Four mistakes first-home buyers can't afford to make
Recent ABS Housing Finance data revealed the number of first home buyer commitments as a percentage of total owner-occupied new housing loans has reached a six year high of 18.3%.
Anyone who has a goal of buying this year should be getting their finances in order. To reach a 20% deposit, plus additional purchase costs, will take committing to a savings plan.
Recent Canstar research found one in five Aussies under 35 are saving less than 10% of their after-tax income and 17% are saving nothing at all.
First-time buyers should also be aware of the mistakes easily made that could impact their ability to buy, affect their loan application or cost them more in the long run.
The good news is the panic and desperation of 2016 and 2017 has eased. In 2018, new housing loans and prices were down for the first time in years. First home buyers are now competing with fewer investors and require lower deposits.
Here are four mistakes new buyers can't afford to make and tips to help avoid them.
1. Not getting pre-approval
While house hunting can be exciting for first-time buyers, it can also be a waste of time if buyers don't know how much lenders are willing to fork out.
Before getting hung up on a dream home, buyers need to have a clear picture of their purchase power.
How to avoid this: While using an online home loan borrowing power calculator is great to give you an indicative figure, to find out exactly how much banks are willing to loan it's best to seek pre-approval through your preferred lender. It's worth noting pre-approval is not binding but gives you a good idea.
2. Underestimating the upfront costs
Not only do first home buyers have to save a substantial deposit, they should be mindful of additional buying expenses and unexpected costs.
Costs to consider include stamp duty, government fees, building and pest inspections, loan application fees, lender's mortgage insurance (for those with less than 20% deposit), solicitor/conveyancer fees, moving costs and more.
How to avoid this: It's important to research before buying so that you understand the upfront costs for any particular property. Set a buying budget so you can tally up any associated costs.
3. Not looking for a loan that offers flexibility
It's a good idea for first time buyers to look for a loan that gives them the flexibility to make extra repayments and pay off the loan ahead of schedule. As unlikely as it seems to them now, the time will come when buyers can afford this and it will help them get ahead financially.
The loan should come with a redraw facility, meaning homeowners can take the early payments back out of the loan if needed. This gives peace of mind to stretch and make maximum payments into the loan.
Another way to do this is with an offset account, which is a savings or transaction account linked to a home loan account.
Interest is not charged on the balance in the offset account, meaning more of the monthly loan repayment goes towards getting the outstanding loan balance down. Down the track the savings will be available to clear the loan.
In both cases buyers want to find a loan that does not charge extra fees or penalties to give this flexibility.
How to avoid this: Ensure you conduct research to understand loan features, including mortgage offset and redraw.
4. Getting into mortgage stress
The hard work doesn't stop once buyers have forked out the deposit and upfront costs - then come the loan repayments.
As a general rule of thumb, homeowners are determined to be in mortgage stress if their repayments are upwards of 30% of their pre-tax income.
A first-time buyer looking to purchase a $400,000 home, with a 20% deposit would be looking to borrow $320,000. Buyers with a loan of $320,000, making monthly repayments of $1610, will need an annual income of over $64,400 to avoid mortgage stress.
How to avoid this: In order to steer clear of stress territory, you need to work out what your repayments will be and ensure they don't exceed more than 30% of your pre-tax income.
Buying a first home may seem daunting but by avoiding simple mistakes new buyers will ensure they are on the right track for a brighter financial future.
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