There is nothing quite as exciting as buying your first home.
Homeownership has become a rite of passage in Australia – a marker that you are successfully moving into a new phase of life.
But part of the reason it’s so satisfying is that there are challenges to be overcome as a first homebuyer – especially around securing finance, and the hurdles are magnified in 2023 as we tackle an uncertain economic landscape.
Organising your loan can be tough without guidance, so we’ve answered a few common questions to help get you into that first home with less stress and more success in 2023.
How much can I borrow?
When lenders assess your loan application, they look at several factors to determine your borrowing capacity.
The biggest among them is your home finances.
The way you treat your dollars in the months leading up to your loan application will be a significant influence on the outcome.
To this end, you’ll need to have already implemented a budget and savings plan to help grow your deposit.
This healthy deposit will be a benchmark figure in gaining a first homebuyer loan approval.
Generally, the higher your deposit in percentage terms, the easier it is to finance the balance.
Lenders will then look at your household’s “profit and loss” sheet.
They want to see details on income and expenses – so be prepared to share details.
This includes discretionary spending, so the six months leading up to applying for a loan is not really the time to spend wildly on travel, dinners out, and new clothes.
Being seen as sensible and frugal by the lender goes a long way toward loan success.
I believe the smartest move new borrowers can make is to engage a mortgage broker as soon as possible after deciding they want to buy their first home.
We can help you establish budgeting practices and strategies that will improve your chances of securing a first homebuyer loan.
We can also assist in seeking loan pre-approval so you know exactly what you can afford to spend on your first home.
How much deposit will I need?
As mentioned earlier, a healthy deposit goes a long way toward securing your loan.
By the same measure, you don’t want to get stuck in an indefinite deposit-saving loop.
At some point, you need to determine how much is enough and take the leap into buying your first home.
The size of the deposit you’ll require is subject to several factors – including the general financial landscape in Australia at a given point in time.
In 2023, gaining finance will remain relatively challenging.
Financiers are dealing with guidelines set by the Australian Prudential Regulation Authority (APRA) which is responsible for regulating lending institutions.
APRA directives have seen banks implement more rigorous lending parameters and more scrupulous analysis of financials.
As such, you might need a slightly larger deposit in 2023 than was previously the case.
Although these elements may ease at some future date, they must be allowed for in your calculations.
Lenders also generally have different deposit requirements depending on your needs.
For example, the level of deposit for a homebuyer will vary from that of an investor.
Generally speaking, the more deposit you have, the better your chances of home loan success.
That said, there are strategies that will allow you to boost your deposit when your savings are low, such as through government grants or with Lenders' Mortgage Insurance.
As a general guide, whilst a 20% deposit i.e. if purchasing a property for $500,000, then $100,000 would be required, is preferred by lenders, you can buy with a 10% or even 5% deposit if you meet the criteria.
Aiming for a 10% deposit is a very good starting point though.
What is Lender Mortgage Insurance (LMI)?
LMI is mortgage insurance that is required by the lender when you are borrowing more than 80 per cent of the property value, which is not unusual for first homebuyers.
The confusing part for some people is the insurance isn’t for the borrower, even though you pay for it.
It’s actually to protect the lender in case you default on your mortgage repayments.
While it can cost a few thousand dollars, this amount can be capitalised (i.e. added to) your loan, so it’s not like you have to immediately come up with extra funds to enjoy the benefits of LMI.
LMI can be a useful tool for first-time borrowers because it allows you to get into the market quicker than if you try and save up a larger deposit.
This is particularly useful if the market in your area strengthens in 2023 and you want to strike quickly when a prime opportunity presents itself.
One of the keys to successful property ownership is “time in the market” which means getting in as soon as possible to enjoy more capital growth.
LMI is a way to achieve that.
How about guarantor loans and government grants?
Guarantor loans are a way for the “Bank of Mum and Dad” to help you buy your first home without having to make a cash contribution.
It requires the guarantor (i.e. your parents or another generous relative) to secure the loan by offering a slice of the equity in their own home, which funds any deposit shortfall.
It can help you boost your deposit from, say, 10 to 20 per cent, which means you won’t be liable for LMI.
This structure will also usually attract more favourable loan terms.
Your home loan is guaranteed by the family member’s equity until such time as you’ve paid down the principal of the loan (that’s the original loan amount) or the property’s value has increased to the point where the guaranteed portion can be released.
