How to finance your new home
Springtime is the busiest season for the real estate market and if it’s inspiring you to find a new home, the first thing you need to consider is: can you afford it?
Earlier this year, the financial forecast wasn’t looking so great for those hoping to enter the property market. A mixture of Australia’s property boom pushing house prices up and the banks new lending conditions as a result of the Royal Commission had made it harder for many to own a home compared to previous years.
However, in a matter of months, the situation has changed and across the board, banks have loosened their conditions for lending.
Isaac Baker, Branch Principal and Wealth Manager at wealth management company Yellow Brick Road Geelong and Torquay, says current lender conditions have improved slightly due to the Government, via the Australian Prudential Regulation Authority (APRA), decreasing the loan assessment rate for banks.
“This has increased an average family’s borrowing capacity by around $80,000 to $100,000,” Isaac says.
“The government was prompted by weak economic forecasting and is using this to stimulate the economy and increase spending. Also, the restrictions were too tight and they wanted to make housing affordability easier for families.”
But how do you know if you are financially ready to build a new home? Here’s our advice on how to best prepare your finances before you build.
First things first — what are you looking for in a dream home?
Geelong Homes General Manager Andrew Carroll says you should always consider the big picture before you start shopping around for finance or property.
“Everyone should write a list of their needs now and a list of their needs in five years time — then when they look at a house and its floor plans, they should think about how well that house will serve their needs now as well as their needs in the future,” he says
Isaac recommends you should establish what your dream property goals are.
“Ask yourself, what are my property dreams?” he says. “What areas of Geelong would you like to live in? Use this as motivation. Once you get the motivation behind you and goals to aim for, it will help get you through.”
Take a look at your income and savings
Buying a house is the biggest investment you’re likely to make in your lifetime — so it’s important to not only have savings behind you but to also know you can continue to pay off your loan into the future.
Andrew says that it’s important you choose a home you can afford and spend time saving for a home deposit.
“We want Geelong Homes clients to have all their ducks in a row financially to make sure we’re building them a home they can afford.
“No one wants to put a family in financial hardships for a house. For us, making sure a client is financial ready to build a new home is also about securing the industry for the long term.”
Isaac says your focus should be on two things – income and savings.
“Do not save what is left after spending, but spend what is left after saving,” he says.
“Most people think of saving in the inverse, meaning you save whatever is left over after all of your expenses and spending. When in actuality you should save/pay yourself first, then spend.”
Another thing to look into is what Government schemes, concessions or subsidies you might be eligible for. From now until June 2020, first home owners will receive $20,000 for new homes in regional Victoria valued up to $750,000. As a first home buyer, you’re also entitled to a stamp duty exemption or concession depending on the value of your property.
In addition, when you buy a home-and-land package you can save on stamp duty through the State Government’s off-the-plan concession. This duty concession applies to off-the-plan property that’s either a house and land package or a refurbished lot.
You may also be eligible for the Federal Government’s First Home Super Saver Scheme (FHSS), which was introduced in 2017. The scheme allows first home buyers to make voluntary concessional and non-concessional contributions into their super fund that they can then release to help purchase their first home.
And starting from 1 January next year, the Federal Government’s First Home Loan Deposit Scheme will help eligible first home buyers purchase a house with a deposit as low as 5 percent.
Isaac says once you’ve looked at your income and savings, then you are ready to call your potential broker and discuss what is needed for an appointment and pre-approval.
Understand how home loans work
You’ve determined what you’re looking for in a dream property, and you’ve put together a home deposit, next you should determine what you’re looking for in a loan.
Take the time to do your research. Understand the difference between a principal and interest loan and an interest-only loan. Also, consider the length of a loan term and whether you want a fixed rate or a variable rate. Make sure you completely understand features such as offset accounts and any other fees that are associated with a loan.
If you haven’t saved 20% of the value of the property you’re wishing to purchase, you will have to pay Lenders Mortgage Insurance (LMI). This insurance protects the lender, in case you can’t repay your loan. Your mortgage broker will be able to calculate how much LMI you will need to pay depending on your circumstances.
And if you’re still unsure, write questions down and ask the mortgage broker at your meeting.
Find a mortgage broker or see your bank
Now it’s time to find a mortgage broker of visit your bank. Andrew says Geelong Homes new home consultants can provide a list of different brokers and banks that we work with.“We don’t align ourselves with any bank and we don’t take any sort of referral fees,” he says.
“We look for companies that are easy to work with and provide our clients great service and good solutions.”
Isaac describes a mortgage broker as the middleman who acts on your behalf with potential lenders.
“The broker’s job is to work on your behalf with several banks to find mortgage lenders with competitive interest rates that best fit your needs,” he says.
Once your broker has determined your goals and looked at your income and savings, they can calculate how much you can borrow. Your broker will then provide loan options and explain how the loan will work, including its features, interest rates and fees. This is where your research will be most beneficial and will help you choose the right loan for your circumstances.
Isaac says he also likes to walk his clients through the building process, and help them understand any other costs associated with building, including any additional site costs and driveway costs. It is at this point you should also understand any other costs that you might need to take into consideration, including conveyancer fees and transfer fees.
When you have decided which loan option suits you best, your broker will apply for the loan and manage the process on your behalf all the way through to settlement.
This includes pre-approval; land deposit/sign land contract; formal land approval; build deposit /sign build contract; formal build approval; settlement of land; and construction drawdown payments. Once that’s complete you’ll then receive the keys from your builder and enjoy the dream home you’ve spent so much time saving for!
If you feel ready to build your own home, the first step is to seek finance. To make sure you’re financially ready to build follow this checklist:
- Establish your home goals: Write down what you want in a home – for now and five years in the future. Where do you want to live? What does your dream property look like?
- Focus on income and savings: How are your savings looking? And will your current income be able to service a home loan going into the future.
- Understand how home loans work. Research additional options and fees that come with a home loan package.
- See a mortgage broker or bank. Your broker or bank will provide loan options and explain how the loan will work, including its features, interest rates and fees. This is where your research will be most beneficial and will help you choose the right loan for your circumstances.
Once you’ve successfully financed your new home build, your broker manages the process on your behalf all the way through to settlement.