When interest rates are low, house prices usually rise and first home buyers can feel shut out of the market. But all is not lost – first home buyers should stick to a few simple tips:
- Deposit: Lenders want to see you have at least 5 per cent of the purchase price as genuine savings (generally you'll need 10 per cent overall). You can top up with money from your parents or grandparents, but you have to show at least six months of your own savings. Start saving, now …
- Savings: Set a goal for your deposit amount and save in a high-interest savings account that's separated from household expenses. Set a weekly deposit goal, use direct crediting and if you're a couple have one person's income going directly into savings.
- Reduce debt: Eliminate or reduce the limits on your credit cards and store cards. Lenders look at the limit on your cards, not your balance.
- Grants: The First Home Owners Grant can help with your purchase. But it must be for a new home construction; you can't use it to buy the land and lenders will not treat the FHOG as part of genuine savings. Do your homework because the grant differs slightly between states.
- Income: Lenders like to see stability and want to see evidence that you will repay the mortgage. So you should demonstrate at least six months (but preferably one year) of PAYG employment, or two years of financials and tax returns if you're self-employed.
- Shop around: You can find variable rate mortgages in the range of 4.6 per cent to 6 per cent. The 1.4 per cent difference, on a 350,000 loan over 30 years, is worth over $300 per month.
- Marketing: Watch for "discount" mortgages and special low offers. The low rates last for a year or two and then revert to a much higher rate. Always look at the "comparison rate".
- Fixed: Many first-home buyers like to balance their budget for a few years, and a fixed loan creates certainty. However, once in a fixed loan, your flexibility is restricted and you may encounter break costs if you want to sell or refinance.
- Vary it: Variable rates fluctuate with the market but they are flexible, allowing you to repay higher amounts and deposit lump sums from bonuses and tax refunds, speeding your repayment. You can refinance a variable rate loan without penalty.
- Offset: When you put all your income into a mortgage offset account, the balance pays down the mortgage by the amount you have in there each day. It stops interest capitalising against you as fast as monthly repayments. Offset accounts suit good budgeters.
- Price: Don't be disheartened if you can't buy what you want – buy the next-best and build a strategy for your next property.
- Advice: Mortgage brokers are excellent for insights, strategies and getting you a good result. They're worth talking to.
Always remember: When borrowing money and buying property, the same basic rules apply to everyone. So do your homework, be prepared, take some advice and go for it.
Mark Bouris is executive chairman of wealth management company Yellow Brick Road. www.ybr.com.au