6 First home buyer advise best to ignore
Most young Aussies dream about buying their own home one day.
And despite of abundance of quality information readily available today, unfortunately there seems to be as much misinformation which stop many newbies getting on the property ladder.
So, let’s dispel six home buyer myths.
Myth 1. I need a 20 per cent deposit
Even though property prices around the country vary greatly, not many first home buyers can save a 20 per cent deposit when they're also paying rent while trying to save up.
While lending is currently more restrictive than years gone by, that doesn’t mean that banks are only approving loans for borrowers with six-figure deposits.
Lenders have always understood how tricky it can be for first-timers to save a large deposit – and they still do.
While the days of borrowing 105 per cent of a property's value are thankfully behind us, many first home buyers can still secure loans with as little as 5 percent deposit and there’re lenders on the loansHub platform who can lend you up to 98 percent of the property's value (inclusive of lender mortgage insurance premium).
Of course, when borrowing greater than 80 percent of a property’s value you'll have to pay LMI or Lenders Mortgage Insurance (more on that later) but that's a better strategy than futilely trying to save a “big enough” deposit that will probably never reach the 20 per cent mark because of property prices in certain cities are growing faster than your ability to save.
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Myth 2: If my parents guarantee my home loan, they’ll be out of pocket
Many first home buyers turn to the bank of mum and dad to help them get into property. Sometimes parents choose to give the required deposit as a gift, other times parents elect to go guarantor on their children’s loan.
This way they don't have to hand over any cash but instead they offer the bank additional assurance by putting their property (either their home or an investment property) up as security for your loan.
Keep in mind, if you default on your loan, as guarantors your parents will be responsible for paying back your debt and a lender is likely to request that they seek independent legal advice on risk involved when providing a security guarantee.
Myth 3. I need dual income to borrow
Banks have been lending to singles and single income families since they’ve been around. Fact is, up till the eighties most families only had one income coming in anyway and they managed to buy houses albeit the property prices were more affordable.
Whether you’re single or separated, lenders will treat your application the same as anyone else’s – plus, the fact that you probably don’t have children is a good thing when it comes to finance and surplus cashflow.
Myth 4. It’s hard to get a home loan when self employed
Lenders are prepared to approve loan applications for the large number of Australians who have taken their financial futures into their own hands.
With most lenders, self-employed borrowers will have to provide two most recent years of financials as well as business and personal tax returns for these years.
If you always minimise your income to reduce tax payable, of course it’s going to be hard for you to borrow as lenders want to see that you have the income required to repay the loan.
Myth 5. Lenders’ Mortgage Insurance protects me
One of the big causes of confusion out there in lending land is that Lenders Mortgage Insurance (LMI) somehow protects the borrower. Just look at its name - "Lender's" Insurance - not "Borrower's insurance.”
Part of the confusion might be because the borrowers (you) pays for LMI, which ultimately safeguards the bank against a borrower defaulting on their repayments. LMI is payable for loans that have a loan-to-value ratio of greater than 80 percent of the property value.
And as most first home buyers usually don’t have 20 percent deposit, they have to pay it. The one good thing about it is, you don’t have to pay for it upfront as lenders will add it onto your loan (certain conditions need to be satisfied).
Myth 6. My bank knows my history and will reward my loyalty
The 2018 Royal Commission into Banking as well as ACCC’s 2020 report on banking put this B.S to rest when it found that banks put their own interests before their customers.
With progress towards open banking, the days of having the same bank for your whole life are behind us – unfortunately 3 out 4 Australian’s haven’t caught on yet and it’s costing them thousands of dollars.
Not only is Australia’s banking sector robust, it is also very competitive, which means plenty of opportunities for great deals for borrowers. Alas, far too many first home buyers go straight to the bank they opened an account with when they were school or when they started a part-time job at Maccas.
Buying your first property is rightly a big moment in your life. It should be a time of celebration because of what you have achieved. What it shouldn’t be is confusing, which is why the savviest of first-timers focus on the facts and ignore the myriad myths that are still out there.
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This article via Your Mortgage does not constitute advice; readers should seek independent and personalised counsel from a trusted adviser that specialises in property, a tax accountant and property design specialist.