So You Want to Buy Your First Home

How does a Lender decide whether or not to give you a loan?

The Lenders decide this based on the following criteria.

• Whether you have enough acceptable income to support the loan-This is called serviceability
• Are you a good Credit Risk
• Max LVR ( Loan to Value Ratio)
• Funds to complete the deal
• 5% Genuine Savings
• Acceptable property

Acceptable Income and Serviceability

What is Serviceability?

Serviceability means that you have sufficient acceptable income according to the lender’s formula to afford the loan amount. The banks work out whether you can afford the loan based on how many people the income is supporting and what other debts you have. The Lenders have their own criteria stipulating that 1 person requires “X” amount per month to live on, and 2 people require” Y” amount. They also allow so much for the first child and subsequent children. The Lenders also work out whether you can afford the loan on their assessment rates (which are higher) not the actual interest rate, this is in case interest rates go up. The amount you can borrow varies greatly between lenders often as much as $150000

What is acceptable income? 

As a general rule all the full time and part time PAYG  income are acceptable and self-employed income, however all the Lenders have different rules about how long you have had to be in the current position for. They all have different rules about overtime, allowances and family tax benefit as described below

So I am self Employed

You are fairly safe if you have been self-employed for more than 2 years, have an ABN and completed your tax returns. With self-employment it is taken off your net profit and with some lenders what is called add backs (e.g. depreciation that can be added to your income.) There are some lenders who will lend to you if you have not made it to 2 years in self-employment. Some lenders will not add back depreciation.

Casual employment

Generally the banks require you to have been in the position for at least 12 months, but there are a couple who will look at shorter periods.

Overtime

Yes this can be used as well but the rules vary significantly with regard to how long you have been receiving it and what proportion of it they will use. This can also be affected by what industry you work in. Some lenders will use 100% in certain industries

Family Tax Benefit 

Can also be used but again the Banks vary on when this cuts out based on the child’s age.

Child Support Agency Income 

Is also acceptable for some lenders, provided it is through the child support agency.

Other Long Term Centrelink Payments are acceptable to some lenders.

Investment income can also be used with some lenders

Other Debts

After the Lenders have worked out your acceptable income they also take into account other debts you are paying.

• Personal Loans
• Credit Cards (3.8% of the Limit)
• HECS debt (If you are currently paying it back)
• Lease agreements
• Hire Purchase Agreements
• Board or ongoing rent
• Buy now, pay later, Zip Pay

The total repayments on other debts is then deducted from your acceptable income to work out your borrowing capacity.

Are you a good Credit Risk

The lenders work this out on such criteria as

• Employment Stability
• Stability of where you live – you haven’t moved house heaps of times
• Credit default, court judgements – most lenders will not lend to people with these
• If there are too many enquires on your credit report this can also be a difficulty – so be careful – do not shop around
• Bankruptcy – If you are still bankrupt then it is illegal for you to borrow money
• Overdrawn on your bank statements – not a good look
• Payday lenders – again not a good look

 LVR  or Loan to What on earth is this?

LVR means Loan to Value Ratio, which is the amount you borrow divided by the value of the property multiplied by 100/1

This is a really important concept in borrowing money as the lenders have LVR limits they are prepared to lend up too. Some lenders will go to a 95% LVR where others will only go to a 90% LVR. Some will cap the LMI, some will partially cap the LMI and other will not. (Cap means add it on.)

What it LMI

What is LMI? It is Lenders Mortgage Insurance

A lot of people are under the misconception that this Insurance will protect you, but it protects the Lender from you defaulting on the loan. Generally you pay LMI when the loan amount is greater than 80% LVR. You do not pay it each year but only once when you first take out the loan. The amount of the LMI increases with both the LVR and Loan size.

Some lenders call this a risk fee.

The Federal Government First Home Guarantee provides a guarantee to the lender, so you do not have to pay it if you are approved.

Funds to Complete

You must have sufficient funds to complete the deal. Okay so your house is going to cost you “Z” but then you have the other costs as well, such as 

• stamp duty on the transfer
• registration of the transfer
• registration of the mortgage
• registration of the discharge 
• legal fees  

So you need to add these on and then you have the total amount required. Now deduct the amount you are going to get in the way of a loan. The result is what you have to put in. The lender will want to see you have this amount in your bank account, which is the money to complete the deal.

