First Home Buyer Tips

Crown Money, where we show you how to pay your home loan off in up to half the time of a normal bank loan. Welcome to the Crown Money podcast. I'm Jessie Edge and I'm joined by finance broker and, well, just general finance specialist, really. Chelsea Burton. How you going? Good, how are you? Yeah, good. Going well today. It's a bit cloudy and rainy, but we'll get through.

You gotta love Melvin.

Yeah. All right, today we're going to talk about just some tips for the first home buyers out there. You know, it's a very daunting experience buying your first home. There's a lot to know and a lot to figure it out. So we just want to go through a couple of things you need to be aware of and then the steps you should be taking in terms of, you know, the process of actually buying a property.

Absolutely, yeah. I think buying any property is a daunting experience, but the first one is the most scary.

Absolutely. So, I mean, first of all, we're talking about it from a finance perspective. There's definitely two different sides to the numbers when it comes to buying a house. It's called your serviceability and your funds to complete. And quite often people get, they think about one, but not the other. And it's definitely both of them that you need to consider. So we're going to talk about those today. So, Chelsea, talk to me. What is serviceability?

So serviceability is your ability to actually pay for the loan that you have. So when a bank looks at a loan application, they look at your income and your other expenses and monthly commitments and work out whether or not you can actually afford the loan that you're applying for.

Yeah, if you earn $50,000 a year, you're probably not going to get a 2 million dollar loan.

That's right. Exactly. And I mean, in real reality, the banks are doing the right thing. You couldn't afford that if you're earning $50,000 a year.

Yeah, absolutely. And they are quite conservative, but they're definitely insulating you from things like, you know, rate rises or any changes in your current circumstances. And they're trying to protect you and make sure that in the long term you are going to be able to afford this loan. Because mortgage repayments are, you know, a big part of, you know, your, your outgoing cash flow. They need to make sure that you have enough money to do it.

Exactly. And banks will assess above the rate that they're going to offer you. So. But rates with banks are really cheap at the moment. You can get loans for around 3% interest, but they're going to assess you at 5 and a half percent, 6%, just to make sure that if the rates do go up, you can still afford to pay that.

Absolutely. I mean, in our parents day, they had interest rates as high as 17% on their home loan.

Again.

The bank is trying to protect you. They're also trying to protect themselves. Everybody just, they just don't want you to dishonour on your home loan and neither do you. So it is a bit of a win win situation, but it can be a little bit of a blow to some people. They expect to be able to afford a certain loan, but actually they can't. And that's why it's really important to know what your serviceability is up front because that's gonna determine what is the potential purchase price. Like what are you actually gonna be buying for.

Exactly. And you need to talk to a broker right at the beginning to work that out.

Yeah, absolutely. And then the second part of it is what's called the funds to complete.

Yes.

So it's important to remember. Well, I mean, you can go into this Chelsea talk about the funds to complete.

So funds to are how much money you actually have saved up in order to complete the purchase, because the bank's not going to lend you 100% of the purchase price plus all of the purchase costs. Now, as a first home buyer, you're probably going to get a stamp duty concession if you're buying. Every state's got a different limit, but if you're buying under the limit, you'll get a concession on your stamp duty and you won't have to pay that, but you'll still need to pay for a conveyancer. The bank will have fees, legal fees, or their titles, office fees and things that you have to pay for. And you still have to be able to put down a deposit on that property. So yes.

Yeah, this is, this is something a lot of people forget. Is that the land, the bank is never going to lend you 100% of the value of the property.

No, exactly.

The number your own money.

Yeah. The number of clients I get who call up saying, you know, I want to buy my first house. Great. How much do you have in savings of $500? Exactly. And you know, a bank will lend you 95% of the purchase price, but you have to have the other 5%. And yes, if you're going to borrow more than 80% of the purchase price, you also need to have the money for mortgage insurance, which, yes, it can be quite expensive.

It can be quite a lot of money, you know, six, $7,000 on a $400,000 loan.

Exactly.

You know, sometimes that can be capitalized on top of the loan amount, but generally only up to a 90% LBR. So it's, if you're around the 90% mark, it's still going to be a big expense there.

Absolutely. And also too, once you get above an 80% loan to value ratio, your servicing reduces because banks assess it more harshly. So the less you've got in savings, the less you're going to be able to borrow too.

So the basic idea here is savings good.

