Talking to the twenty-somethings at work last week it became apparent to me that the steps and assistance on hand for buying a first home are still pretty blurry for the group that should know the most about it.
Sure, everyone’s aware that first home buyer grants are on hand to help out, but I get the impression that the savings incentives, insurance requirements and taxes involved aren’t so clear.
To help fill this information gap, here are the key things that every prospective first home buyer needs to know.
First of all let’s look at deposits.
Obviously, the more you can save of the purchase price the better. Not only will it reduce the amount of interest paid over the life of the loan, and also the term of the debt, but also remove the requirement to pay for lender’s mortgage insurance.
The rule of thumb is that a deposit of 20% of the purchase price will free you from insuring the mortgage. Anything under that amount and you will need to buy insurance to guarantee the bank you’ll actually pay the debt off. This can cost up to $10,000.
Of course properties can be bought with a much lower deposit, as little as 5%, but keep in mind the additional costs of doing so.
In saving a deposit there are terrific government incentives available if you plan ahead, the best being First Home Saver Accounts. These are super high interest accounts offered by most banks.
On top of the advertised interest rate, the government kicks in a whopping 17% on the first $6000 deposited each year. That’s an extra $1020 towards your deposit every 12 months you’re saving.
In addition, the interest on the account is taxed at just 15% instead of your marginal tax rate.
I was especially surprised to learn these accounts aren’t common knowledge because that interest rate is simply fantastic.
There is a catch though. You need save at least $1000 a year for four years before the deposit can be withdrawn, and then it must be used to buy a first home. Otherwise it goes into a superannuation account.
If you buy a home before the four year period the money can still be withdrawn at the end of four years and put towards your mortgage, but in the meantime no more deposits can be made.
If your purchase timeframe is much shorter than four years, start saving in a high interest, fee-free online savings account instead. Rate comparison sites are an easy way to find the best rates on offer.
Making the purchase
Onto making the purchase and there are some hefty taxes, valuable concessions and that well publicised grant that you need to be aware of.
The first home buyers grant varies from State to State, but in most cases is $7000 for established homes valued under $750,000. If buying a newly built home however, or building on a block of land, you may be eligible for a bonus of up to $8000.
While these are great incentives, any possible reduction to the grant or touted changes to eligibility criteria should never weigh in on the buying decision. Buy what you want, when you are ready to - don’t be pressured by fear of missing out.
On the tax side of things, there are some big hits you’ll cop when purchasing a home. Stamp duty is the largest of these and is charged as a flat rate and/or a percentage of the purchase price, it varies by State.
There are some concessions accessible to first home buyers and for properties under a certain value, so make sure you get across the local State rules in case there is relief available to you.
A second big hit might come by way of land tax. But there are tax free thresholds and exemptions for some properties, including most family homes, so again consult your local State Revenue Office to gain any advantage you can.
A word of warning on low-doc loans
Low documentation loans are becoming increasingly popular again as they require less information for approval than traditional home loans. But because banks deem them higher risk they carry higher interest rates and are less flexible than full doc loans.
Banks are also liable to change borrowers’ loans and rates on low doc loans, which unfortunately borrowers can’t do a great deal about. If you find yourself in a low doc loan and this happens, make sure you ask what you need to show the bank to get a better deal and refinance the loan to a lower rate.
Often getting a lower interest rate is just a matter of an enquiry and some extra information.
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