Financing Your First Home: A Complete Guide for Home Buyers
Between engaging an expert, saving for a deposit, qualifying for financial assistance and all the rest of it, there are a few things you’ll have to tick off as you get yourself in a position to buy.
Let’s get down to business!
Engaging an Expert Early
Once you’ve conducted a financial health check and have a good picture of your financial position, the next step is to get in touch with a financial expert.
Remember – we are experts in the field of residential development, therefore all our recommendations in other areas are general in nature only!
Mortgage Brokers or Banks
For many, securing finance is part and parcel of buying a new home. But, with so many lenders offering so many different types of loans, it’s hard to know which one is right for you.
This is where mortgage brokers or a broker at your bank can help take some of the legwork out of the process. Brokers act as a middleman, presenting you with a range of loans from multiple lenders that suit your financial situation and property goals. So you can forget about trawling the internet, trying to figure out how to choose a lender – mortgage brokers have got you covered. Working with your existing bank can have advantages in the way of providing means to offset your interest, or options to consolidate your debt.
What’s more is that Australian mortgage brokers and banks have a duty to act in your best interests, so you know you’ll always be presented with the best deals when it comes to interest rates, loan fees, repayment options and additional loan features.
Before engaging the help of a financial professional, it is always recommended to inquire about any associated fees or charges that will be incurred.
Government Grants and Concessions
It’s no secret that the Aussie property market is a competitive landscape. Luckily, there are a host of government grants and concessions designed to give you a financial leg up as you embark on your home building journey.
However, with the rules, eligibility criteria and grant sizes differing between states and territories, it’s important to know what’s available in your region. Here’s what you need to know.
First Home Owner Grant (FHOG)
This is a lump sum payment of $10,000 for first home buyers who intend to build or buy a new home as their principal place of residence.
While the FHOG is not means tested, the WA government does set a cap on how much your land and building transaction can amount to before you become ineligible. This cap ranges from $750,000 up to $1,000,000, depending on where you live in WA. You can read the full list of rules and eligibility requirements for the FHOG on the WA government website.
First Home Owner Rate (FHOR)
This incentive allows first home buyers who qualify for the FHOG to access a concessional rate of stamp duty or even avoid paying stamp duty altogether. Under the FHOR, vacant land purchases that amount to less than $300,000 do not incur any stamp duty, while transactions that are valued between $300,000 and $400,000 are entitled to a discounted rate. You can read the full list of rules and eligibility requirements for the FHOR on the WA government website.
First Home Owner Grant (FHOG)
Similar to Western Australia, the Victorian FHOG is a lump sum payment of $10,000 designed to assist first home buyers who plan to build or buy a new home valued up to $750,000. Like WA, this new build has to be your principal place of residence. You can read the full list of rules and eligibility requirements for the FHOG on the VIC government website.
First Home Buyer Duty Exemption or Concession
First home buyers looking to build or buy a new or established home valued up to $600,000 may be eligible for a one-off stamp duty exemption. Even then, first home buyers may still qualify for a concessional rate of duty for properties valued between $601,000 and $750,000. You can read up on the full list of rules and eligibility requirements for the First Home Buyer Duty Exemption or Concession on the VIC government website.
Principal Place of Residence (PPR) Concession
This duty concession is available to all home buyers who purchase a property (including vacant land) valued up to $550,000 which you intend to use as your primary home. You can read up on the full list of rules and eligibility requirements for the PPR Concession on the VIC government website.
Eligible pensioners may be entitled to a one-off stamp duty exemption for a home valued up to $330,000, or a concessional stamp duty rate for a home valued between $330,001 and $750,000. In the case of vacant land purchases where you intend to build a home, both the dutiable value of the land and the construction costs will contribute to the total value. You can read up on the full list of rules and eligibility requirements for the Pensioner Concession on the VIC government website.
First Home Owner Grant (FHOG)
In Queensland the FHOG allows eligible first home buyers to receive a lump sum payment of $15,000 when buying or building a new home. Like other states, there is a cap placed on the value of the home you buy or plan to build, whereby it cannot exceed $750,000 (including land). You can read up on the full list of rules and eligibility requirements for the FHOG on the QLD government website.
First Home Vacant Land Concession
First home buyers planning to build a new home may be entitled to a stamp duty exemption if the vacant land is valued less than $250,000. Otherwise a concessional rate of stamp duty may be payable if the vacant land is valued between $250,001 and $399,999. You can read up on the full list of rules and eligibility requirements for the First Home Vacant Land Concession on the QLD government website.
Federal Government Grants
First Home Guarantee (FHBG)
The FHBG is part of the Home Guarantee scheme that is overseen by the Australian Government and is thus available Australia-wide.
Rather than paying a lump sum, the FHBG allows eligible first home buyers to purchase a home with as little as 5% deposit without the need to pay Lender Mortgage Insurance (LMI). This is because the National Housing Finance and Investment Corporation guarantees up to 15% of purchase price of the property, promising the lender that the loan repayments will be covered if you become unable to meet the repayments yourself
The NHFIC has announced that there are 35,000 available places for the FHBG, open to eligible first home buyers from 1 July 2022 to 30 June 2023. You can read up on the full list of rules and eligibility requirements for the FHBG on the NHFIC website.
Family Home Guarantee (FHG)
The FHG forms the second half of the Australian Government’s Home Guarantee scheme. Similar to the First Home Guarantee, the FHG allows eligible single parents with at least one dependent child purchase a home with as little as 2% deposit without needing to pay LMI.
