• 5 scenarios every good home loan specialist will show you

    There are several pathways to help first home buyers enter the market. Here are five important ones you should discuss with your home loan specialist.

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    Buying your first home is a big step filled with uncertainty. Every good home loan specialist will be able to talk you through your options and help you find the best fit for your financial situation.

    We spoke to Franchise Principal at RAMS Illawarra, Matthew Clark, to find out what options you should be considering.

    1.     Using a guarantor

    A guarantor describes a person or people willing to leverage their assets as collateral to reassure your lender the loan will be repaid. It is often used to help buyers secure a home loan if they don’t have sufficient savings.

    5-scenarios-signing 
    Your parents or other trusted persons can provide a gift or act as a guarantor. Picture: Romain Dancre

    Pros:

    This is an option to get a home loan if you don’t have any assets of your own.

    “It is a great way to get into the market without needing a significant deposit, or potentially any deposit at all,” Clark explains. “It can enable you to borrow the full purchase price plus costs and avoid Lender’s Mortgage Insurance (LMI). LMI is an extra fee demanded by your lender when you have a deposit of less than 20%. So there are some really significant savings, especially in regard to saving a deposit.”

    Cons: 

    “The downside is that someone else is providing additional collateral to assist you,” Clark adds. “With any guarantee comes a level of risk for those people and their property. It would be best for your guarantor to seek the appropriate legal advice so they are aware of the risks.”

    2.     A gift

    A monetary gift can be given by anyone, usually a member of your family, directly towards your 20% deposit.

    Pros:

    “This is one of the key drivers to avoid LMI,” Clark says.

    “It is similar to a guarantor in that it helps reduce your savings required to secure your loan, but nobody else’s property is at risk.”

    Cons:

     Your family needs to be in a position to give you a whopping chunk of cash – which isn’t an option for many. Depending on the terms of your agreement with the person/s gifting, you may be obligated to pay back the gift amount, which for all intents and purposes will feel like an additional loan on top of your home loan.

    3.     First Home Owner Grants

    Depending on your state or territory, you might be able to access a generous First Home Owner Grant (FHOG). This could offer additional funds or stamp duty concessions towards your first home purchase. It’s best to check what grants and incentives are available in your state or territory.

    Pros: 

    FHOG helps get you closer to the amount you need for an initial deposit. It is designed to help people get into the property market.

    “If you’re entitled to a First Home Owner Grant, I would always recommend claiming it,” Clark states.

    “It’s important to understand early in your enquiries what the grants are and how they can help you.”

    5-scenarios-laptop 
    When buying your first home, you should understand all the grants and options available to you. Picture: Glenn Carstens-Peters

    Cons: 

    It is a leg up towards meeting your lender’s deposit minimum. The only problem is, you may not meet the criteria. For example, if you don’t have the budget for a brand new property, or you don’t want to live in the property you’ve bought, you might have to forego the grant. It is not available to investors and is only eligible for new home buyers in most states.

    Similarly, if you’re buying with a partner who already owns property or previously claimed the grant, you won’t be eligible.

    However, for those who don’t wish to buy a new home, or perhaps don’t meet some of the other criteria, you may still be eligible for a stamp duty concession.

    4.     Investor property vs. owner occupied

    Do you want to live in your first property purchase or rent it out as an investment? A lot of first home buyers are opting to ‘rentvest’: renting where you want to live and buying an investment property where you can afford.


    5-scenarios-dining-room 
    If you can’t afford to live in a major city, you might consider investing in property. Picture: James McCreddie

    Pros: 

    Investing means you can still live in the city, even if you can’t afford to buy there.

    “If you want to live in the North Shore (of Sydney), you may not be able to afford to buy a house there, but you might be able to afford to buy an investment property in Wagga Wagga,” Clark explains.

    “As an investor, you’ve got the whole of Australia to choose from. You could find somewhere a lot cheaper, with great rental returns and all these factors could help you get into the market.”

    Cons: 

    The con for first home buyers is that you can’t claim FHOG on a property you don’t intend to live in.

    Therefore, you will likely need more savings to get this first property purchase off the ground.

    5.      LMI or no LMI?

    If you have a deposit of less than 20%, you will be required to pay Lender’s Mortgage Insurance (LMI). LMI is non-refundable and is typically considered an undesirable cost. However, you may find it’s in your favour to cop the added fee if it helps you crack the market.

    Pros: 

    The main reason you may want to just pay LMI is if you want to get in the market quickly and don’t have the required deposit just yet.

    “If you don’t have 20%, you don’t have 20%!” Clark begins.

    “It could take five to ten years to save the deposit and in that time a house that was worth $500,000 might now be worth a lot more. If you don’t have a 20% deposit but you’ve got enough to get into the market, then Lender’s Mortgage Insurance is not the worst thing.”

    What’s more, it’s not an upfront cost, but rather, rolled into the life of your loan (which for many is thirty years) as a monthly cost.

    Cons: 

    Depending on the price of the property vs. the size of your deposit (loan to value ratio), for many people, LMI is simply too great a cost to cop on the chin. It is, after all, increasing the size of your loan and in some cases, by a considerable amount. Whether you pay it upfront or over the course of the loan, it is still money you’ll never see again.

    Read: Do you really need a 20% deposit?

    There you have it – five important conversations to have with your home loan specialist. Once you’ve discussed each option and understand them fully, take your time, keep saving towards your deposit and buy when you feel comfortable.

    Good luck!

    This article was originally published on realestate.com.au ‘5 scenarios every good home loan specialist will show you’ 

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  • Disclaimer:

    While such material is published with permission, RAMS is not responsible for its accuracy or completeness.  This information is general in nature and has been prepared without taking your objectives, needs and overall financial situation into account. For this reason, you should consider the appropriateness of the information to your own circumstances and, if necessary, seek appropriate professional advice.