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LCU’s guide to purchasing your 1st home

Announcement posted by Laboratories Credit Union 17 Apr 2015

Laboratories Credit Union

Whether you are dreaming of owning your first home in the future or all set to purchase your first home now, this guide to purchasing your first home will hopefully help answer some unsolved questions or provide you with insightful tips. We understand that this is a big step in your life and you need to be well informed and prepared. Many first home buyers don’t know where to start and are often confused with the processes of buying their first home. We have made this step by step process for you to follow so you can get all the facts when purchasing your first home.

Step 1: Start early!

It is important to prepare yourself as early as possible! When getting a loan approved it helps to have a good credit history. Below are a few outlined tips to build a good credit history.

Build a good credit history: When a loan application is being assessed the lender conducts a credit check on the person or persons enquiring about the loan. Ways to build a good credit history starts with paying your bills on time, keeping a stable job, avoiding debts and showing you can save money.

Pay your bills on time:You can start to build a good credit history by having your phone, electricity, internet and other bills in your name and pay them off responsibly on time. This will show the lender that you are responsible and will be inclined to paying off the loan repayments if you are granted a loan with them.

Keep a stable job: Keeping a stable job will boost your borrowing power. It is best to keep a stable job for at least 2 years. Changing jobs too often may suggest to a lender that you cannot hold a job down. If a financial institution knows you have a regular pay coming in it will increase your chances of getting a loan with them.

Save for a deposit:You should aim to save at least a 20% deposit of the property value because if you borrow more than 80% of the property value you may have to take out lenders mortgage insurance. For example if you are purchasing a $500,000 property a 20% deposit of $100,000 would be ideal.

Keep your credit card limit as low as possible:Whatever your credit card limit is, it will be included as a potential debt when applying for a loan. This will reduce your borrowing power so it is very important to keep it as low as possible.

Step 2: Do your research

Go online, attend auctions and inspections to see what is out there in the property market. Get a rough idea of the market and work out what you can afford.

Ask yourself the following questions:

  • What type of property am I looking for? Are you looking for a house, townhouse, apartment or studio? How many bedrooms, bathrooms and car spaces would you like to acquire?
  • What area do I want to buy in? What kind of area would you like to buy in? Which suburb is best for you and your budget? Would you like to be close to public transport, shopping centres, schools etc.?
  • How much can I afford? Before you get ahead of yourself make sure what you want corresponds with what you can afford. Step 3 covers more information about how to work out your finances.

Step 3: Calculate your budget

Determining how much to save and how much you can afford to borrow is an important and daunting step but ultimately it will need to be calculated realistically and responsibly. The following outlines what you have to take into consideration when you save and borrow money for your home.

Work out a monthly budget

It is important to work out how much money you need to spend and how much you can save before taking out a loan. This allows you to plan ahead and juggle your expenses more efficiently.

Play around with a mortgage calculator

Mortgage calculators are a great way to find out for yourself if you can afford to purchase the home you have in mind. There are different Home Loan calculators on the LCU website to give you an idea about borrowing power, loan repayments and other mortgage enquires.

How much deposit you need

The more you save for the deposit, the better! As mentioned previously when purchasing a property it is recommended that you have a 20% deposit. You can still take out a loan with a minimum of 5% deposit but remember that in most instances if you borrow more than 80% of the property value you will be required to take out Lenders Mortgage Insurance. Lenders Mortgage Insurance protects your lender from losses if you cannot pay off on the property.  Lenders Mortgage Insurance can be very costly and you can end up paying more interest and more fees which can be avoided if you have the 20% deposit.

Overcoming deposit hurdles

Family Banking

If you don’t have a 20% deposit and you want to avoid paying Lenders Mortgage Insurance you can get a family member to guarantee you through LCU’s Family Banking offer. LCU recently introduced Family Banking to help out first home buyers. Our Helping Hand Loan is particularly popular for first home buyers who do not have the 20% deposit. This is a split loan where the Guarantee secures up to 20% of the loan (through a first mortgage or a term deposit) and the home buyer secures the remaining 80%. The home buyer pays off both loans.

Find out more about Family Banking

The Government’s first home buyer’s grant                                                                  

If you are purchasing a brand new property you may be eligible for the First Home Buyer’s Grant. The rules are always changing and limits and regulations depend on the states. It’s best to find out more information from the government website.

Additional costs

  • Be aware that there will be additional costs such as Stamp Duty, Legal Fees, Valuation, Building Inspections and Pest Inspections. These additional costs will vary depending on the property but allow for at least $5,000 - $22,000 in addition to your deposit savings. With an LCU Barefoot Loan we assist you by paying your legal fees and valuation costs up to $800.
  • Remember there will also be other expenses such as the moving and setting up costs (utilities, repairs, council, water and if necessary strata fees).
  • The importance of budgeting and keeping track of all your expenses is so that you know how much you’ll need at closing.

