Buying Your First Home
Is the ‘Australian Dream’ of buying a house a dream of yours?
It doesn’t have to be. Your goals and dreams need to be aligned with your values and with your vision of your unique life. You do not have to buy a house. You can invest in your future in other ways. But, if you are like me and have collected some art pieces that look sad resting against the wall because you’re not allowed to hang them in a rental, then this blog is for you!
I had always imagined buying a home one day with the love of my life, but as I approached my 30th birthday with no knight in shining armour in sight, I decided ‘f#ck it’ and did it myself. Even though I consider myself to be a reasonably intelligent person and reliable borrower (hello, I am an accountant) I couldn’t believe how hard the process was.
So, I thought my darling self-employed arts clients and friends would appreciate a heads up on things to consider when dreaming of buying a home.
I asked my mate Leath Margrie at ‘The Lending Therapist’ some FAQ:
So, I want to buy a house… what should I be thinking about and preparing now?
Well, that all depends on when you want to buy. If you are thinking about the next two years, that is very different from wanting to go to an auction next week.
2 years out
Research
Start thinking about the property, location and research rough price ranges of your dream purchase. Consider what suburbs you would prefer to be in. Consider whether you will buy an existing property or build new. Research what kinds of prices to expect depending on the type of properties in that area (units, apartments, townhouses, small houses with small land).
Of course prices do move and in two years things might look different, and your preferences might change. But this gives us a price range to work toward.
If you are looking to find land and build a home, availability is going to depend on where you are looking to live; there may be plenty of land (new estates) or you may be chasing land-poor areas closer to the city. Check out some display villages to get a draft idea on building costs.
Do your best not to fall in love with anything just yet (remember, we’re planning for 2-years time), but getting an idea of the numbers is important so we can set realistic goals and make plans.
Credit Score
I’d suggest doing a credit score or preferably, credit report check and ensure all details are correct. If any late payments/issues are on there, now is the time to clean that up so your report is looking tidy when it comes time to apply in 18-20 months time.
Save
Now is a good time to start a budget (ew, dirty word) so you’re saving at least $500 to $1,000/month, this will get you into the pattern of what loan repayments may be. Naturally this will depend on the size of the loan you get, but creating the habit is important.
You might also ask a broker to help you create a more realistic estimate of what repayments might be for a property like the one you want, then reduce it by any rent you pay now, and then save the difference. That is what Lauren did! That way she could look at her financial situation and budget and make sure that the house she was hoping for was something she could afford to pay off.
Ideally, if any changes are planned in employment, especially if you’re going to Self-Employed, now is a better time to do that so you can show some history. The banks love to see consistency and regular income.
When Lauren bought her home (Jan 2021), she had been full-time self-employed for only 18 months, and as many people do in the first year of business, she paid herself a modest wage. So, the bank struggled to lend to her until she could show 2 years of growth/consistency in the business and an improved regular wage.
You are trying to make yourself look like a reliable borrower. Show them you know how to save and not dip into that savings account.
12 months out
If you haven’t already, make sure you have covered the stuff above: credit report, savings, research. This is the time to meet with a broker. Come with your idea of what you want, your bank records and wages, or self-employed after tax profit figures ready to roll. When you have those, the broker can help you figure out whether you are on track for that dream home, or if you need to give yourself more time, adjust expectations, or tweak your budget.
If you want to build, just a heads up that rarely does the build go to schedule; Lauren bought in January and they said expected completion was December. At the time of writing it is October and the slab just went down.
ASAP
If I want to buy ASAP: always interesting when people suddenly decide to purchase and not have a plan / get their lending picture painted before. Being patient is the first key, gathering the key info / reviewing and finding solutions that suit your needs takes time. If you do fall in love with a property, then get help preparing the Offer so it protects you and gives you time to do a proper job, not a rushed job. This will keep the stress & emotion at bay, which is very important. Then it's about working together with a professional and providing / gathering info for them so they ‘bring the magic’ for you.
What is the bank looking for in me as a borrower?
Rugged good looks, charming personality and a smile - oh, that’s enough about me :)
All the lenders have their own criteria for different borrowers, the key is to be flexible with Lender choice. This is like the dating world - not everyone is a good fit and that is ok. But if you put your best foot forward and work with a good, hard-working broker, they can act like tinder and match you up!
For example, if you come at the last minute and want to buy a Home but your credit file is full of holes or you’ve been self-employed for just a year, then most of the ‘mainstream’ lenders will struggle to help. We may need to use a specialist lender to get you in the home, then when your situation fits the mainstream, we can change later.
Some of the key common things the lender looks at:
- some form of savings
- credit report in good nick
- history of good repayments
- track record of employment (or self employment: 2 years, upward trend or consistent profits)
Everyone’s picture is unique, so it’s about trying to understand that and then finding a lender to match that picture.
I work for myself, what extra info do I need to provide?
Depending on your structure (Sole Trader, Partnership, Trust, Company, combo, SMSF), we will need to verify identity in slightly different ways. Think of your business like your employer, except that the banks cannot rely on a payslip and employment contract. They will want to see historic profit and loss reports, bank statements, and tax returns to check how healthy the business is to then determine how likely it is that your business can continue to pay you.