Exactly. And banks do require it to be genuine savings. So that 5% has to be money that you've actually saved up. Now there are some banks who will look at, okay, you've been paying rent for the past two years and you've paid it every month and will include that as genuine savings if you've got another way of completing the purchase. But in general it has to be genuinely safe. So you can't have a $30,000 lump sum deposit put into your account. You can't pull $10,000 out of your superannuation and put that in your account. That's not genuine savings.

No, they want to be able to see that you have the capacity to save money over a longer period of time, which would show your ability to be making a rep. So they just want to see the health of your accounts. So what is genuine savings are usually looking for between three and six months of statements. Yes, they're looking for regular deposits and they're looking for a balance of a minimum of 5% of the purchase price.

That's right. So that's 5%. If you did get a lump sum, it has to have been held in your account for three to six months. Otherwise I want to see it having built over that three to six months.

Absolutely. Now say you are going to get a gift from a family member or something along those lines. You can do that. You have to have the genuine savings as well. But that can be topped up by a gift from a family member and they'll need to sign a stat deck claiming that or stating that the money is a gift and is non refundable and the exact amount. And they'll want to see that money in your account ready to go towards the purchase.

That's right. So a gift from a family member. Actually if the loan to value ratio ends up being 85% or less, you don't also have to have the genuine savings. So if you're getting a 5% gift and that brings you down to 90%, then you still need to be able to show genuine savings. But if you getting a 10% gift and that brings you down to 85%, the genuine savings is not so necessary.

They just need to see the money in a bank account.

That's right.

You've got the money. They don't have to, you don't have to show that you've been able to build it up over time.

Exactly, exactly. So that's one way of doing that. And also, if you are going to get a gift from a family member and it brings your loan to value ratio down to 80%, it means you avoid mortgage insurance. So that's awesome too.

Yes, absolutely. I mean, 80% is definitely the magic number when it comes to loans. Avoiding mortgage insurance is a big thing. A, mortgage insurance is a big expense and B, it means there's a second set of assessors that have to review your application and approve it. And so it can take more time and you've got a higher risk of it being declined. So definitely, if you can get to that 80% LVR, it's really a positive thing.

Absolutely. It is a little bit of a, a numbers game though. So I mean, if you're in a rapidly rising market and your mortgage insurance you're looking at paying is, you know, $6,000, but it's gonna, it's gonna take you six months to save up that extra 10%. It may not be worth holding off the purchase in order to save the six grand. So. Yeah, it's just really, it depends on the market as well.

Yeah. So probably not a problem right now. Yes, definitely. And again, that's broker can discuss with you.

Exactly.

And so that's why it's really important to reach out to your broker at the very beginning of the process and they can talk you through all these different options where you sit in regards to your savings, what additional savings you're going to need, or what the plan is in regards to a gift or whatever it may be. So definitely they'll be able to help you with that strategy and put a plan in place right from the beginning. Quite often we'll speak to a first home buyer six to 12 months before they actually end up buying.

That's right.

You know, to give them time to be prepared and to get that savings together.

That's right.

So let's talk about that. Let's talk about the steps involved with, you know, okay, you're thinking about buying your first home. What's the first step, so the first.

Thing you want to do is you want to speak to a broker and you want to find out how much of a loan you can service and how much you need in savings.

Yep. And if you don't have enough in.

Savings, then you need to figure out how you're going to get there. And so there are a number of different options available to you. But if you go going to need your 5% genuine savings, then you need to come up with a plan on how to get that and how to save it over a period of time. If you're going to go with a gift, then you obviously need to talk to family members about who's going to give you that gift. One other option is using equity from a family member's home. So if your parents have a house with a lot of equity in it or very small or no mortgage, they might be able to gift you some of that equity or put their house up as security for your purchase. Which will mean that you don't need to come up with as much money.

Yeah, yeah.

So you need to work out which way you're going to go and how you're going to get there. And then you need to apply for a pre approval. So once you've got your savings or you know how you're going to come up with your funds to complete, whether it be a guarantor loan or a gift, you can apply for a pre approval with the lender.

And this is a very important step, isn't it?

Absolutely. So this is where the lender will have a look at all your numbers and say, yes, we're prepared to give you a loan and this is how much for.

And that's a lot of security or comfort that this loan will get approved. Because a pre approval means you're approved subject only to the property itself. So they're comfortable with your income, with your credit history, they're comfortable with your savings. Everything else you've got a piece of paper saying it's pre approved or conditionally approved, subject only to you finding a property.

