Unlike most first times, when it comes to buying your first home you need to get it right.
Yet almost two out of three first home buyers find the process confusing, according to realestate.com.au’s latest Consumer Intentions Study.
Around 15% of those surveyed were “extremely confused” by the process, while 49% were “somewhat confused”.
Here’s a look at what puzzles first home buyers, along with tips from property finance expert Bruce Brammall on how to resolve these issues.
Is there a “right” deposit amount? Not really. There’s an ideal deposit amount which is 20% or higher, Brammall says.
“The best way of doing it is to have 20% of the cost of the property, but realistically many first home buyers are not going to have that,” Brammall says.
“The major issue (with a deposit of less than 20%) is that you’re going to have to pay Lenders Mortgage Insurance (LMI) and the more you borrow the higher the LMI is.”
What is LMI? It’s a fee charged by finance lenders, generally applicable on high loan terms.
“If you borrow 90% of the property’s value it (LMI) can really kick up,” Brammall says.
“But it’s almost unavoidable that first home buyers end up paying LMI. There aren’t too many that have 20% plus stamp duty. Most first home buyers will have to pay LMI and I don’t think that should stop them (from buying a property).”
So if you’ve only saved a 10% deposit and the property of your dreams is on the market, should you go for it?
Be realistic, Brammall says. “If you wait until you’ve saved 20% of the property’s value you might have to save another two or three years, and what’s going to happen to property prices in that time?”
What legal fees do you need to pay? Most buyers will need to hire a conveyancer who may also be a solicitor, to help with the legal requirements of the sale.
Conveyancing is the change of ownership of a property from one person to another. A conveyancer is somebody who facilitates this process, who may also be a solicitor.
For a conveyancer, it’s best to budget for around $800 to $1,500, Brammall says.
Pre-settlement, it’s also a good idea to get a lawyer to look over the contracts.
“They will look through the pre-offer documentation for any potential nasties that may make the property less appealing,” he says.
Adding pre-bid lawyer costs, Brammall recommends allowing around $2,000-$3,000 all up for legal fees.
Stamp duty is a state government tax on the transfer of land or the sale of a property.
It is calculated either at a set rate or as a percentage of the total sale, depending on where the transaction took place.
Many states have different rules and most offer concessions or bonuses on stamp duty, depending on the type of property purchased and the sale price.
Currentlybuyers can pay stamp duty of up to 5.5% of the purchase price in Victoria, depending on the concessions available. But in some states, Brammall says the tax can “effectively amount to nothing after stamp duty bonuses”.
Use a stamp duty calculator to work out roughly how much you will need to pay based on the final sale price of the property.
First home owner grants are usually tied to stamp duty concessions and do differ from state to state. Some states limit their offers to those building or purchasing a new home, and some states cut off grants when a certain purchase price is hit.
Perhaps the most confusing thing about applying for a mortgage is not the application process itself, but finding the right mortgage. There are just so many options.
Before you go knocking on all the different finance lenders doors trying to find the best deal, remember that there’s a whole profession dedicated to that task – and it doesn’t cost a thing.
“Go to a broker,” Brammall says. “They know the products on the market, and they don’t charge you. A mortgage broker gets paid by the banks.
“They will not only be able do all the hard work for you, they can almost inevitably get you a better deal that you’re going to be able to get on your own.”
What is a Body Corporate and why do some buyers need to pay fees to such groups?
The Body Corporate, or Owner’s Corporation is the body that manages common ownership aspects of a property, usually in an apartment building or a group of townhouses.
This can include communal facilities, such as pools, as well as structural aspects of the apartment building, such as roofing.
The Body Corporate will pay for repairs and maintenance of these things, but buyers need to pay a fee to keep the Body Corporate afloat. All owners in a complex pay a portion of the upkeep of the common property via the Body Corporate fees.
It is a mandatory annual fee that will be set out in the contract of sale. Make sure you budget for this fee and have a lawyer read through the contract as well.
“If you’re getting a pool, tennis court and a spa, you’re obviously going to pay a bit more. Some of the smaller Body Corporates just exist to have a building and painting fund.”
“The more services you’re getting the more expensive it’s going to be,” Brammall says.
Do you need to pay Capital Gains Tax (CGT)? Probably not.
CGT is a tax paid on the profit made from an investment. The good news for first home buyers is that if you plan on living in the property until you sell it, you won’t have to pay CGT.
“It’s only a cost you need to factor in if you’re using your first property as an investment,” Brammall says.
What home insurance do you need and why is it important?
Some lenders insist on home and contents insurance, and others will also offer policies as a separate service.
Insurance will protect your home against a wide range of events, which will differ depending on the policy.
“Your mortgage broker and bank will most likely insist that you have coverage,” Brammall says.
“They want to make sure that the building will be replaced in the event that a disaster happens. For home and contents you’ll be paying something between $700 and $1,500 a year.”
Brammall says it’s important to shop around for insurance, as opposed to settling on the one your lender is offering. You can engage a general insurance broker to help you with this – they may be able to find a better deal that includes your cars as well the house.
It’s also important to not just go for the cheapest offer, but to choose insurance according to your specific property and location.
“Cheapest isn’t always best. You’ve got to go with the one that will give you coverage that will pay out when you need it,” he says.
“There are different clauses for insurance when it comes to floods, for example. When the Queensland floods happened, some insurers paid out and some didn’t. Which one would you have wanted to be with?”
A home that falls under a Body Corporate may have some elements already insured. But you will need to read your contracts carefully to work out exactly what needs to be covered by you, and what is covered by the Body Corporate.