Buying your first home is likely to be an exciting but equally scary time in your life. For most people, it’s the biggest purchase they will ever make. And given that most people only buy 1 or 2 homes in their lifetime, most people need a fair amount of guidance through the process. So to get you feeling confident about diving in here is the information that everyone buying a home in NSW needs to know, whether you are buying your first home or your last:
There are a few unavoidable costs associated with buying your first home. So in addition to your deposit for the house, you will need to ensure that you have sufficient additional funds to cover these costs.
When buying your first home, the NSW Government provides an exemption on transfer duty to Australian Citizens and permanent residents*. The eligibility criteria is different depending on whether you are buying a new home or an established home. You can obtain an estimate of the cost of stamp duty by accessing the Revenue NSW transfer duty calculator for first home buyers here
For permanent residents not ordinarily resident in Australia and for foreign purchasers, The NSW Government imposes the foreign purchases surcharge duty and the land tax surcharge duty. If you think that these may apply to you then you can access further information and the calculator here
In addition to the above costs, you will also have between $3000 and $4000 of costs for government registration fees, loan setup costs, building inspection reports and the cost of having a solicitor or conveyancer act on your behalf.
How much deposit do you need?
How much deposit you need will depend on the price of the house you are looking to buy? Whilst most lenders will limit your loan to 95% of the purchase price including the lenders mortgage insurance, there are lenders who will allow you to borrow 95% of the purchase price plus the lenders mortgage insurance. If you are borrowing 95% plus lenders mortgage insurance you will likely be paying a significant interest rate premium to what you see advertised.
Lenders mortgage insurance is taken out by lenders when they allow you to borrow more than 80% of the purchase price. Whilst the lenders pass the cost of the premium onto the borrower, it doesn’t provide any protection to you. The higher the loan to value ratio and the larger the loan, the bigger the premium.
If you can come up with a 10% deposit plus costs you will minimize the lenders mortgage insurance payable and still get a very competitive interest rate on your loan. One final word on lenders mortgage insurance – it is not refundable and not transferrable from one lender to another.
Is there anyway to avoid lenders mortgage insurance?
The Federal Government currently has a program called the First Home Loan Deposit Guarantee Scheme. This scheme lets eligible borrowers borrow 95% of the purchase price without the need to pay lenders mortgage insurance. The scheme is administered by the National Housing Finance Investment Corporation and in its most recent press release, it indicated that they would release another 10,000 spots in the scheme on 1 July 2021. Eligibility rules apply and in order to access this scheme, you must apply for your home loan via a participating lender or a mortgage broker who has access to lenders in the scheme.
The use of a family guarantee is another way to avoid having to pay lenders mortgage insurance. A family guarantee is when a member of your immediate family offers their property as additional security for your loan.
Of course if you keep your borrowing to less than 80% of the value of the property you are buying you won’t have to pay lenders mortgage insurance.
So if you have the deposit and sufficient money to cover the associated costs what’s next?
The next step is to work out your borrowing capacity. If you have used any of the online calculators you will probably have some rough idea about what you can afford to borrow but you have probably also seen significant differences between one calculator and another. Borrowing capacity is determined by looking at your income, expenses and existing/on going liabilities.
When it comes to borrowing not all income is treated equally. Whilst most lenders will accept 100% of base income, the treatment of variable income such as overtime, allowances, bonuses, commissions, government allowances and maintenance can vary greatly and is often subject to additional rules that must be met before it can be included.
Your living expenses are likely to change once you own a home. It is unlikely whilst you are renting that you are paying for the costs associated with homeownership. These costs including council and water rates, strata levies, and home insurance will need to be allowed for in your estimate of your living expenses. Any rent you’re currently paying, and that will not be ongoing, needs to be excluded. The best way to calculate your living expenses is to access a budget tool, then open your bank account and find all of your regular outgoings. Using a budgeting tool will ensure that you don’t forget things that you might only pay for annually like registration. The Australian Government Money Smart website has an excellent budget calculator which you can access from here
Existing debts that are ongoing going will also need to be included. The most common debt first home buyer have is HECS. This one is easy to forget as its repayment is deducted as additional tax. The rate at which you have to repay your HECS debt depends on your income. You can find the rates for the 2020/2021 financial year here.
Credit cards can also have a significant impact on your borrowing capacity as it doesn’t matter how much you owe on them, it’s the limit that counts.
The best way to get an accurate assessment of your borrowing capacity is to get an assessment completed. You can do this either directly with a lender or if you use a mortgage broker, we can do the assessment across many lenders.
If you have done all of the above you will be in a great position to know what you can afford. If working out the above seems too complicated then feel free to get in contact with me. I love numbers and will be happy to help you crunch yours. As a mortgage broker in Newcastle I’ve helped hundreds of first home buyers understand what they can and can’t afford and I’d be only too happy to help you too. Give me, Margaret Godfrey, Mortgage Broker Newcastle a call on 0451 471 061 or send me an email at firstname.lastname@example.org
*You must meet the test of being ordinarily resident in Australia