6 Questions a First Home Buyer Must Know the Answers to (Most People Don’t Know Number 4)
According to the latest report from ABS (Australian Bureau of Statistics), the total amount of loans approved for first home buyers have increased by 1.8 per cent in February. Commsec’s chief economist Craig James believes that recent price reductions have allowed first home buyers to take advantage of this opportunity.
Based on CoreLogic’s report in August, Australia as a whole experienced a 5.20 per cent reduction in property prices. Due to this, the Commonwealth Bank had also stated that buying your first home is more achievable than ever before in Australia. Another factor to consider is that APRA (Australian Prudential Regulation Authority) had also removed the 7.00 per cent serviceability buffer, which means that banks are more willing to provide bigger loans.
With the RBA (Reserve Bank of Australia) reducing the cash rate to a record low of 1.00 per cent, there are high chances that first home buyers are able to secure a good deal from lenders when requesting a loan. Based on recent changes, research has shown that the declining trend of the Australian real estate market is starting to shift. In August, Corelogic stated that property prices in Melbourne had enjoyed an increase of 1.40 per cent. Reports have shown that even when the Australian real estate market as a whole experienced a decline in prices every year, the rate of decline has gotten much better and more stable since August 2019.
Given all the changes happening in the Australian real estate market, you might think:
“Is the era for Australian first home buyers finally here?”
As a potential first home buyer in Australia, you may come across these two questions quite often with the current state of the real estate market:
- When will Australian property prices stop decreasing?
- Is this the right time for me to buy a property, or should I wait longer for the prices to reduce more?
An article from Aussie Home Loans used the data from CoreLogic and reported that 26 years ago until April 2018, the median price of a house in Australia had increased by 412 per cent or $460,000 approximately.
Source: Corelogic, Aussie Home Loans.
In 1993, the median price of houses in Australia were only $111,524 and the median price of units was slightly higher at $123,840. If property prices grew at the same rate as 25 years ago until April 2018; by 2043, Corelogic predicted that the median house price will reach $2,9 million while median unit prices will reach $2,1 million in Australia.
Source: Corelogic, Aussie Home Loans
Source: Corelogic, Aussie Home Loans
Based on the information above, we can clearly see how Melbourne and Sydney outperform other cities in Australia. Even if this is just a prediction, it is based on historical data from 25 years ago, which amplifies the credibility of the assumption. Property prices are also very likely to increase in the long run due to inflation. Like any industry, there are factors that cause prices to increase and decrease. If you are worried as to why property prices keep decreasing, think of it as the Australian real estate industry is undergoing adjustments in pricing in order to balance out the unbelievably high prices near the end of 2017. Most first home buyers didn’t stand a chance to participate in the Australian real estate market when prices were at their peak.
No matter how the real estate industry is performing, being able to have your own home comes with irreplaceable benefits. According to the Commonwealth Bank, 70 per cent of Australians still considers that owning a home is still the ultimate Aussie goal or the Australian dream. Besides the ability to obtain equity from investment returns and rental income, the feeling of security and achievement from being able to have your own home is a very special and unique feeling.
If you read the two common questions above that a first home buyer might have, the answers to those questions rely on changes that happen in the market. For every first home buyers out there, rather than trying to change something out of your control, Xynergy Realty recommends that you read through the answers to the 6 questions that a first home buyer must know.
Are you actually ready to be a first home buyer?
The most important part when buying your first home is to thoroughly evaluate if you are actually capable of buying your first home. Often you might hear families, friends and the media talking about how you should buy your first home as soon as possible. The social pressure might cause you to make rushed decisions and not evaluating your situation realistically.
As a result, there is a risk that your loan is not approved or you could run into financial difficulties in the middle of your repayments. If your loan is not approved, it might affect your credit score that will affect your success rate in getting a loan in the future. Are you actually ready to cover all the costs in buying your first home with your current earnings, or will you need financial assistance from your family, friends or your partner to achieve the ultimate Aussie goal?
What are some ways to have an effective savings plan?
The basic theory of a savings plan is not hard but requires a lot of commitment and discipline that is consistent in order to be efficient in your savings. The first step is to understand your current financial position. One of the ways to achieve this is to grab a piece of paper or open a word document and map out all your current earnings, costs as well as your debts at the moment. By doing so, you will have a better understanding of your capability in applying for a loan. You can also try using an online mortgage calculator, or consult with your current bank or mortgage broker regarding how much you can actually borrow, and how much will your repayments be. The number of repayments will also depend on the length of loan repayments that you have agreed upon.
Based on the information you have collected, you are able to have more clarity if you should apply for a loan now, or what are the steps you need to take in order to be able to apply for a loan to purchase your first home. You will also be able to make a plan on how much you will need to save to be eligible to apply for a loan. It’s time to go back to your earnings and costs that you have mapped out and reflect on which costs are necessary, and which ones you can reduce. You can also make a limit on how much you can actually spend every week/month so that your first home is not only a dream.
Once you have figured out how much you need to save, Xynergy Realty recommends utilizing your bank app or online banking services and set up automatic transfers to your savings account, which will make the process much easier, and reduce the temptation of spending what you need to save. As a result, you will also discover how long it would take for you to be eligible for the loan you wish to apply.
How much information is required in order to apply for a loan?
