5 tips for Millennial Home Buyers
I remember when property developer, Tim Gurner implied on national TV that millennials would never be able to afford to buy homes because they enjoyed having $19 avocado & toast and $4 coffees too much.
Well, surprise! Millennials, you now make up 44 percent of Australia’s workforce and most are earning more than the generation before, when they were in a similar age bracket. As for buying property, over 70% of applicants for the first home loan deposit scheme are millennials! So, it seems Tim was wrong (and I assume marketing hard to get millennials to buy his properties).
While I love seeing more and more of my generation making this big decision, I also want to make sure you are doing it with as informed as possible so that you can make the right decisions, after all, a mortgage will be the biggest debt you’re most likely to ever have.
So, if you’re a millennial looking to buy a house, here are five things you can do to make that dream come true.
1. Pay off and close existing debt
What’s the biggest challenge facing millennial home buyers? Affordability or as banks see it, borrowing capacity.
With homes in our major capital cities costing eight times what an average household earns, your borrowing power matters if you want to take a mortgage out. Every dollar that is needed to pay another debt, is a dollar not available for home loan repayments.
Since buying a house is the most expensive purchase you’ll make, you need to be as debt-free as possible before you apply for a home loan. If you have any debt, be it credit card, buy-now-pay-later or personal loan, pay it down and close where possible. Only then will you be ready for the next challenge: Deposit.
2. Create a saving plan for your deposit
Most of us cannot afford to pay cash for our first home. In fact, I don’t know of any millennial who has managed to buy without a mortgage even with the backing of the bank of mum & dad.
The first step is to check your borrowing power as this will give you a ball park figure of what your property price range will be. Next, based on your price range, use a savings calculator to workout how long it will take you to save your preferred contribution.
Most banks require borrowers to contribute a minimum 5% of the property’s price as deposit. Though to avoid paying lenders mortgage insurance premium, you need a minimum 20% deposit.
The table below from ANZ, Corelogic housing affordability report will provide you with an indication of how long it takes to save for major regions around Australia. If you don’t qualify for the first home loan deposit scheme, when starting out, it’s not always possible to save 20% in the timeframe you may have set yourself to buy a property.
If you’re struggling to save a deposit, you’re not alone. For millennial home buyers who cannot do it by themselves, an option is to ask your parents if they would be able to provide security guarantee for your first home purchase. The biggest advantage of using a guarantor is you not having to put up any cash towards the purchase if there is sufficient equity in your parent’s property.
It’s important to remember, your parents cannot help with the servicing of the loan and by agreeing to be your guarantor, they are taking a financial risk for you and should not be pressured into making a decision.
And if you decide to go it alone, be patient and stay the course. Keep saving! Start with a clear plan. After you have a goal in place, it will take less time than you think.
3. Get your finances in order
If you’ve already reduced your existing debt and saved for your deposit, good work! The next step is to get onto the property ladder.
When looking for a good deal on a mortgage do your research. A home loan is a long-term debt, so even a small difference in interest adds up over time.
And before you start comparing home loans, remember the best deal you can today is not going to be the best deal for you forever. It could be 12 months, 16 months, your existing loan will cease to be competitive when compared to the market.
When doing your sums, remember to factor in the cost of purchase, things like conveyancing cost, building and pest inspection, statutory cost. You will need funds for these on top of your home loan deposit unless of course you are getting first home buyers grant (FHOG), then you can fund these using part of your FHOG.
Compare home loan rates
There are nearly 100 home loan lenders in Australia, to get the best offer, contact at least 5 different lenders to get loan options. A rate, even 0.25% lower could save you thousands of dollars per year, imagine the savings over the life of your loan!
Get help, it will save you thousands
With so many lenders to choose from, you may consider taking advantage of loansHub’s personal mortgage manager technology. On application, our smart technology send you the best personalised loan options from multiple lenders and after settlement, continuously reviews to ensure you have the best loan for life of your mortgage.
Get pre-approval if attending an auction
It’s required that you have pre-approval prior to bidding at an auction, it’s valid for up to 90 days and shows you're eligible to apply for a loan (but not guaranteed of an final approval) up to a certain amount.
It doesn't commit you to a loan with the lender that issued the pre-approval. However, it lets you set an affordable price range, and tells sellers you're serious about buying. Generally, banks and brokers recommend pre-approval for every buyer because they want to get you on their databases.
4. Find an affordable property
Another challenge facing millennials is the rising value of homes. For many of us—especially those who’ve just managed to pay off our buy-now-pay-later accounts and are in a stable job—rising home prices could be the most frustrating hurdle we face.
Just as millennials are finally moving from renters to home buyers, empty-nesting baby boomers are likely to be downsizing into the very homes that millennials are trying to buy.
You might find yourself in bidding wars with buyers who have a bigger budget and more home-buying experience.
On the plus side, mortgage interest rates are super low. In first two weeks of July 2020, the average interest rates a loansHub owner occupier client was offered was 2.8%—and close to 2% for fixed loans. A low rate means a lower monthly payment and less of your money going toward interest over the life of the loan.
Still, my best advice is patience. Once you start shopping, don’t give in to the temptation to stretch your dollars and buy a home that’s out of your price range. No home is worth sacrificing other financial goals like your retirement or your family’s lifestyle.
5. Get familiar with the buying process
One of the best things you can do as a first-time home buyer is familiarizing yourself with the buying process.
That’s why it’s extra important for millennials to work with experts who know what they’re doing. Talk with a real estate pro who has the heart of a teacher and takes time to listen to your needs and answer your questions. A good agent is more concerned about your bank account, not theirs.
Finding a property, you love can get tiring, don’t let emotions get the better of you. Stick to your budget, and be as clear-headed as possible when bidding or negotiating to buy.
Auction or private treaty
If you're a first home buyer, observe a few auctions so you understand how they work. Bring an experienced family-member along to help you bid. If buying at auction, you’ll be expected to pay a deposit if you have the winning bid and there's no cooling-off period.
If buying privately, the contract of sale will include the deposit amount, which isn’t set in stone so negotiate. You should pay a nominal amount, say $1,000 on signing the contract and remaining 5% of finance being approved or settlement. There’s a short cooling-off period in most states and territories. You can usually get out of the contract and get most of your deposit back if you give written notice.
Contract of sale
As a potential buyer, talk to the real estate agent or seller and ask to see the contract of sale. Make sure to get your solicitor or conveyancer to review the contract before signing.
Building and pest inspection
Once you've found a property you like, make an offer and if accepted, sign a contract (subject to building & pest as well as finance), get a building and pest report done by a professional, this could save you a lot of money down the track.
If there are issues highlighted in the report, you can either negotiate the purchase price down to match the repair cost or pull out of the contract if it’s unacceptable.
Get ready to be a home owner
Tell your finance provider that you've found a property you wish to buy, and provide them with a contract of sale so that they can start the loan assessment and approval process.
Depending on lenders processing times, the approval can take anywhere from 3 to 14 working days. Time frames may extend a bit if valuations are required or if the lender keeps requesting additional documents from you.
Once the lender is satisfied, you have signed and returned the loan and mortgage documents, the conveyancers from all parties will work together to enable settlement to occur.
Congratulations! You can now pick up the keys to your new home and start building equity by paying down the mortgage.
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This article 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.