Ways To Finance
Your First Home
Understand the different mortgage types.
There’s a lot more to loans than interest rates and fees.
Obviously a low rate is important but it’s not everything. There are different sorts of loans and features that will make managing your mortgage easier. We can take the time to teach and advise you on the fundamentals you need to know to make an informed decision. To begin with, it’s important to know the main types of loans:
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The interest rates go up and down depending on factors such as the official cash rate, market conditions and each lender’s decisioning. When the rate goes down, so do your minimum repayments. But when the rate goes up, your payments will too. Obviously, a low rate is important but it’s not everything.
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The interest rate can be fixed for one to five years. Even if rates change, your repayments stay the same. This helps manage your household budget by knowing exactly what you’ll have to pay. Of course, you won’t benefit if interest rates drop and there may be significant break costs to change the loan before the end of the fixed term.
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One part is variable, the other is fixed. This lets you enjoy the benefits of an interest rate drop but also protects you from being affected fully if they rise.
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You only pay the interest on your loan but not the principal loan amount. Your repayments are less but you still have the same level of debt at the end of the interest only period. However, an interest only loan will usually cost more over the term of the loan as you won’t start paying off the principal until after the end of the interest only period.
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You can pay into and withdraw from this account as long as you keep up with the required repayments. You can have your income paid into this account to help pay off the mortgage sooner but interest rates are usually slightly higher.
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Designed especially for first homebuyers, you can enjoy a lower interest rate for the first six to 12 months, and then the rate returns to the standard variable rate.
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These are popular with self-employed people because they need less documentation or proof of income. However, they usually have a higher rate of interest or need a larger deposit, or both.
Borrowing From The Bank Of Mum And Dad
With property affordability getting increasingly tricky for some, many first home buyers are reaching out to their families for financial assistance to help increase their borrowing power.
Partnering up can reduce the financial burden and may mean you can afford a better quality property with greater growth potential than if you bought solo. But it’s not a move you should make lightly. Even if you decide to buy your first property with family, make sure you seek legal advice and ensure each party understands their financial and legal obligations. You don’t want a financial transaction or financial partnership to come between you and your family. You should talk about what would happen if one of you was unable to cover their share of the mortgage and how you might reduce this risk.
It’s also important to contemplate scenarios such as one of you wanting to sell or move out sooner than planned. If you are considering this then you may find it helpful to speak to a financial planner and lawyer. There are benefits to be gained but as with every significant financial decision you make, it is critical to weigh up the risks at the same time.
Family Guarantee Loans
A family member can use the equity in their home to guarantee part of your loan.
If you’re struggling to save for a deposit, or find your dream sooner than reaching your required deposit amount, there may be other options that will get you into your first home faster. It’s a common option to get family members on board, either through a gift or family guarantee. This can be a great way to increase your deposit to avoid paying lender’s mortgage insurance, which is usually a requirement if you are borrowing more than 80% of the property value.
The family member may be able to use the equity in their home to guarantee part of your loan. The guarantor should understand that if you fail to make a payment, the bank may look at them to pay the guaranteed part of your loan. As such, it’s important for all parties to seek independent financial and legal advice prior to entering a guarantee arrangement.
Rent Out Your First Home
There’s no rule that says you have to live in your first property.
Many first home buyers are challenging convention by renting where they want to live and buying an investment property in a more affordable location. The objective for these renters is to buy where they can afford to get a foothold on the property ladder. That could be another suburb in the same city or a town in an entirely different state.
As with any investment, the key is to choose a property on financial merit, not emotion. Are you looking for capital gain over time or high rental yields right away? The investment property can be positively geared, where the rent exceeds the cost of the mortgage and upkeep to give you a profit, or negatively geared, where the rental income is less than the cost of owning and managing the property, which may create a tax deduction.
Again it’s important to seek appropriate legal and financial advice so you are well informed about how renting and taking on an investment property impacts your finances and tax obligations.
The first home owner’s grant and other incentives.
The grants usually apply to apartments and houses up to a certain value. These thresholds can vary depending on the type of dwelling and the state or territory in which the property is located. The savings can be significant, so it’s certainly worth exploring.
Visit www.firsthome.gov.au to find out what’s on offer under the FHOG scheme in your market. It is also worth checking if your state or territory offers stamp duty exemptions or concessions for first homebuyers. The First Home Owners Grant and other various grants and stamp duty concessions may be available to give first homebuyers a leg up.
At Barwon Mortgages, we’re here to help make it easier. If there’s something you don’t understand or need more of an explanation, please just pick up the phone or email today.