When I joined Mum at Purvis AgriFinance, we decided that alongside learning the agri broking side of the business, I would also take on home loans. Initially, the idea was to offer an additional service to our existing clients.
Agri income can be complex. Having an understanding of our clients’ businesses helps us explore which lenders might suit, how their income could be assessed and when a residential property purchase might be possible.
While that is still part of what I do, I’ve also found myself helping young rural people purchase their first home. In turn, it has become a bit of an additional passion of mine.
Being 25 myself, and not yet a homeowner, I’m very much in the same shoes as my clients. Saving for a deposit takes time, house prices can feel out of reach, and some of the information about buying your first home can be confusing.
There’s also the balance of saving for a house while still wanting to enjoy life along the way.
I wanted to run through a few of the questions that come up, and some things worth thinking about if buying your first home or an investment property is on your radar. While the reasons for buying might be different, both start with understanding what you can afford and how a property fits into your plans.
How much can I borrow?
This is usually the starting question, which is fair enough. Understanding what you might be able to borrow helps you work out what sort of property you could look at.
A big part of this comes down to your income, your expenses and any existing debts. However, different lenders can assess the same circumstances differently.
For example, I earn commission, so my income isn’t necessarily the same each month. A lender may only accept a portion of that commission, or require a certain history before including it. Another may be comfortable using more of it, or require a shorter period of earning that money.
Similar differences can apply to overtime, casual work and self-employed income. This is why the lender you apply with can make a difference to your borrowing capacity.
The next part is your spending. We usually start by looking at around three months of transactions to understand your average expenses, although a lender may ask for more information.
If buying a home is getting closer, it’s worth getting familiar with where your money goes. A one-off holiday might make your spending look higher than usual, and we can explain that to the lender. It won’t necessarily be treated as an ongoing expense, although regular holidays still need to be allowed for in your budget. If you’re at the pub each weekend spending $100, that’s okay, it just needs to be included in your average expenses.
Frequent missed repayments and an account regularly becoming overdrawn can also raise concerns for lenders. It’s about showing that you can manage your money and comfortably meet your repayments. Existing commitments, such as car loans and personal loans, can also reduce the amount available for home loan repayments.
If you’re purchasing an investment property, the expected rental income may also help with borrowing capacity. Lenders generally only include a portion of that income, allowing for expenses and periods when the property might be vacant. The way they assess this can vary too, which can be why comparing multiple lenders is a good idea.
Most importantly, what a bank is willing to lend you and what you feel comfortable repaying may be two different amounts. You still need room for everyday expenses, the things you enjoy and the unexpected bills that come along.
For me, I have been trying to understand what a lender would allow me to borrow. I then look at what the monthly repayments would be for that amount and determine if it would be something I would be comfortable with. Right now those numbers don’t align for me as I work to save up an emergency fund.
How much deposit do I need?
This one can be confusing because there isn’t one answer that applies to everyone.
You may have seen loans or schemes advertised with deposits as low as 2% or 5%. These have particular eligibility requirements and can work quite differently, so it’s worth understanding what you’re applying for.
For example, a government guarantee scheme and a shared equity scheme are different arrangements. One may help eligible buyers purchase with a smaller deposit without lenders mortgage insurance, while the other involves the government contributing towards the purchase in exchange for a share of the property’s equity.
Having the minimum deposit also doesn’t automatically mean you can borrow the rest. Your income and expenses still need to support the loan repayments.
A larger deposit generally means borrowing less and may give you access to more competitive pricing, depending on the lender and loan.
Lenders mortgage insurance, or LMI, may also apply when borrowing a high proportion of the property’s value, unless an exemption or eligible scheme applies. This protects the lender if you cannot repay your loan, it does not protect you.
Buying with a small deposit can help you enter the market sooner, but it also leaves less room for a fall in property value. If your loan balance is higher than the value of your home, this is called negative equity. It can make selling or refinancing more difficult.
Someone who needs to get into a home sooner might have different priorities, which is where the lower deposit schemes may be appealing. It comes back to your circumstances and what you want your first home to help you achieve.
If you’re buying an investment property, deposit requirements can differ, and first home buyer assistance generally comes with conditions around living in the property. If you already own a home, there may also be an option to use some of your available equity towards the purchase. This still means taking on additional debt, so the repayments need to work within your budget.
What else do I need to save for?
The deposit isn’t the only cost to consider.
In South Australia, if you’re buying an established home, you will generally need to allow for stamp duty. Eligible first home buyers purchasing a new home, an off-the-plan apartment or vacant land to build a new home may qualify for stamp duty relief.
There can also be conveyancing fees, building and pest inspections, registration fees, lender fees and moving costs.
These amounts can add up, so it’s useful to work out the total cash you’ll need early on.
I’d also encourage you to think about what you want left in the bank after settlement. Getting the keys is exciting, but using every dollar of your savings can leave things tight if an unexpected expense comes up.
Here is a funding position I do for my clients to highlight what expenses need to be paid (example only):
What will owning the home cost me?
When looking at repayments, remember to include the expenses that come with owning a property.
Council rates, insurance, water charges and maintenance all need a place in the budget. Depending on the property, there may also be strata or community title fees.
An older home might have a lower purchase price but need work sooner. A bigger block might suit your plans but come with more upkeep. These things are worth considering alongside the asking price.
It also helps to think about any changes you expect in the next few years. Changing jobs, reducing your hours or taking time off could affect what feels comfortable to repay.
You don’t need to have your whole life planned out, but the things you already know are worth discussing.
For an investment property, you’ll also need to allow for property management fees, letting fees and periods without a tenant. Rent can help cover the costs, but it’s worth understanding how much you may need to contribute yourself, including when repairs or unexpected bills come up.
It’s also worth speaking with your accountant before purchasing, particularly about ownership and the tax implications for your circumstances.
Where do I start?
Whether you’re saving for your first home or considering an investment property, you don’t need to have everything worked out before asking questions. Understanding your options early can give you a clearer idea of what’s possible now and what you might need to work towards.
I suggest working through it in this order:
- Understand your current position. Start with what you earn, what you spend, any existing debts and what you have saved.
- Find out how much you could borrow. We can also look at what the repayments would be and whether they feel comfortable for you.
- Work out your purchase price. Consider the price of the home you’d like to buy and how that fits with your borrowing capacity and savings.
- Calculate the deposit and other costs you’ll need. Using that purchase price, we can work out what you need upfront, including any stamp duty and fees.
If you’re still a little way off, that’s okay too. Understanding the gap can give you something clearer to work towards.
As someone working towards my own first home, I know it can feel like a big mountain to climb. Breaking it into smaller steps makes it easier to see where to start.