In 2023, I think we’ll see more of these structures too.
Despite a general slowdown in property markets, many long-term owners, such as parents, have seen a substantial rise in their property’s value compared to a few years back.
This added equity can be put to good use in a year where the cost of living for the young could be a challenge.
Another way to boost your deposit is via a First Home Owner Grant.
These schemes are state and territory based, so you will have to seek information pertinent to your jurisdiction, alternatively, you can just contact us and we guide you through the relative offers available.
Your qualification for a grant and the amount you can access will vary depending on several factors.
For example, as of right now, a first homebuyer in New South Wales can qualify for a $10,000 grant if they purchase a newly built house, townhouse, apartment, unit, or similar for $600,000 or less, or if they contract on a house-and-land package for $750,000 or less.
It’s also worth noting that most states and territories also offer stamp duty concessions to first homebuyers.
Your mortgage broker can help you research what discounts and grants you might qualify for as part of your loan application.
How do I deal with repayment?
Your loan repayment will be a function of the amount you borrow, the period for which you have the loan, and the prevailing interest rate attached to your mortgage.
Therefore, the way to minimise your repayment is by borrowing less (by either spending less or having a bigger deposit), borrowing over a longer period, and/or seeking the loan product with the lowest real interest rate.
The key should really be to avoid overleveraging.
You should have financial buffers in place to cover unexpected costs – particularly in the initial years of your loan while you’re building equity.
You can work out your likely mortgage repayments by clicking this link which will direct you to one of our handy calculators.
What are some other buying costs?
As well as the purchase price of the property, there are several other costs associated with buying your first home.
These additional costs can be anywhere between five and seven per cent of the purchase price.
One of the biggest costs is stamp duty which is collected at the state government level.
Stamp duty is calculated based on the property’s purchase price and can run into many thousands of dollars.
Fortunately for the first home buyers, many will be eligible for stamp duty concessions.
Some of the other costs that you’ll need to budget for include:
- Loan establishment and service fees
- Lenders' mortgage insurance (LMI)
- Settlement and drawing fees
- Registration fees
- Building and pest reports
- Solicitors fees
- Insurances
- Council and water rates
- Owners' corporate or body corporate fees
Be sure to factor these into your budget going forward so you are not caught short.
Securing your property
With finance pre-approval in place and sound knowledge of your financial situation, you can now source and secure your first home with confidence.
Choices around what type of home you want will be entirely individual with location and budget both playing major roles in your decisions.
Of course, sorting through listings and attending open homes are all part of the education too.
Then there’s the negotiation and settlement processes where you’ll be dealing with an array of new professionals such as conveyancers, and building inspectors.
You may want to tackle all this yourself or might choose to draw on the expertise of a buyers’ agent.
However, you decided to proceed, having certainty around your lending before you start the search will deliver a great result.
Applying for your first home loan application
When it comes to a loan application, you’re qualifying loan amount will determine how much you can afford to pay for a property.
But determining that figure is a daunting task.
There are so many hoops to jump through and people to deal with.
To help, I’ve pulled together this step-by-step guide on the loan application process to help first homebuyers realise their ownership dreams.
1. Seek professional help
While I’m sure most first homebuyers will have friends and family who will provide advice on securing a loan, the best outcomes result from utilising the skills of an experienced mortgage broker.
Not only will the broker be able to present you with the best loan options, but they can also detail your requirements and responsibilities under a lending agreement.
Let their knowledge and networks be to your advantage.
Good mortgage brokers will also be aware of any and all government schemes and incentives to assist would-be buyers, that they may otherwise be unaware of.
It’s essential you bring the mortgage broker into the process early – and I mean prior to beginning your property hunt.
Preparing for a loan application should be started well in advance to get the best possible financial outcome.
2. Initial assessment
The initial assessment is crucial.
The broker will want to discuss your needs, wants, and resources in preparation for the formal loan application process.
They’ll want to know what sort of property you’re looking to buy and your anticipated budget.
The broker will also need to know about your resources.
What’s your current income and outgoings each month?
Do you have other loans or further financial commitments?
How about additional lines of credit such as credit cards or store loyalty cards?
The mortgage broker will want to get a reasonable idea of where your finances sit so they can provide some initial assessment of your borrowing capacity.
