If you are deciding whether now is the right time to purchase your first home, you may have heard common misconceptions of homeownership and be confused of the truth! It’s important for you to conduct some of your own research about homeownership, including asking your family and friends who are homeowner about their first home purchase. However, keep in mind that times have changed from when your grandparents and parents would have purchased their first home and the requirements then would be significantly different to first home requirements now – which may be the reason why there are common misconceptions about purchasing your first home.
You will require a 20% deposit
It’s a very common misconception that first home owners require a 20% home deposit before they are approved for a mortgage. Although having a 20% deposit is an amazing achievement will benefit you when owning the home, it is not often required. If you have at least 5% deposit saved, you can begin looking at the property market and/ or enquire with a Lender to see what is in your best interest financially.
If you have a deposit that is between 5% and 19% of a home’s purchase price, you may be required to pay Lender’s Mortgage Insurance (LMI). LMI is insurance paid by you, as the purchaser, as part of your application fees, but is intended to protect the Lender (not you) against financial loss in the event that you are unable or refuse to pay your loan. A benefit of having a 20% deposit will eliminate paying LMI. However, if you have at least 5% deposit of the purchase price, you are eligible for the Federal Government Initiative – the First Home Loan Deposit Scheme. This Scheme supports 10,000 first home buyers get into the property market sooner rather than later with as little as a 5% deposit and all approved applicants will be exempt from paying LMI. The First Home Loan Deposit Scheme works in conjunction with other Government Initiatives, including the First Home Owners’ Grant (FHOG) and the HomeBuilder Grant. In Queensland, the FHOG is a helping hand from the QLD Government to assist first home buyers to get into their new home. The QLD FHOG is $15,000 and can be used with your deposit for your first home, if you fit the eligibility criteria. The HomeBuilder Grant, valued at $15,000, will assist homeowners to build their new home.
Using your maximum loan amount
The first step to owning your first home is to receive a finance assessment on your current situation so your Lender can determine what your initial borrowing capacity. They will assess your income, credit score, assets and liabilities to determine what the financial outcome will be. Once your Lender receives these personal documents, they will let you know how much you are qualified to borrow for a home loan.
Once your Lender lets you know how much you are qualified for, it’s important to understand what it actually means. It is very important to understand that if you are approved for a home loan for $540,000, it does not always mean it’s the wisest idea to use the maximum you are qualified for. It’s a natural impulse to want to use as much as something is available to you, e.g. eating chocolate, finishing a perfume or a book, but obtaining a home loan for the maximum amount may do more harm than good if not advised correctly. This borrowing limit should only be used as an initiation. A home loan is the primary cost when purchasing a home, but other costs that need to be considered and factored into your budget include: conveyancing and legal fees, stamp duty, LMI and mortgage transfer fees.
To put it in perspective
Say you only have $300 left in your spending account until payday and you decide that you want to buy new shoes. You decide to look online because it’s more convenience than going to a shopping centre. You find the perfect going out shoes and will match your outfit this weekend, so you click checkout and pay. While you’re putting in your details to confirm your order, you notice that the shoes cost $279.99 and shipping is $12.99, which totals to $292.98. If you purchase the shoes, you run the risk of having only $7.02 until payday. Just because you can afford something, doesn’t always mean it’s a wise decision to go ahead with the purchase if the risk may be considered extreme. For a first house, just because you are approved to purchase $680,000, doesn’t mean you always should! You must remember that your home expenses do not include your personal and leisure expenses, so the more your home loan’s repayments are, the less you can spend on your other expenses. As a future homeowner, it’s imperative you consider all options and decide what’s in your best interest, with the help of a financial expert.