Are you saving for your first home while renting or saving for your second property investment? The ever-changing market can make saving a challenging task. Thanks to our friends at Swan River Finance, here are some top tips to get you money-smart and financially ahead of the game.
It’s easy to feel excited and nervous about committing to such a large task. We like to anticipate plenty of big building industry changes ahead, but no one has a crystal ball. However, fear not, with our sound advice we can help get you into your first home. Or to assist you in growing your investment portfolio.
To help break down the do’s and don’ts, we interviewed Rhys Orchard from Swan River Finance. He says when it comes down to saving, research and common sense go a long way.
For First Home Buyers
What are the main issues facing first home buyers getting into the market?
The most critical issue for first home buyers is being able to come up with the deposit required to purchase their first home. Most banks require a 5% genuine savings* deposit. Which equates to $26,250 based on the current median house price in Perth.
Keystart does assist in helping FHB’s get in to the market sooner. Their minimum deposit requirement is a 1% genuine savings with the first home owners grant providing the remaining funds. The FHOG for FHB’s building a new home is definitely assisting them to get their foot in the door. However, it still remains difficult for FHB’s to save a deposit while living costs remain relatively high.
What are factors to consider for first home buyers that are currently saving a deposit?
Saving a deposit proves to be one of the biggest hurdles to buying a first home. Wage growth has been relatively low over the past couple of years while the cost of living has climbed. Job security has become more uncertain, and all of these factors contribute to issues with saving.
The main considerations to take into account:
Genuine Savings is the requirement to save or hold a minimum deposit amount for at least a 3-month time period.
Having too many unsecured debts / credit cards prior to applying for a home loan will impact your borrowing capacity. Too many additional liabilities will have a massive impact on your ability to borrow for a first home. Work out how important it is to take out a new car loan if you have a goal of entering the property market soon. It could be the difference between being able to buy a home or not. Likewise, living outside of your means and accruing credit card debt can have the same impact.
It is crucial to maintain a tidy credit history. So it doesn’t affect your ability to borrow funds for something important in the future. Young people rarely realise that not paying their mobile phone bill, or defaulting on a small personal loan can be the difference between having a finance application approved or declined.
What are your top 4 tips to those wanting to save for their first home?
The four tips I can share with those saving for their first home are:
Open a dedicated/specific savings account in the name/s of the individual/s intending on purchasing the property only.
At the time you apply for finance the bank/lender will want to see clear evidence of your genuine savings. The ownership of the account must reflect the names of the person/people purchasing the property. This also helps to set a clear savings goal!
Speak to a finance broker/finance professional as the first port of call
They can work out your borrowing power. They can reverse engineer the numbers to give you the exact amount you will require of savings/deposit to come up with. This will help work out a clear strategy and savings plan.
Reduce your cost of living as much as possible.
Limit or reduce your non-essential spending. A small amount of short term sacrifice will speed up your ability to enter the market. If this means living with parents for an extra 6 – 12 months, or a few less nights out, it will be worth it in the long run. It is about prioritising what is most important to you.
Explore all options
See if you have the ability to eliminate the need for Lender’s Mortgage Insurance (LMI). Coming up with a 20% deposit or a security guarantee from parents / family members can save you a substantial amount of money. The saving’s are not only made on Lender’s Mortgage Insurance premiums, but in most cases the banks will offer more attractive interest rates when there is additional security being offered.
Current home owner – prospective 2nd/ 3rd home builders
Any tips for paying off your mortgage quicker?
Most banks / lenders will have an option to link an offset account to your mortgage. The optimal way of using this is to have all of your income deposited in your offset account and held for as long as possible. The savings on your interest are calculated daily.
Alternatively, ensure there is a workable redraw facility so you can make additional payments into the loan. In most cases, once an individual has a home loan, their best form of saving money will be to ‘offset’ or pay additional funds into the actual loan.
Treat it like your savings account
Rarely will a bank pay interest on a savings account which would match the interest you are paying on the home loan. In addition, the interest you earn in a savings account must be declared in your tax return. But the savings you make in your home loan are just that, pure savings at your home loan interest rate %.
Equity: How does it work?
Equity is the difference between the current market value of your property and the balance of any debt held against it. Usable equity is a slightly different story. As we know that the banks will not use 100% of the value of a property to lend against.
Equity can be used as security to enable you to borrow any required funds. In some instances having enough equity in an existing property may allow you to borrow 100% of the funds required to make a second, third or fourth purchase without having to continually come up with a cash deposit.
You can also tap in to your equity to borrow for home improvements or other investments.
How often should you look to update your home loan?
With the constant changes we are seeing to the finance industry recently we are recommending that every 18 months is a good time to have a quick review of your current setup to ensure you are still getting the best deal. This could be as easy as asking the question of your current lender, or looking externally at other lenders if it is going to generate some good savings for you.
Your finance broker / professional should be offering a regular review of your existing lending to ensure you are not paying too much. Be wary that they don’t just recommend moving loans if there is no financial gain for you.
Variable or Fixed?
Both fixed loans and variable loans can be advantageous depending on the individual situation of the borrower. So many matters relating to the setup and structure of your finance must be the best fit for you in your current and future personal situation. It seems to be one of the most common ‘water-cooler’ conversations and it is wrong to think that just because a friend or family have fixed their loan that it will be the best thing for you in your situation.
Everybody’s individual circumstances should dictate the structure and setup of their finances. If your finance broker/professional is doing the best by you they should be asking in-depth and detailed questions to establish what will be the best setup for you given your current and future needs.
What’s the difference between fixed loans and variable loans?
Fixed loans will restrict the flexibility you have to make changes to your loan during the fixed period. Fixing is ideal for borrowers who want to know exactly what their commitment will be for a fixed period of time. The potential negative of fixing is that you will be tied in to that loan for the fixed rate period and there is a risk of being charged penalties should you need or want to ‘break’ the fixed rate.
Variable loans on the other hand will provide more flexibility for a borrower. Making additional repayments, linking offset accounts and paying the loan out early are all possible without risk of any ‘break’ costs. Variable rate loans mean that your interest rate is subject to move up and down with cash rate fluctuations or if the bank decides to move their own rates independently.
So, there you have it, it’s not all doom and gloom!
This year looks to be a promising year for the building industry so don’t get left behind. Whether you are a first home buyer, an upgrader or investor – now would be a good time to consider building your first home or expanding your property investment strategies.