How to: Buy your first home
It’s one of life’s most exciting moments and it’s also a little daunting! Here’s a few handy things to think about when you’re buying your first home and to get you popping that housewarming champagne in no time!
First things first! What’s your borrowing power?
“How much can I borrow” is probably one of the first questions you’ve asked yourself, and there’s no simple answer to this question as it all comes down to your personal financial situation. Lenders will measure your ability to make loan repayments comfortably without putting you in financial hardship. This is called a debt-to-income ratio (DTI) or loan-to-income ratio (LTI).
You’ll also hear this term a lot – loan-to-value ratio (LVR). This describes the amount you need to borrow to buy a particular property. Generally, the lower the LVR the better, as a lower LVR carries less risk.
It also means you’ll have a head start on fully owning your home and have more equity from the get-go (equity is the market value of your property less how much you owe on it).
When your LVR is over 80%, the cost of getting a home loan may increase because you might need to pay for Lenders Mortgage Insurance (LMI). LMI protects the lender if you can’t keep up with your home loan repayments. Even though you’re paying for this insurance, it’s not protecting you. It only protects the lender. So generally, the higher your LVR, the more LMI will cost. But more on LMI coming up.
Get an Approval in Principle
To help you understand the maximum amount you’ll be able to borrow from a lender, you should ask for an Approval in Principle (also called pre-approval or conditional approval). Generally, it shouldn’t cost you anything and you need to know that it’s no guarantee to getting a home loan. What it does do is give you an idea of how much you can borrow, so you can narrow your house hunting and help with your budgeting.
Once you’ve got an Approval in Principle, it’s valid for 90-days from when it was approved. If it lapses before you’ve signed a contract on a house, you’ll have to re-apply. Make sure you ask your lender or broker about the AIP renewal policy.
Time to start house hunting
Once you’ve got your finances sorted, it’s time to start the exciting part – finding your dream home! This is the part where you’ll be scrolling various real estate sites a few times a day, heading along to countless inspections, or visiting a number of display homes to find the right one. This part can seem overwhelming but remember, searching is half the fun!
Choosing a location
It’s the million-dollar question for all house hunters, not just first home buyers. How do you choose the right suburb to buy in? There’s no right or wrong answer, but there is a well-tested formula. First, know what you can afford without it affecting your lifestyle too much. You still want to be able to go out occasionally and have a holiday each year! The next is considering ‘the village’ of a suburb – the shops, where you might walk to for a coffee, transport links, hospitals and public transport options.
Even if you’re not considering a family right now, it’s wise to factor in school zones and childcare options, especially with childcare centres experiencing long waiting lists. Another thing to consider is the demographics of a suburb. What’s the unemployment rate like? What will your insurances cost? What will your council rates be?
Lastly, be open! While that blue-chip suburb may not be on the cards right now, a house and land package in a new master-planned community may be very achievable and a good first step on the property ladder.
What you want versus what you need
House hunting is exciting. But before you jump in, you need to know your non-negotiables and recognise the wants. Remember, every extra feature or room you want adds a cost to your mortgage. You might find it helpful to make a list and ask yourself, do you really need the fifth bedroom and third bathroom, or can it wait for the next home? Identifying the essentials could save you money and stop you wasting time looking at the wrong houses.
Potential resale should also be front of mind. It’s easy to let emotions take over when looking for a home to live in, but be conscious of the location, return, desirability and resale value of the home you’re looking at. Things like a north-facing orientation, great floorplan, size, security, privacy, and of course, scarcity, all add value to your home.
Check the property before you buy
If you’re buying established, you should always check the property carefully before you buy. If you discover problems with the property after an offer goes unconditional, you may not be in a position to have them rectified. A building inspection report will cover everything from roof, walls and ceilings, any signs of cracks or signs of erosion, plus electrical wiring and plumbing.
Don’t go it alone
Our team is on hand to guide you through the home buying process from start to finish. From the sales process right through to getting those keys, we’ll be there! We’ve even got Mortgage Brokers at Loan Market that can help with the money side of things. So no matter where you are – be it renting or living at home – we are positioned to help you take the next step.