New home buyer's starter kit
Dec 10, 2024
By: Ubank
Buying your first home is an exciting leap forward in life, but the process can be a bit daunting. Where do you even begin? Before you jump in the deep end, Ubank has compiled this handy guide, filled with all sorts of info to help you land your first place. We've kept it simple, to help you navigate the world of home loans and property with confidence.
1. Setting a budget π°π
How much do you need for a deposit when buying your first home?
When you’re gearing up to buy your first home, working out the deposit you’ll need is a big deal. Here’s the lowdown: Usually, you’ll need a 20% deposit to avoid paying for LMI (Lender’s Mortgage Insurance). Fortunately, none of Ubank's products have LMI, even if you have a 15% deposit. That 5% difference can reduce the cash you need to save by thousands of dollars.
Going in with a deposit over 20% is a power move. It means you borrow less, which means your repayments shrink and you could get yourself a lower interest rate. Plus, a solid deposit gives you better starting equity in your home. Your equity is how much of your home you actually own. That’s going to help you in future when you’re ready to upgrade to a bigger place.
How to save for a deposit?
Ubank Save accounts come with zero monthly fees and an impressive bonus interest rate of up to 5.50% p.a. to help you maximise your savings. Ubank can help you monitor your savings targets across multiple accounts to keep your deposit on track.
How much can I borrow?
To estimate your borrowing capacity, you can consult with a lender or a broker who will assess your financial position. Your maximum loan amount is calculated based on your income, savings, assets, expenses and credit history. If you want a quick snapshot today, try out Ubank's borrowing power calculator or book a call with a Ubank home loans expert.
What are some of the unexpected costs of buying a Home?
When it comes to buying a home, the price tag isn’t quite the final price. So, before you set yourself up to seal the deal there are a few additional costs you need to factor in:
- Stamp Duty
This is a government tax on property transactions based on the property’s purchase price. It’s usually the largest additional cost, but if you’re a first home buyer you could be eligible for a Stamp Duty concession. This depends on what and where you are looking to buy and if you intend to live in the home, so check the rules for your state or territory.
- Settlement Costs
These are the costs associated with all the paperwork needed to register your purchase. Settlement costs include transfer fees, registration and conveyancing (legal fees).
- Loan fees
Your lender may charge application fees, annual fees and valuation fees to cover the administrative time it takes to process your home loan and secure your property.
- Inspections
Paying for professional inspections is a proactive step you can take to protect yourself before completing the sale. It provides peace of mind by ensuring the property is structurally sound and making you aware of possible issues.
- Building Insurance
Most lenders will also require you to provide evidence of building insurance before you proceed to settlement, to ensure that your new property is appropriately covered and to give you some peace of mind. If you buy a property that is part of a strata scheme, this requirement may already be taken care of by the body corporate.
2. Grants & Incentives πΈπ
First-home buyers in Australia can get access to a range of government grants, discounts, and schemes aimed at easing the financial burden of purchasing a home. These incentives are designed to make the dream of home ownership more attainable.
Typically, these programs require buyers to use the property as a primary residence for at least 12 months, so you may not be able to use your home as an investment straight away. It’s also important to note that these programs are generally available below certain price thresholds, and the details of these schemes can change periodically. Additionally, if anyone on the contract of sale has previously owned a home, you may not be eligible for certain benefits.
3. How to get a Loan π¦π³
The difference between pre-approval and unconditional approval?
- Pre-approval
(or conditional approval) Gives you an estimate of how much you can borrow. Based on your financial situation – income, assets, liabilities and expenses – lenders will give you an indication of whether you qualify for the loan you're after. This can help you set a realistic budget.
This approval is subject to certain conditions, which can vary depending on the lender. It’s important to clarify what pre-approval means with your chosen lender. They may require additional documentation to take you from pre-approval to a successful purchase.
Arranging pre-approval is advisable early in your property search, but particularly before making an offer or bidding at auction. Pre-approval with Ubank lasts 90 days before you need to apply to have it renewed.
- Unconditional approval
Is the final ok from your lender that the loan is approved. This often occurs after a successful bid and the exchange of contracts. You’ll have to submit further documentation and details about the property at this stage (e.g. a property valuation), to formalise your loan application. Once unconditional approval is granted, your lender will issue loan offer documents, allowing you to sign on the dotted line and progress to the settlement phase.
How to get pre-approved for a home loan?
Each lender has a slightly different pre-approval process. You can apply for pre-approval with Ubank online, by phone or using a broker. Each option has advantages and disadvantages, so do some research to decide which one is right for you. Remember, if your circumstances change during your home buying journey, make sure you let your lender know as it may affect the outcome of your pre-approval.
What do lenders look for when providing pre-approval?
When evaluating a loan application, lenders look at various aspects of your finances to weigh up the risk of lending to you.
- Income, and Expenses
Lenders review your income, including wages; interest; investment dividends; and any additional business earnings. On the flipside they also look at your expenses: things like bills; groceries; transport; leisure and more. This helps to determine your financial health and if you can afford the loan repayments.
- Savings
Lenders want to see that you have a sufficient deposit and may want to see you have additional funds to cover repayments if your circumstances change in scenarios like increased expenses or job loss. They also look for a history of consistent savings over at least three to six months.
- Debt
Lenders want to know the amount of money you could owe other parties as well as any facilities you have with credit limits. This includes total credit card limits as well as existing personal loans, car loans, business loans, and student loans. Higher debt levels can reduce the amount a lender is willing to lend. Reducing the number of credit cards you have and/or lowering their limits can improve your application.
- Financial History
Your credit history will be examined for any missed repayments or defaults on loans or credit cards. While these might not necessarily be deal-breakers, you should be prepared to explain them and demonstrate why they won’t happen again.
Understanding your options
When getting a home loan, you can choose different loan structures and features. It’s important to discuss options with your lender to find the best fit for you. Here are the most common products:
Loan types
- Variable Rate Loans:
- Rates may change meaning you enjoy rate drops but have to plan for increases
- Offset accounts may be available to help you save on interest
- Typically allows extra repayments
- Fixed-Rate Loans:
- Rates are locked for a set term (generally 1-5 years), to provide repayment certainty
- Rates may be higher or lower than variable options over time
- Limited or no access to features like redraw and offsets
- Possible break costs if you repay or refinance your loan within the fixed term
- Split Loans:
- Part of your loan is variable rate while the other part is on a fixed rate
- Can reduce the impacts of rate volatility while providing some flexibility
- Not available with all lenders
Repayment types
- Principal and Interest Loans:
- Repayments pay off a portion of your principal (loan balance) as well as interest
- Most common type because you build equity (ownership of your property) by paying down your loan balance
- Generally, offer better interest rates relative to Interest Only loans, leading to less interest over the life of your loan
- Loan is fully repaid over time, typically 25-30 years
- Interest-Only Loans:
- Repayments only cover the interest on your principal (loan balance)
- Limited to a set period of time before reverting to Principal & Interest repayments
- Usually have higher interest rates than Principal & Interest loans
- Reduces repayments in the short term to help with cash flow
- Typically used for investment properties or new families with reduced income.
- The total amount you need to pay over the life of your loan will generally be higher