That's right. There may be some other conditions there as well, being subject to your income and financial circumstances not changing. As an example. So if you know between when you get your pre approval and when you find the house you want to buy, you lose your job or change jobs. That's something that the bank needs to know about.

Yeah, absolutely. And this is something that comes up a lot for us. We find that a lot of people, when they're going through a home loan application I don't know why it is, but they tend to decide that that's the time to change jobs. It's really important to remember that if you change jobs, you go back to ground zero with your application and you have to reapply and most likely won't get approved if you're on, if it doesn't all stack up. So it's something that wait till it's approved, it's settled, everything else is running smoothly, and then consider a move with your job.

Exactly. Exactly. Yeah.

What's the next step? We've got our pre approval.

Yeah. So then we need to find a. Find a house. So you need to figure out where you want to live, where, you know, what sort of house do you want to buy, what's going to fit within your price range. And you want to research properties, making sure that you are finding a property that's nice and safe and secure. You need to decide if you're going to buy something that's established, if you're going to buy something that's new, if you want to build, et cetera, et cetera.

And then. So you found your property. I think another thing to point out as well is making sure, especially because it's your first home, if you're not planning on living in it for the rest of your life, making sure that it's actually a good investment as well, that it's looking at the numbers themselves, not just it feels good or I really like the look of the house or whatever it may be. Is it in a desirable location? Can I sell it again in five years and upgrade into the bigger family home that's going to last you for the rest of your life or whatever it may be.

Absolutely. And how much work do I need to do in order to get it to that stage? I mean, you know, not all properties are good rental properties. Not all properties are good properties to live in. So is it just it's going to need new carpet and a paint job, or are you going to have to knock down walls or replace kitchens? And can you afford to do those things?

Absolutely. All right, so you think you've found your property, you've checked out a whole bunch of them. The other thing I'll mention as well is like, keep track of the property market. This will take a long time, you won't get your pre approval, then walk out the next day and find your dream house. It will take a couple of months to find a property that suits you. So once you've kind of got a feel for things, you know, what properties are generally priced and you found one that's within your budget. What's the next step?

So you want to speak to the agent that's selling that property, find out why it's being sold, because sometimes that's an important question to ask. Have a look at the contract of sale in the section 32, which is basically a disclosure document that tells you all the things you need to know about the property. Get a bit of a feel for what sort of money the owners are asking for and then do your research and figure out whether or not that's actually a decent amount of money for that property. Because quite often people overvalue their properties and what, more than they're actually worth.

Yeah, absolutely.

Also have a think about how long it's been on the market for and whether or not that means that. I mean a long time on the market could mean that they're not willing to negotiate on price and it's overpriced. It could also mean that they're getting really desperate and they're really willing to negotiate on price and will accept a low offer.

Absolutely. And from there, how do you put an offer in or in Melbourne, quite often people go to auction. So talk me through those two different processes.

So yeah, the property will either go to auction or it will be by private treaty, which means that you put in an offer. Quite often if it is an auction property and you're, you know, a few weeks before the auction still the agent may allow you to put an offer in before the auction if it is close to the reserve price that the clients wanting. But basically if you're going to go to an auction, you need to bid at the auction, which is the most nerve wracking experience that I've ever had. I hate doing that. Yeah.

I remember when we were selling a property and it was incredibly nerve wracking but incredibly exciting because we were on the other side of the fence. And that was much more compelling. Yeah, exactly.

But it can be a bit of fun too because there's quite a good vibe at an auction. So when you go to an auction, you want to make, hey, there's a.

Bit of energy there, like.

Exactly. So because of that excitement though, prices tend to go up a lot faster and that's why people do auctions. So it's really important to know what your maximum is that you can spend and stick to it because.

Absolutely. You have a number and that's it. And you must know that that is your exit.

Exactly.

Because those numbers will be worked out beforehand with Your broker, based on your servicing, based on your funds to complete, you know, you'll have, you know, your pre approval from your bank, you know exactly what that number is. And if you're trying to go an extra 5, 10 or maybe 15 or 20, it's a lot harder to try and come up with that money.

Exactly right. And one thing that you really need to know about auctions is that it's unconditional. So once you sign, once you win that auction, there's no getting out of that contract. You have to buy property, no getting.

Out of that contract.

Whereas if you do it by private treaty, which is where you go into the real estate agent, you make an offer, you write it on a piece of paper and sign it. They take it to the person who's selling and that person either accepts it or declines it. When it's done like that, you can put conditions on the contract like subject to finance and subject to building and pest inspection and subject to a whole variety of other things. And it's just whether or not the vendor will accept those terms. So they're very, very different. And that's something to be aware of.