This is where your accountant comes in. You can make the process simpler by introducing accounting software early on, which will then provide financial information you can take to the bank at a moment's notice.
What happens if I am not in the best position right now?
This depends on what the issue is.
Often for first home buyers, it will be a shortfall of funds required to get started (the savings balance). Depending on how much of a rush you are in to buy, quickly boosting your savings patterns may work. Otherwise, time to call a friend (or family). Friends and family can lend money to you and/or act as guarantor. This is not without risk and complexity of course. You could also look to sell assets you don’t need anymore to boost cash in the bank. It is always a good idea to address any skeletons in the credit report.
Or, ask your broker! Consider a 18-24 month plan of using a Specialist lender to make the plan work. This may mean you’ll get not quite the right product or pricing (it might not be the ideal interest rate for you), however it may be the difference of keeping or losing the home / separating from ex-partner / taking that business opportunity / whatever.
What does a mortgage broker do? How do they get paid?
This is a tricky question as it's like asking “what does an Accountant do?”
Usually your broker is the person who helps you figure out if you are ready to buy, or what it’s going to take to make that happen. They research and negotiate deals with banks on your behalf. They help with the calculations and navigating the process too. As with Accountants, there are different specialities and niches that brokers may be in.
Sometimes there is an admin fee involved, and sometimes not. Every broker will be different. Best to ask them upfront what they charge, how and when. Usually the lender (like the bank) pays the broker a commission for a successful application only, which is paid after the loan goes through. Also, they are subject to ‘claw-back’ where if the loan is closed within the first 2 years, the lender will take the commission back!
What is a conveyancer?
Mates of your broker. Kidding. They are professionals that help ensure the contract is prepared correctly, assists with Form 1’s, updates the relevant Council on the change of ownership of a property and updating the Title. This is just a snippet of what they do and it’s a very important part of the Home Buying Journey.
How much is my loan going to be? (i.e. property plus extras, minus deposit, minus grants)
Classic answer: it depends! This will vary depending on several factors so it's about understanding what property / lending path we are taking. I spend time going through this with my clients so we ensure we have sufficient funds to bring it all together.
As an example:
- $500,000 purchase price of an established property
- + $28,000 ish for Government costs (varies between states), Conveyancer, Lender and other points depending on the client's situation*
= $528,000 - (-) $68,000 savings the client has
= $460,000 being the amount to borrow
*note: the extra costs vary significantly depending on the purchase price of the property and other elements.
From there, I’ll work on lending ratios / grants applicable etc. and then discuss which Lenders may suit.
What are the common ways to get into the property market as a first home buyer?
I find it's often the choice of buying an established home or ‘house & land package’ first. Then location as price points will vary. Then it’s giving an idea of funds required & repayments, then assisting with the journey from there.
How do I actually buy the house: (auction, off the plan etc.)
There are different paths when it comes to this, part of what I explain and guide my clients on.
If you go to Auction, it’s an unconditional contract which means not subject to finance - so knowing how to be ready for that is key.
Off the Plan is often unconditional also, however, the property might not be ready for 6-24 months so do you know what your position will be when the property is ready?
Private Treaty (where you get to negotiate) - if you’re subject to finance, this is the best path for you. Still, the points that need to be covered and getting the Offer right will make this path work better for you.
What are the current grants available? (*at time of writing)
This one will depend on when you are buying, your state, your property ownership history and your unique situation. But at the time of writing, here are a couple:
- Family Home Guarantee: allows a 2% deposit for single parents, conditions and caps apply.
- First Home Loan Deposit Scheme: for Established properties, waives Lenders Mortgage Insurance, conditions and caps apply.
- New Home Scheme: same as above point, for a new Home or ones being built.
- First Home Owners Grant: $15,000, New Homes or ones being built.
- SA doesnt do Stamp Duty waivers for First Timers, other states do.
Your broker can point you in the right direction when you are ready.
What does ‘subject to finance’ mean?
Building and buying contracts are so confusing! One thing you might like to keep an eye out for though is the ‘subject to finance’ clause. This is helpful in protecting you, the borrower, so if you can’t obtain finance then the contract gets waived (subject to conditions). If you don’t have the full purchase price in the bank, then your offer should be ‘subject to finance’ to protect yourself. Certain timeframes and wording are needed to help make the Offer better and less stressful.
It’s like your get out of jail free (ish) card.
Do I need anyone else on my ‘buying a house’ team? (lawyer, accountant, architect etc.)
You need an A-team!
That’s one of the key points of having the right Broker, they have a working relationship with lots of key people.
Some of the people I have to help the process along;
- Conveyancers
- Accountants for Tax & business advice (that’s me!)
- Builder or a Builder Agent
- Buyers Agent
- Pest Inspector
- Building Inspector
- Removalist
- Insurance Broker
- Landscaper
- Tradies for work around the home (Plumber, Sparkie, Painter)
- Financial Planner (for help with protecting you)
If you need any more information, reach out and I’ll do my best to steer you in the right direction.
Lauren xxx