During a loan application, the lender will require various forms of information to ensure that you are truly eligible for a loan. Xynergy Realty had compiled the documents or information required as follows:
- proof of identification (passport, birth certificate, proof of citizenship, or driver license.);
- proof of employment and income (income statement for the last three months for self-employed and or tax return documents.);
- proof of savings;
- all your current debts; and
- other assets that you have.
According to realestateview.com.au, majority of lenders require proof of genuine savings, which means that you have saved, or own 5 per cent of the value of the property you are intending to purchase, as well as keeping it in your bank account for a minimum of three months. If you received that 5 per cent externally, from a friend, colleague or family member, you are also required to keep that amount for a minimum of three months before it is considered as genuine savings.
Another factor that lenders will put into consideration is your credit score. Your credit score ranges between 0-1200. The higher your credit score, the easier it will be for your loan to be approved. If you have a history of being in debt and late repayments, there is a high chance your credit score will be lower, which correlates to the success rate in getting your loan approved.
Besides a 10 per cent deposit from the home value, what other expenses are required when buying your first home?
There are a lot of cases where people think that they would only need to pay the total value of the property they are purchasing. However, you need to consider that there are other expenses associated with buying a home, which are:
- Stamp duty
- Mortgage registration fee
- Loan application fee
- Legal fees
- Loan mortgage insurance (LMI)
- Home contents insurance
- Building insurance
- Building and pest inspection
- Moving or relocating expenses
- Rates and council fees
- Strata (owners’ corporation) fees
According to Domain, you may be eligible for some cost reductions and benefits depending on your location and situation. One of the benefits you may receive is stamp duty savings, which depends on the value of the property you purchased. In Victoria, you are not required to pay stamp duty if the value of the property is below $600,000. You will also receive a discount if the value of the property is within the range of $600,000 and $750,000. Since everybody’s situation is different, it will be hard to generalise the total amount of expenses you may have to bear when buying your property. If you require any assistance in understanding the number of expenses you are required to pay when purchasing a property, Xynergy Realty’s property consultants are always ready to assist you and answer any questions that you may have in regards to real estate.
What are some of the best ways to find the right home?
In most cases, people have an unrealistic view of what their dream home should be like, either too ideal or it does not match what they actually need in a home. As a first step, you have to understand the main objective of purchasing your home. Do you intend to have a family? How many kids are you planning to have? Are you purchasing this property as an owner-occupier or as an investment property? By answering these questions, you will be able to have more clarity in determining the size as well as the type of property that suits your objective.
The next step is to understand what’s your budget, which allows you to align it with your objective. You need to be absolutely sure that you purchase a property that is within your budget, which will not detriment your financial position in the process of repayments.
After you have evaluated your objective and budget in purchasing a property, the next step is to pick a location. As Jeff Bezos had said, “real estate is the key cost of physical retailers. That’s why there’s the old saw, LOCATION, LOCATION, LOCATION!”. In outer suburbs, the value of a three-bedroom home could easily be similar to a one-bedroom apartment in the CBD. Xynergy Realty recommends taking a look at external benefits that are important for a home as well, such as potential work opportunities, close to public transport, great infrastructure condition, near shopping and entertainment district, as well as educational institutes. Your property does not have to have all the benefits, but the more it has, the higher the potential the property has to keep increasing in value.
An apartment that is around 3-10 km from the CBD is a strategic investment choice; because it will attract many potential tenants, especially international students as well as people who work near the CBD. Purchasing a property that is quite far from the CBD is suitable for owner-occupiers because you will be able to secure a bigger property and allocate the leftover budget to cover the other expenses that you are required to pay.
Are there any grants or incentives for a first home buyer?
More often than not, it will be quite challenging to purchase your first home in the financial part. Lucky for you, as a first home buyer, you are entitled to state government grants, discounts as well as a scheme to make purchasing a home easier and cheaper. The state government grant was first introduced in 2000 and is called the First Home Owner Grant, which aims to offset the stamp duty costs when purchasing or building a property.
According to Domain, to receive the incentive as a first home buyer, you are required to live in that property for the first 12 months after settlement. Moreover, if you have a partner that already purchased a property in the past, you will not be able to receive a second or combined incentive.
One of the incentives that you are eligible to receive is the stamp duty savings that have been discussed previously. In addition, Domain also mentioned if you purchase a property in Victoria, you will receive grants such as:
- $10,000 for a new property below $750,000 or,
- $20,000 for a new property in regional areas below $750,000
Since 1 July 2018, you are able to use the First Home Super Saver Scheme, in which you are able to save up to $30,000 in your superannuation, with a limit of $15,000 every financial year. In conclusion, the process of purchasing your first property is not easy but will provide significant benefits in the long term. At Xynergy Realty, our priority is to make the journey to your first home easier and find the right property for our clients. We understand that as a first home buyer, you will have a lot of questions and concerns. However, our property consultants are always here and ready to assist your real estate journey, no matter where you are at.
CEA (REIV), CA (MFAA), TAA, CIT (M), CPS (RE), Dipl FMBM, B.Ec (Fin), FIML
Property Writer/ Property Consultant
Finance Consultant (Mortgage Broker)
Licensed Estate Agent
Harvard University Scholar
B.BUS (MKT), M.MKT, CAR
Marketing Communications Manager