Absolutely. And it is quite interesting how you know, in Victoria in particular we have majority of sales are through auctions, whereas in other states it's just, it isn't done that way. So it's important to know what's happening in your local area and you know how these things are. And if you are going to go to an auction, definitely go to a bunch of auctions before you actually go into one that you're planning on bidding on. Just so that you understand how it works, you get a feel for it and hopefully lose a few of those nerves before it's actually your turn to go to one that you need bid on.

Absolutely. And it's important to know sort of how they run too, so that you can you prepared on the day.

Absolutely. And then what happens like once you're, you've won the auction or your offer has been accepted.

Sure. So at the auction or when you make an offer, you will need to put down how much deposit you're going to pay and that will be 5 or 10% of the purchase price most likely. So you need to have that available. If you're winning an auction quite often you've got three business days to pay it. If you're making an offer, you need to pay it. Sometimes when the offer is when the contract is signed, sometimes it'll be when your loan is approved. But you need to have that money available. So that's something to really consider. So you'll need to pay your deposit. You'll also need to have a conveyancer who is somebody who handles the settlement of your property from a titles office point of view. So they do searches on the property to make sure that you know, it's where it's supposed to be and the owners are correct and it doesn't have any weird sort of rules over it and all of that kind of stuff. And they will change the names on the title for the property from the current owners to your name. So they cost usually around about one to two thousand dollars. But they are super important. And one thing I often get from first home buyers is that they'll ask their broker, oh, don't you do that? And the answer is no. You need a separate conveyancer, an independent person.

And you know, if you're quite savvy, you can potentially do your own conveyancing somewhere. But it's definitely not recommended. It's a very important role. They can help to review the contract for you, they can help to do a whole bunch of things. So it's worth, you know, just getting that, getting a really good conveyancer in place to help you through that process.

That's right. And you want it to be somebody who's different to the person who's handling the sale. Quite often if you're buying land off a developer or a brand new off the plan townhouse, the agent will recommend that you use the same conveyance that the vendor is using. Don't do that. Find your own.

Yeah, absolutely. You want that person representing you.

Exactly, exactly. And then you'll have a fully executed contract that's signed by both parties and that needs to go to your broker as soon as possible as well as to your conveyancer so that the broker can start the process of getting your loan formally approved.

Absolutely. And so they'll send it off to the lender, potentially, you know, evaluation will then be done and then they from there, because you already had your pre approval in place, there shouldn't be much else that you'll need to provide. They'll be able to issue with a full formal approval and then they can go through the loan documents and settlement.

Exactly.

And how often, how long usually is the, you know, you've signed the contract, how long is it usually until settlement?

Well, if you've already got a pre approval in place beforehand, you could realistically settle in four weeks. Ordinarily when you sign the contract, you'll put down a date for Settlement. And depending on what state you are, I mean, it might be 60 or 90 days. Some states are more likely to be 28 days. So that's how long you'll get till settlement. Yep, yep. 28 days, just for your information, is a rush.

Seems like a long time. That is a very short amount of time in finance.

Yeah, for sure, exactly. If you can get six weeks or more, that is a much better option. It's just less stressful for you as a first home buyer because you don't have to be on stuff quite so much. And sometimes banks take time. I mean, they can have delays as well. And that's all stressful if you've got a really short time frame.

Yeah, absolutely. And you know, it's important to remember as well, you might put down, say a 90 day settlement date and then that settlement date can actually be brought forward if all parties are ready. That's something that your conveyancer will negotiate for you. But it can be like, okay, well, we're ready to go, they're ready to go. Let's bring it forward by a couple of weeks and settle in 60 days or whatever it may be. Whereas if you're going to 28 days or, you know, a shorter time frame and having to negotiate it out becomes a little bit more difficult.

That's right. And the vendor can charge penalties if they want to. So it's better to go a longer settlement and bring it forward if you can.

Awesome. Well, I think that's all really great information there for our first home buyers. I think, you know, the biggest takeaway from this is right from the very beginning of the process, before you even start looking at property, you need to speak to a broker, you need to know your numbers because that dictates what house you're going to look at. And then once you know your numbers, you've got to spend your time doing your research, get prepared and get your pre approval in place.

Exactly.

Lovely. Thank you so much, Chelsea.

Thanks for having me.