Expert Advice: Mastering the Home Loan Basics With Jeff Chapman
A First Home Buyer Case Study
Start Thinking About it Early
As you might have noticed around here, we're delving right into how to buy your first home at the moment. And when it comes to mastering the home buying process, they don't get much more knowledgeable than Jeff Chapman.
As the National Product and Marketing Manager over at LJ Hooker Home Loans, he has dealt with all types of mortgages and borrowers, so we thought there was no-one better to ask about the basics of borrowing.
As soon as you start paying rent, or start to earn an income, Jeff says you should start thinking about preparing for home ownership. After all, in a flat in your 20s you could be paying up to $2,000 per month for rent - doesn't it make more sense to be paying that money to something that works in your favour permanently?
Creating wealth starts with property, and today's historic interest rate lows mean you're unlikely to ever find cash repayments lower than they are now. So as soon as you're paying rent, you should be thinking about a home loan!
Don't Forget Forward Planning
But before you even start looking at the specifics of a home loan, Jeff says having your future planned out is essential. And this doesn't mean what you're having for dinner! This means knowing how much you need. Even if you don't need a 20 per cent deposit on a home these days, it still takes years to have the money together for a home loan approval.
Jeff says many people 'hit the button' too early, and start looking for a home as soon as they decide they're ready to own. However, it could still be another two years before they can actually afford to buy - priorities and knowledge are key!
Making sure you have financial stability is important too. This means holding down a job for a year or two, demonstrating some good savings, and having a good credit report. As Jeff reminds us, banks are in the business of lending to people who can pay them back - make sure that's you.
Pick the Right Products and Features
When you're choosing your first mortgage, you have to understand the different elements involved, namely features and products. Products include the type of loan you get and features include certain repayment and redraw options. And according to Jeff, the typical first home buyer will be using principal and interest loan products, rather than interest-only.
This means you pay off the loan principal as well as the interest you accrue – very important if you have borrowed at a high loan to value ratio. Because the first home buyer is generally going to be an owner-occupier, and doesn't have the tax advantages that make interest-only products more appealing for investors, it makes more sense for them to take this route and build equity in their home.
These days, it's possible to secure a home loan with a much smaller percentage deposit. But as home prices rise, even 5 per cent of a home's value is still a significant amount. Talking to mortgage experts and being prepared are some great ways to move forward with your plans. Finance first, and then you'll be sitting pretty for a great home loan and home ownership!
A First Home Buyer Case Study
OK so you know a little more about the importance of planning and picking the right products and features when choosing a home loan, but how does a lending specialist work out what someone can borrow and how does the process actually work? Here Jeff shares with us the story of Jo and Mary Lang, and how the home loan journey worked for them.
Jo is 30 years old and works full time as a High School teacher. He earns an average income of $80,000.00. Mary is 28 years old and works full time as an office manager. Mary earns an average income of $60,000.00. Over the last few years the Langs have been paying $650.00 per week in rent and have decided to see what they can afford to buy. This will help them pay off their own property – not someone else’s. These are the steps the Langs took:
Step 1 Made Contact with a Lending Specialist
The Langs contacted LJ Hooker Home Loans and spoke to one of their specialists to obtain a true finance pre-approval and find out their buying power.
Step 2: Collated Paperwork
In order to make things as easy as possible the Lending Specialist helped them collate their paperwork.
As the Langs were a couple and both working full-time in PAYG jobs, the following paperwork was required by the lender:
- 2 recent payslips each
- The previous years group certificate for both of them
- Savings account showing deposit saved
- Their identification
Step 3: Savings and Asset Were Evaluated
Their property lending specialist noted that:
- The Langs had savings accumulated of $50,000
- Their combined annual salary was $140,000 gross
- They had a clear credit history (a good lending specialist can help you obtain a credit report)
- They had a credit card limit of $10,000 (of which they owed $4,000)
- Jo still had a remaining HECS debt
- They had no other debts
- Other major assets (cars, etc) totalling $35,000
Step 4: How Much Could They Borrow?
Based on their income and expenses, and their savings, the lending specialist determined how much they could borrow:
- Current rent weekly - $650.00 (would be removed after purchasing)
- Discretionary weekly spending – $900.00 (bills, groceries, petrol, personal)
- Credit Card limit $10,000.00 - $75.00 per week
- Number of dependants – No kids
This table shows how their available monthly funds would look like:
|Net Joint Icome (Including HECS Allowance)||$8,048|
|Less||Current Monthly Rent||$2,816|
|Monthly Discretionary Spending||$3,900|
|Monthly Credit Card Payments||$325|
|Available Monthly Surplus||$1,007|
When added back with rent that would no longer be payable the Langs had available monthly surplus income of $3,823 that they could put toward mortgage repayments.
The lending specialist advised the Langs that most lenders have their own policy in relation to how much you can borrow as a percentage of your gross income. When their lending specialist helped the Langs select the most suitable mortgage product and lender, the table below outlines what their borrowing capacity was:
- Term 30 Years
- Interest Rate of 4.50%
- How much they could borrow $835,000
The Langs and their lending specialist also had to factor in their level of savings. Most lenders will require you to have a minimum of 5% or 10% deposit. The Langs wanted to contribute $35,000 of their savings to the deposit so decided to go with a loan with a 95% loan to valuation ratio.
With the help of their lending specialist the Langs were able to obtain a home loan pre-approval based on:
Expected purchase price: $700,000
Loan amount: $665,000
Approximate repayments: $3,450.00 per month
The variable rate loan with principal and interest repayments selected by the Langs had repayments within their monthly surplus level of $3,823. As the Langs were owner occupiers of the property with no negative gearing benefits on repayments, they decided that paying off the loan principal and interest was the best option for them to build up equity in the home.
4 Tips for Saving Your Deposit
We hope that you have a clearer understanding of what is required from a lender and how the home loan process works. If you are feeling inspired to start down the path on home ownership but haven't saved the all important deposit, here are 4 winning tips to help set you on the your way to home ownership, fast:
1. Put your goals in writing
Setting a financial goal will make it much easier to plan and save successfully. Make a conscious effort to track your expenses so you can see where your money’s going and cut back where you can. Small sacrifices, such as taking the bus instead of a taxi, cutting back on buying coffee or bringing your lunch to work can also go a long way towards helping you save.
2. Create a Budget
Buying your first home is exciting, but saving for it isn’t much fun…. but the more money you put down up front will help determine how much money you can borrow so the more you save the better.
There are many ways to save for a home that don’t require you to make major changes to your lifestyle. Here is an easy to use budget planner that will help you work out where your money is going so you can actively save for that home https://www.moneysmart.gov.au/tools-and-resources/calculators-and-apps/budget-planner.
3. Beat the Credit Monster
Credit card debt, unpaid bills and personal loan repayments can be major setbacks to your saving efforts. As part of your saving strategy get these debts paid off. Start by paying off your debts that have the highest interest rate – typically your credit card. If you can’t pay it off in one lump sum, ensure that you pay more than the minimum monthly repayment. You’ll not only slash your debt, you’ll also have extra funds to channel into other debt commitments or even savings.
4. Make your Savings Work Harder for you
Making cutbacks on your lifestyle is one thing, but putting that money to use is another. Remove the temptation to spend your savings by arranging a set amount to be taken out of your pay each month and put directly into a savings account. Shop around, and seek a high interest rate savings account to get the best returns – many banks now offer an online high interest account.