Come in and talk to our Loans Specialist

We know this may all seem daunting and we understand that everyone’s finances are different depending on your lifestyle and income. Speaking to an LCU loans specialist will help you sort out your finances when you are buying your first home.  

Getting preapproved finance

Once you have a rough idea of the type of property you want and your budget, you can apply for a pre-approval. If you get your pre-approval you can start searching for a home knowing your budget and what loan limit has been approved.  

Step 4: Finding the Right Mortgage for you

Type of Loans

 First of all, with any loan there is principal and interest. Principal is the amount borrowed and the Interest is the extra percentage paid as a commission to the lender. The interest rates vary between different financial institutions. Interest rates usually are dependent on the decisions made by the RBA.  The different types of loans are designed to suit different needs.

Start researching mortgages

At LCU we have different types of loans for different needs. (E.g. First home buyer:Barefoot Loan). Depending on your needs there will be a loan for you.

The following are the different types of loans available

Fixed or Variable Rate Loans

 A Fixed Rate Loan is when the interest rate stays the same throughout the agreed term and there is no unpredictability, the rates are the same. Whereas with the variable interest rate loan, the interest rate charged on the loan varies as the market interest rates change.   

Principal & Interest or Interest Only Loan

With the Principal and Interest loan you pay both the principal and interest in your loan repayments and you start paying off the loan from day 1.With the Interest Only loan you pay only the monthly interest payment. This way you pay less on your monthly repayments than if you were to do a Principal and Interest loan. However the principal amount will still be there to pay off and it may end up costing you more than a Principal and Interest Loan.

Offset Facility

At LCU we provide a 100% offset that allows members to link the money in their deposit account to their mortgage account. The interest accrued on your loan depends on the principal of the loan (the money borrowed). If you have an offset account the principal amount will be reduced by the amount in the offset account for the monthly interest calculation and therefore the interest costs will be lower.

Redraw Facility

The redraw facility gives our members the option to make extra repayments on their loan, which then gives the flexibility of being able to redraw on these extra repayments. This facility allows members to be flexible with their money whilst paying off their home loan faster.

Step 5: Buy the home

Make an offer on the property           

Once your pre approval has been approved and you find a property that matches your budget you can finally make an offer on the property. Your first offer should be below the asking price.

5-10 day cooling-off Period

During the cooling off period both parties have the option to back out of the offer. This can be a stressful time for both parties. Make the most of this time, investigate the home and make sure you are getting a good deal. We recommend that in this time to do a building inspection, pest inspection, and strata research. During this time the financial institution you take the loan out with will also conduct a valuation on the properly for their own security. If all this goes fine, both the financial institution and the solicitors will advise that it’s okay to exchange contracts.

The exchange of contracts

Once the cooling off period is over and you have been advised by your financial institution and solicitors that the property is okay to purchase you can exchange contracts and pay the deposit. This is the legally binding part of the transaction when you buy a property. At this point you will be required to put down a minimum 5 - 10% deposit to the Real Estate Agent. You must be certain at this point that you would like to purchase this property because if you pull out after the deposit has been paid and contracts have been exchanged the deposit and fees are still chargeable.

Process for auction

Buying a property at an auction is a different process from making an offer on a property. There is no cooling-off period when buying a property at an auction. If you are the highest bidder the property will be sold to you and you must sign the sale contract and pay the deposit on the spot. So make sure you have your finances arranged as well as doing a pre–purchase inspection prior to the action. Your solicitor will also have to examine the sale contract to see that it’s okay.

Before you bid at an auction you may want to attend a few as a spectator to get an idea about how it all works. Then when you are ready you can register your details with the selling agent of the property you would like to purchase. If you are bidding on behalf of someone else you must have a letter of authority from them to bid on their behalf.  To be able to register you must have proof of ID such as a Drivers Licence. You can register for the auction prior to the auction and in some cases on the day itself.  On the day of the auction the agent will give you a bidder’s number, which must be displayed each time you make a bid. 

Taking part in an auction means you must abide with the auction conditions. The auctioneer will notify you of these conditions which is set by law. If you do not abide by these laws fines may apply.

Make sure you have a biding strategy before you go into an auction. Research the property and know its worth before impulsively making bids. Set yourself biding starting points and limits and always stick to your budget!

Good Luck! 

We hope this step by step guide to owning your first home has helped you overcome some fears about purchasing your first property. Now you can finally focus on the more exciting stuff such as moving in, decorating etc. If you have any questions about buying your first home we are more than happy to go over any queries. We know it’s going to be hard work but it will be worth it knowing you can call that place your home one day!