Want to buy your first home as soon as you can? We explore 10 tips first home buyers can take advantage of to get into the property market faster.
1) Buy off the plan
As a first home buyer, purchasing a property off the plan can bring two distinct advantages.
First, depending on which state or territory you’re in, you may be entitled to access the First Home Owner Grant (FHOG), which will give you between $7,000 and $20,000 towards the cost of your home if you’re a first home buyer. Second, because when you buy off the plan there’s a gap between exchange and settlement, you generally only have to pay 10 per cent upfront. That means you have additional time up your sleeve to keep saving a larger deposit for settlement.
2) Pay Lenders Mortgage Insurance (LMI)
If you don’t have a 20 per cent deposit saved, you can often still get a home loan and buy your first home, so long as you also pay for Lenders Mortgage Insurance (LMI). LMI covers the lender if you default on your loan and they need to sell your home but can’t recoup their money.
With LMI lenders are often happy to allow a loan-to-value ratio (LVR) of up to 95 per cent. However, they’ll add the cost of this to your monthly loan repayments, meaning your loan will be more expensive.
Still, taking out LMI can be a good strategy especially in a rising market because it allows you to enter the property market before prices get too far beyond your reach.
3) Use a guarantor
A guarantor puts up the equity in their own property as security against your loan. This gives the bank added assurance they’ll be able to recoup their money if you can’t meet your own going repayments.
When you use a guarantor (usually a parent or family member, sometimes a friend) a bank is likely to lend you a higher amount against the property, meaning you won’t have to save a large deposit. However, for the guarantor themselves, there’s a risk that they may have to sell their property if you can’t repay your loan. For that reason, guarantors should always get their own independent legal and financial advice before committing.
The good news is that these days guarantors don’t always have to guarantee the full amount of a loan – they can choose to guarantee just a percentage of your loan – say 20 per cent of the total value – so that you don’t have to pay LMI.
Rentvesting is a strategy that involves renting in the area you want to live in but buying in another area that you can afford and then renting it out as an investment property to pay off your mortgage. With property affordability a very real issue in many parts of Australia, this could give you the opportunity to get onto the real estate ladder without having to sacrifice your lifestyle too much.
There are some downsides to rentvesting though. For instance, you may not be entitled to government First Home Buyer Grant or stamp duty exemptions or concessions. You’ll also have to keep paying your own rent on top of making sure you meet your mortgage, which may present a financial challenge if the property is vacant for too long.
5) Get some friends on board
Pooling resources with friends to buy a home can immediately increase your deposit and your borrowing power, depending of course on how much you earn and what you save.
This could help you get on the property ladder sooner than you otherwise could. That said, it can also be fraught with danger, especially if you fall out or if someone wants to move on. For that reason, if you’re buying with friends you should always have a legal contract that sets out each person’s rights and responsibilities – and you should have this drawn up professionally by a solicitor.
6) Super-charge your home deposit
The federal government’s First Home Super Scheme lets you contribute up to $30,000 to your super, which you can later withdraw and put towards your deposit. The advantage of this is that you can put money into super before tax and pay a super fund rate of 15%, although you may have to pay withholding tax when you withdraw it. If it went into your pocket first, you’d need to pay your marginal rate. You also get the added advantage of potentially higher returns.
The downside of this approach is that your money is less accessible than it would be if you had it in a savings account. There is also the possibility your super fund will lose, rather than gain money – something that just won’t happen if you leave it in a bank account.
7) Cut back on credit
One of the biggest impediments to getting a home loan is having too much credit – or even access to credit in the form of credit cards. So before you ever apply for a loan, it’s best to get any credit cards under control and, where possible, pay them off. You should also close down any credit cards you’re not using or reduce the credit limit on the cards you do use. This simple step can have a very real impact on the amount you can borrow and what you can afford.
Ultimately, it may be the difference between getting on the property ladder and staying off it.
8) Use a mortgage broker
A good mortgage broker doesn’t just have access to a range of home loans, they can find the right home loan for your needs and give you advice on which lenders are most likely to lend money to you. They can then guide you through the home loan process so that you understand what’s happening every step of the way and maximise your chances of being approved.
9) Improve your credit score
You may not know it but you already have a credit score. In fact, it’s one of the most important things a lender will take into consideration when working out how much they’re prepared to lend you and even whether they’ll lend to you at all.
Crucial to your credit score is meeting credit card and loan repayments on time, as well as not applying for credit too often. If you have black marks on your credit report – such as defaults or judgments against you – you may be best waiting until these are cleared before you apply for a loan (generally this takes five years).
10) Move back home
It may not be the most glamorous option but if you’re currently paying rent moving home can help give your savings a real boost so that you save a deposit sooner. If you choose to do this, just be upfront with mum and/or dad and set out a timeframe for how long you intend to stay and spell out what you’ll contribute to board.
A little bit of short-term pain could lead to real long-term gain if it helps you buy your first home sooner.