Currently, the NHFIC has released 5,000 available places for the FHG, open to eligible single parents with dependent children from 1 July 2022 to 30 June 2025. You can read up on the full list of rules and eligibility requirements for the FHBG on the NHFIC website.
How Much Can I Borrow for a Home Loan?
Before you get started with buying your ideal plot of land and turning your dream home into a reality, you’ll need to get a gauge on your borrowing capacity. After all, knowing how much a lender is willing to give you will allow you to budget wisely as far as location, lot size, design and features are concerned.
While lenders may differ slightly when it comes to how much risk they are willing to assume, they all calculate your borrowing power in more or less the same way. That is, on the basis of:
- Your financial situation; and
- Your ability meet repayments should interest rates increase
To determine these things, lenders will generally examine things like your:
Calculate Your Borrowing Power
If you’re asking yourself ‘How much can I borrow for a mortgage’, and want to get a rough figure of how much that might be, most lenders provide online borrowing power calculators. These can give you a quick estimate of how much they may be willing to loan you based on your current financial position.
Saving for a Deposit
One of the great things about buying vacant land and building from scratch is that you can often get started with a smaller amount than you would need to buy an established home.
Nevertheless, you’ll still need a down payment. So what are some things you can do to save for one?
Make a Savings Plan
A tried-and-true method, genuine savings is perhaps the simplest way to build up your funds when looking at how to save for a house deposit. Here are 3 things you can do to make sure you stay on track to meet your savings goal:
- Get clear on how much you need for a deposit. Before you can begin putting a savings plan into action you need to know your end goal. Are you set on putting down the standard 20% so you can enjoy lower repayments? Are you planning on using a government grant to reduce how much you need to save for down payment?
- Create a timeline. Once you put a date on when you want to purchase your plot, you can then calculate how much you’ll need to save on a monthly basis and adjust your outgoings accordingly.
- Set a budget. Set a realistic budget that you and your family can adhere to in order to meet your financial goals.
Types of Home Loans
Lenders offer a number of different home loans, each with their own set of benefits. This is where having a financial expert on your side can be very helpful, as they will be able to advise you on which type of loan is right for your situation.
Here’s a look at some of the most common loan types available in Australia.
A standard variable rate home loan means that the rate of interest that is applied to your loan and your repayments is based on the interest rate that is decided by your lender – which may change if the lender chooses to do so. Often lenders change their interest rates to reflect the official rate that is set by the Reserve Bank of Australia. The benefit here is that if your lender reduces their interest rate your minimum repayments will also decrease, so you won’t have to pay as much. But, on the other side of the coin, if your lender chooses to increase their interest rate, your minimum repayments will also increase. Being aware of how interest rates are trending can help you plan your finances accordingly.
A fixed-rate loan allows you to lock-in the interest rate for the first one to five years of the loan. This means that your repayments will remain the same during this time regardless of interest rate changes. These types of mortgages are particularly beneficial as they can save you from increased repayments if interest rates rise. By the same token, however, you won’t be entitled to reduced repayments during the fixed period should interest rates fall.
An interest-only loan allows you to pay back just the interest for up to the first 5 years of the loan. At the end of the interest-only period, however, you’ll then be required to pay back both the principal and the interest as part of your regular repayments. The benefit of these types of home loans is that because you’re only required to pay the interest and none of the principal, your repayments end up being lower during this period.
A construction loan is specifically targeted towards buyers who want to build their own home. It allows you to progressively draw from the loan so you can pay your builder as they complete each stage of construction. Generally, there are 5 or 6 stages of construction, this means you would draw down from your loan 5-6 times to pay your builder each time they finish a stage.
The major benefit of a construction loan is that the construction period is considered an interest-only period where you only have to pay interest on the parts of the loan that you drew down. This of course can end up saving you a lot in repayments. It’s only once the build is complete that you will start paying interest and principal.
A low doc loan is designed for home buyers who may not be able to provide traditional proof of consistent income such as pay slips. While these types of home loans can be ideal for self-employed individuals, they typically require a larger deposit and the need to pay higher interest rates.
Costs to Consider
It pays to know all of the costs and fees you can expect to come across on your property journey, before you enter into a loan agreement.
Aside from the obvious cost of your land purchase, the other costs of building a house may include:
To find out how much you should expect to pay in associated costs it’s a good idea to talk to your financial expert who can give you a tailored breakdown based on your specific situation.
Home Loan Pre-Approval
How exciting! You’re about to enter the home stretch of getting finance ready for your new home. You’ve taken stock of your financial situation, put some plans in place, and now you’re ready to sit down with a lender to see how much you really have to work with before deciding on your new lot in your dream community.
It sounds like it’s time for pre-approval. But what is that exactly? Let us explain…
A home loan pre-approval is a non-binding agreement in which the lender gives you a good indication of how much they are willing to let you borrow. This of course will allow you to narrow down your search for vacant land and proceed with confidence knowing that your lender is, in principle, willing to lend you close to what they’ve said they will. Typically, you can expect pre-approvals to last between 3 and 6 months.
However, it’s important to remember that your pre-approval is based on the lender’s assessment of your financial situation at the time. If your financial situation changes, the lender may rescind their offer and not allow you to borrow the amount that you had previously been pre-approved for.
There are also other factors that may affect whether your pre-approval proceeds to final approval, such as:
- The lender’s valuation of the land
- Changes to government regulations
While pre-approval may not be mandatory, it is certainly recommended. In the end, it allows you to make an informed decision as you scout for your perfect piece of land.