owners Corporation (also called Body Corporate) is formed by the owners of a piece of land that is subdivided (e.g. into units, townhouses or apartments). The purpose of an Owners Corporation is to oversee and maintain the common areas in the building such as any elevators, pools, gyms and gardens.
Owners in such properties are normally required to pay an annual Owners Corporation fee and can also be asked to make one-off payments. It is a good idea to get an estimate of the expected Owners Corporation charges you may be expected to pay.
It is important to be realistic about how much you want to spend on your first home and what you can afford to repay. Your borrowing capacity will be calculated from your income and expenditure. That’s why having a budget in place before applying for a Home Loan is a smart idea.
To get an idea of your loan affordability and likely monthly repayments, use our loan calculators. Once you feel comfortable with a particular loan amount, adjust the interest rate to make sure you would still be able to repay the loan if interest rates rise. Also, don’t forget to account for other costs associated with buying a home, for example, stamp duty, land and water rates and insurance.
It can also be a good idea to research the areas you would like to live in to get a feel for the median prices and understand what represents value in these properties.
Here are some tools to help you calculate your borrowing capacity:
When applying for a Home Loan, lenders will look into your financial position, your employment and financial history. This is to ensure you can handle your borrowing capacity in a range of circumstances, for example, if interest rates rise.
It is important to be honest to your mortgage broker or lender throughout this process. If you fail to mention any debts or expenses and your lender discovers them in the process your loan may be declined. Lenders will examine your:
Lenders will also ask you about your objectives for purchasing the property and look into your requirements to help ensure the loan meets your needs.
The most effective way to manage your cash flow is through a budget. Once you have identified your borrowing capacity and your estimated monthly repayments, add this to your budget and control your cash flow from there.
It is crucial to pay your loan repayments on time to avoid any fees and charges and to protect your credit history. Here are some useful tips to manage your income and repayments:
Tools to help you stay on top of your Home Loan:
Before you start looking for your home, it’s a good idea to speak to your lender to obtain pre approval. Pre approval is when your lender approves a loan limit, based on your current situation, before you purchase a home. This is a great way to start the buying process as you know exactly how much you can afford to pay and you won’t waste time looking outside your price range.
Pre approval is looked upon favourably by vendors as they know you are a serious buyer. Also, if you decide to make an offer on a home, you’ll be able to move quickly as your finances are already sorted. Conditional pre approval generally lasts for 3 months and the responsibility is on you to let your lender know if your circumstances change in any way that will affect your loan pre approval (e.g. changing jobs).
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1. Bonus interest is earned when deposits totalling a minimum of $100 and no withdrawals are made in the calendar month. 2. Cash back will be paid when a new home loan is funded by the Mutual Bank and the account was held for a minimum of twelve months with a balance of $5,000 maintained over three consecutive months immediately prior to lodging a home loan application.