First home Buyers are eligible for a stamp duty exemption.

Genuine Savings

If you do not have other property, the Lenders generally want to see that you have 5% genuine savings if the loan amount is above a certain LVR (generally 85%). This means that you have progressively saved the money over three months or it has sat in your bank account for three months. 

With some lenders renting can be used to offset this requirement. However it must be through a real estate agent. There is some lenders who do not require it.

Family Guarantee

Another way to avoid the genuine savings requirement is if you have a family member/s who are willing to put their house up as security for the loan also. The guarantors house remains as part of the security until you have paid the loan down to below an 80% LVR. And of course all the lenders have different rules about who is acceptable as a guarantor!

Acceptable Property

As part of the lenders assessment of your application the lender will get a registered valuer to undertake a valuation on the property. The lender will only lend to the LVR based on the valuer’s assessment not what you actually paid for it.

The house must also be acceptable to the Lender to accept as a security (ie. not falling down and not a transportable.)  In many cases the lender may restrict the LVR based on the postcode, so this again may affect your ability to borrow. And some lenders will not lend in some postcodes, this gets particularly tricky in small towns or villages.

Type of Loan

Fixed Rate Loan    

Fixed rate means it stay s at the same rate for the period you fix it for. After the end of the fixed rate period the loan generally reverts to a standard variable rate unless you re fix it.

If you want to discharge your loan during the fixed rate period, you have to pay the economic loss to the bank. This is largely indeterminable, and you will need to get the cost from the individual lender. 

So be carful when you are entering a fixed rate loan. Do not obtain a fixed rate loan unless you are sure you want to remain in the loan for the full period.

The benefit of a fixed rate loan is you know the repayments for the time it is fixed, so that can help with budgeting.

The other disadvantages of a fixed rate loan is that there is generally a limit to the amount of additional repayments you can makem and if interest rates drop you will be paying more than you would if it was variable.

Variable Rate Loan

A variable rate loan is one where the interest rate fluctuates with the prevailing economic conditions. The Lender can put up or reduce the interest rate at any time.

The advantages of a variable rate loan is that you can pay additional money into the loan and there are no break costs.

Construction Loans

Are loans for where you want to construct a new dwelling of substantially alter the dwelling.

Redraw Facility

A redraw facility enables you to save money in your loan, reduce the amount of interest until you redraw it. 

So you have paid additional money into the loan, so the leader will enable you to redraw on it to the amount of the additional repayments.

Some lenders have limits on the amount of times per month you can redraw. Some have limits to the minimum size of the redraw, some charge a fee to withdraw. So make sure you understand the loan you are entering.

Offset Account

On offset account lets you save money in a saving account attached to the loan with the interest you would have received on the savings account deducted from the interest payable on you home loan.

Some lenders charge a fee for the offset account each month, some charge a higher interest rate and some do not offer it.

Packages

Some lenders offer you a package which may include such things as a reduced interest rate, no monthly fee on your loan, cheaper or lower interest rates. Be careful that it is cheaper to pay the package fee then pay the other fees and charges. Some people I see with packages, do not utilise the offers therefore it costs them more money.

First Home Owners Grants

The first Home Owners Grants is available in most States and Territories. It is available for construction of new homes.

Some states offer differing amounts for regional postcodes.

Stamp Duty Exemption

Stamp duty exemptions for first home buyers are available in most states and territories for first home buyers. This applies to new and existing houses.

Firs Home Deposit Scheme

The Federal Government is offering a guarantee to only some lenders to replace Lenders Mortgage Insurance. Places in this scheme are limited to a finite number each year

Protecting Yourself and Your Investment (Your house)

Your lender will require that you insure your house noting them as an interested party on the home insurance policy. They will require you to provide them with a Certificate of Currency, noting their interest in the property

What happens if your income stops?

It is a very good idea to protect yourself with insurance. If you cannot work because of illness or injury you will not be able to make your repayments. Everyone should look at protecting themselves.

If you would like further assistance, I am only too willing to assist.

Kerry Davies                               
0428965146 

Simply Intelligent Finance

kerry@simplyintelligent.com.au