By George Rentzepis – Director of Lending, Navigate Advisory
As a mortgage broker, one of the most rewarding parts of the job is getting a call from a first home buyer who has just got the keys to their home.
Since the introduction of the 5% deposit scheme, those calls have been more regular.
And whilst we certainly want to see more first home buyers getting onto the property ladder, we also want to make sure they do it with their eyes wide open on all the costs and considerations.
There are five big mistakes that catch out first home buyers, and we want you, or your kids, to avoid them.
Mistake 1: Borrowing every dollar the bank will give you
Your maximum borrowing capacity is a number a lender calculates. It is not a recommendation.
There’s a big gap between what you can borrow and what actually sits comfortably against your cash flow. Stretch to the top of your limit and:
- Every month becomes a tightrope
- There’s no room for the car rego, the vet bill, the week off you promised yourself
- A small rate rise turns a comfortable budget into a stressful one
- You’ve got no capacity to absorb a change in work or income
Rates move in both directions, and we’ve all seen how quickly they can turn.
The fix: work out the repayment you’re comfortable with first, then work backwards to the loan. Not the other way around.
Mistake 2: Not budgeting for all the buying costs
Buying a home comes with a number of costs in addition to the purchase price. They need to be factored into your numbers from the start so you don’t get caught out after you sign a contract.
The fix: add up your total purchase costs before you set your price range, not after you’ve fallen in love with a place.
Mistake 3: Spending your whole deposit
This is where it goes wrong most often. Every last dollar goes into the deposit and the costs, the buyer settles, and they walk into their new home with an empty account.
No buffer at all. Then:
- The hot water system dies
- Hours get cut for a month
- The strata levy comes in higher than expected
- Rates move up
The fix: set aside three to six months of repayments and treat them as untouchable.
The real cost of buying your first home
The 5% Deposit Scheme means first home buyers can get onto the property ladder years sooner. But a smaller deposit means a bigger loan, and a bigger loan means higher repayments for the life of it.
Here’s how the two options compare on the same $1.2 million purchase.
Mistake 4: The Bank of Mum and Dad without the paperwork
The “Bank of Mum and Dad” has quietly become one of Australia’s biggest home lenders, tipping in around $35 billion a year and helping a big chunk of first-home buyers get a foot in the door.
But before you hand over or accept help from family, it’s worth understanding the different forms help can take and the financial implications of each. See our article How to help your kids buy a home (and protect the money it goes wrong).
A guarantee carries the most risk, because your parents are putting their own home up as security.
If your parents are going guarantor, sort these four things first:
- Limit the guarantee. A limited guarantee covers only the portion you need, usually the gap to 20% equity, rather than the whole loan. It’s almost always the smarter structure.
- Have a release plan. It shouldn’t sit there forever. Know what has to happen to remove it, typically reaching 20% equity through repayments and growth, and put a rough date on it.
- Get it in writing. Gift or loan, document it. Awkward now beats a family argument in five years.
- Check what it does to their plans. A guarantee can affect their own borrowing capacity, and their ability to downsize or sell.
If you’re the parent reading this
Before you say yes to helping your children buy their first home, ask three questions:
- If they couldn’t make the repayments, could we?
- Does this change our own retirement plan, our borrowing, or our pension position?
- When and how does our house come out of it?
The fix: name it properly. Gift, loan or guarantee, then document it and tell your broker before you apply.
Mistake 5: Leaving the contract check until last
This is the cheapest money you’ll spend, and the step most people skip.
Line up a conveyancer or solicitor before you start seriously looking, not after you’ve made an offer. They will check the contract fine print to determine:
- What special conditions you’re agreeing to
- What’s missing that should be there
- Whether the strata or building report raises anything serious
- What your cooling-off rights actually are
This is the biggest purchase of your life. You don’t want to find out what you signed after you’ve signed it.
The fix: have your conveyancer lined up before the first open home.
Know your full financial picture before you start looking for your first home
- Know your comfortable repayment amount, not just your maximum borrowing capacity
- Budget for the full cost of buying, not just the deposit
- Keep a buffer for costs after settlement
- Structure and document financial help from family properly
- Have a conveyancer, a broker and a plan before the first open home
Let’s talk before you start looking for your first home
Our lending team will map out what you can borrow, what you should borrow, and what the whole purchase actually costs. Then we’ll get you pre-approved so you can walk into open homes knowing exactly where you stand.
And because our financial advisers and accountants sit in the same building, if your parents are helping, we can look at what that means for their position too.
Because when your whole financial world makes sense, you gain the power to say ‘yes’ to bold life choices. Like buying your first home.
Book a 15-minute introductory chat at navigateadvisory.com.au/contact/
George Rentzepis is Director of Lending at Navigate Advisory, helping first home buyers, investors and business owners find the right loan for the life they’re building. Navigate Advisory offers complete financial confidence through financial planning, accounting, business advisory, lending and property advisory – all in one place.
Navigate Advisory has offices in Balmain, Brighton-Le-Sands and Hurlstone Park.