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The Reserve Bank of Australia announced a second rate hike of 50 basis points, increasing the cash rate to 0.85 per cent from 0.35 per cent. Westpac was the first of the Big Four banks to pass on the rate hike to its customers, announcing to increase its variable mortgage interest rate in June. Other major banks and smaller lenders will most likely follow suit – increasing the pain for borrowers by asking them to squeeze their household budgets further to meet their monthly repayments. 

While this is bad news for existing homeowners, first home buyers might potentially benefit from lower property rates as interest rate hikes generally cause a drop in property prices. 

 

Home loan tips for first home buyers

If you are a first home buyer, this could probably be the right time for you to make your entry into the property market when interest rates are still not very high and the property prices are beginning to decline. But buying a house can be an overwhelming experience and following the right steps could help simplify the process for you.

 

1. Understand deposit and LMI

Most lenders require you to provide a 20% deposit to qualify for a home loan. If you don’t have an adequate deposit, you may have to pay for Lenders Mortgage Insurance (LMI), which can run into thousands of dollars depending on the size of your loan. However, there are some options to get a low deposit home loan without paying for LMI. This could be possible if you are eligible for a professional discount, which is generally offered to doctors, lawyers, and chartered accountants. You could also ask your parents to guarantee your home loan to borrow money without a deposit. Speaking to a mortgage broker can help you understand your options better.

 

2. Plan for genuine savings

Interestingly, lenders want to know how you saved your deposit to assess your financial habits. Genuine savings refer to the money saved by you from your income over some time. 

Many lenders require you to hold at least a part of your deposit in genuine savings to demonstrate a saving habit and financial discipline. If you plan to buy a home, it helps to put away some money in a savings account each month to gradually build some genuine savings and grow your home loan deposit. If you are a renter, you might be able to get approved for a loan without genuine savings if you have a strong rental history.  

Here’s a savings goal calculator to help you plan your savings.  

 

3. Find out your borrowing capacity

Borrowing capacity refers to the maximum amount of money you can borrow to purchase a house. Lenders use various factors to calculate this amount, such as your income from various sources, the size of your deposit, your regular household expenses, and existing debts (including your credit card limits and even your BNPL bills).

Knowing your borrowing capacity before you decide to apply for a loan can help you avoid rejection and narrow down your property search to a realistic figure. You can use our borrowing capacity calculator to get an estimate of the maximum amount of money you might be able to borrow for a house.

 

4. Calculate how much you can afford to borrow

Your borrowing capacity and the amount you can afford to borrow may not be the same figure. For instance, if you are planning to start a family, your household expenses will increase and you may not be able to afford the repayments on your ongoing loan. By using a repayment calculator, you can find out your monthly repayments for different loan sizes. Depending on your plans and spending habits, you might find that you are more comfortable servicing a smaller loan than borrowing the full amount you may be eligible for. 

Tip: It’s advisable to calculate your repayments at a higher interest rate than the market average to account for any future rate hikes.

 

5. Get a loan pre-approval

It’s usually a good idea to apply for a pre-approved home loan before starting your property hunt. A pre-approval gives you a fair idea of how much a lender is willing to lend to you, helping you narrow down your property search and shop with confidence.  

 

6. Maintain your credit score

A high credit score increases your chances of getting approved for a mortgage, and even landing a competitive interest rate. Paying your bills on time and clearing some of your debt before applying for a home loan can help you boost your credit score and manage your finances better. 

 

7. Take time to research properties

Buying a property requires patience and hard work. Whether you are buying your first home or an investment property, it’s important to research property prices and learn about the neighbourhood before exchanging contracts.

 

8. Compare home loans 

Even though the big banks have increased their variable interest rates, some lenders continue to offer competitive interest rates that can help you save money on your home loan.

Spend some time comparing different home loans to get the best deal but don’t just focus on interest rates. Consider the different features you need in your home loan and how much they’ll cost you before making your selection. A mortgage broker can help you find competitive home loan deals with the home loan features you need to make it easier for you to manage your mortgage.

 

9. Budget for extra repayments

A variable home loan comes with several features that can help you save money in interest in the long run. Some loans allow you to make extra repayments without incurring any extra cost, which helps you pay down your loan early and save money in interest.

If you opt for this feature, you may want to reassess your budget to cut down unnecessary expenses and boost your savings to use them to knock down your home loan faster. 

 

10. Consider using a 100% offset account

An offset account is another helpful home loan feature that can help you save money in interest payments. An offset account is like your day-to-day transaction account but it doesn’t pay you any interest. Instead, the balance in your account is offset against your mortgage debt so that you only pay interest on the balance.

You are usually required to pay a fee for using an offset account. Therefore, this strategy is generally only useful if you plan to keep a decent amount of money in your offset account. If you only intend to keep a few hundred dollars, it may not be worth paying for an offset account. It’s advisable to evaluate your financial condition and goals before deciding on the features you need in your home loan. 

 

11. Consider working with an expert 

Using a mortgage broker can make the process of financing your home much simpler. A good mortgage broker is a home loan expert and you can use their expertise for free in most cases. A mortgage broker will work with you to understand your financial condition and suggest home loan deals that are tailored for you. They can also help you assess your eligibility for any discounts or state grants that can reduce the cost of buying a home.

A mortgage broker can also increase your chances of approval by organising your home loan application so you don’t miss out on any important information or paperwork that can lead to rejection.  

If you want to find out more about buying your first home or have any query related to a home loan product, you may want to contact a broker or ask a Hashching expert for their opinion.

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