This preliminary calculation is invaluable as it will highlight any potential red flags early in the loan application process.
This gives you as a first homebuyer the opportunity to address any concerns.
For example, they may suggest tightening your budget and cancelling your credit card to help improve your credit score well before making a formal loan application.
3. Detailed application
Once the mortgage broker is across your general position, it’s time to begin the formal loan application process.
It takes around four to six weeks from the loan application to property settlement but it can take even longer in some instances.
Delays are often due to finance not being approved in a timely way because incorrect or insufficient information was given to the lender.
If this is done correctly from the outset then you should be able to achieve approval within 2-3 days but if you aren’t on top of your finances, then delays can be caused.
Fortunately, your broker will assist by describing and helping to coordinate what you must supply.
The loan application document will ask you to set out your income and expenses in detail. It will include your wages and other sources of revenue.
For example, do you own shares that pay dividends, or is there income from a family trust?
In terms of expenses, there will be a range of non-disposable and disposable outlays to include.
This will include living costs along with other existing financial repayment such as a car loan.
The bank also requires particulars about your assets and liabilities.
This will include all your personal assets and chattels.
Be expected to provide estimated values for furniture, jewellery, musical instruments, a motor vehicle, and even your superannuation as this all helps, basically whatever you own that has value.
In the same section, you will need to specify particulars about your liabilities.
This is where existing loans are listed.
You’ll also need to describe your credit cards and store loyalty cards.
You might have other liabilities too such as an outstanding HECS or tax bill that you are servicing via a payment plan.
Documentation to support your numbers will be necessary as well.
Payslips, account statements, group certificates, and a copy of previous years’ tax returns should be on hand.
In short, be comprehensive with your information.
Make sure all questions can be answered.
I’ve seen applications denied for relatively minor gaps in an applicant’s submission.
Having this loan application managed by a mortgage broker also provides some excellent advisory advantages, particularly with what exactly you will need, as each lender has slightly different requirements.
With the full complement of your financial information, an experienced mortgage broker will have a good idea about your chances of a loan application success prior to its lodgement.
They may also look at your numbers and suggest strategies that can enhance your prospects.
4. Loan application approval
Once the loan application has been submitted, it’s time for the bank to do its work.
They will look through your application and assess it against their lending criteria.
This includes benchmark loan-to-value ratios as well as a three per cent serviceability buffer to check your financial tolerance for any increase in interest rates in the future.
If you are applying for preapproval, the bank will advise what size loan you qualify for which enables you to offer or bid on a property with confidence.
If, however, you’ve already contracted on a property, the lender will need to do a bit more work.
This will include instructing a property valuer to assess the market value of the home you’re purchasing to ensure it provides adequate loan security.
The approval process can involve some to and fro with the financier as well.
They may seek additional information or suggest strategies to improve your chances of approval.
For example, you may need to ask a parent to go guarantor on your loan.
Once all the conditions of your loan application have been suitably assessed by the lender, they will make their decision.
If successful, you will be given unconditional approval to borrow the funds.
5. Loan offer issued
Once approved the bank will issue loan offer documents to you.
This loan offer includes comprehensive paperwork to be read and signed.
Again, this is where a mortgage broker comes to the fore.
They will guide you through the reams of lending terms and conditions.
This offer document is extremely important.
It details your responsibilities and the penalties for not meeting them.
Make sure you fully understand what you’re signing up for with this legal and binding agreement.
Don’t hesitate to ask for advice from your legal professional and mortgage broker.
6. Settlement
Settlement occurs when you take possession of your property.
Your solicitor or conveyancer will attend settlement on your behalf and, once complete, you will have unfettered access to your home.
Prior to the handover, you will be given a settlement statement that sets out exactly how your borrowed funds will be distributed.
Most will be to the seller’s account (normally to settle their own mortgage) while the balance will include any other professional costs or government charges.
The moment settlement occurs your loan comes into full effect.
But you are never on your own.
Expect your mortgage broker to check in a few weeks after settlement to ensure your loan repayment processes are going smoothly and that there are no questions or problems that need addressing.
They will also be just a phone call or email away whenever you need help.
Buying your first home and borrowing the funds seems challenging, but guidance from an experienced mortgage broker can ensure things run smoothly.
