So, you’ve worked hard to save up for a home loan deposit, and you’re probably concerned about the potential pitfalls ahead. As we move through 2024, it’s clear that some headwinds could make the process more challenging.
Beyond higher interest rates, the risk of becoming a mortgage prisoner—someone unable to refinance their loan due to a lack of equity—is becoming a reality for an increasing number of borrowers. If you’re just starting and feel anxious about the challenges you may face, here are six crucial considerations to help you navigate the home-buying process successfully.
1. Figure Out Your Housing Expenses
Are you earning enough to manage regular repayments? Use a home loan calculator to estimate your monthly repayment expenses. Keep in mind that the size of your initial deposit and the loan term can significantly impact your repayments.
While you may afford monthly repayments with a smaller deposit—below the 20% LVR (loan-to-value ratio)—other expenses must be considered. For instance, lenders mortgage insurance (LMI) is typically required for deposits below 20%.
In addition to the property purchase price, watch for additional costs such as stamp duty, building inspections, and strata levies.
2. Consider a Home Loan Guarantor
Are you ready to buy a home but don’t want to wait to save up a 20% deposit? With a smaller deposit, your principal will be larger, but as long as your financials are in check, you should be okay.
You might wonder if there’s a way to avoid LMI with a lower deposit. Home guarantors can help. A home guarantor offers part of their equity as collateral if you can’t repay your loan. This can allow you to pay a much lower LVR (like 5% of the deposit) without paying LMI.
3. First Home Buyer Schemes
While you can have someone guarantee your loan, the federal government offers a “first home guarantee” (FHLDS) scheme that works similarly. The government acts as the guarantor, though this is restricted to first home buyers earning below a certain threshold. Be sure to read the conditions.
Additionally, state governments offer their first home buyer grants, often including exemptions from stamp duty or a lump sum payment. These vary by state, so check the details for your specific location.
4. Check Out Auctions
While searching for a new home, you might have passed over auctions. Although private sales are typically better for most people, auctions have advantages that might suit your circumstances.
Auctions usually have a faster process, often taking less time than the months-long private sale process. You might also pay less if there’s a lack of demand. However, be prepared to have the deposit (usually 10%) ready on the auction day. Prices can rise quickly for in-demand properties, which might make auctions challenging for those on tighter budgets.
5. Avoid Becoming a Mortgage Prisoner
With the RBA’s interest rate hikes, more borrowers are finding their mortgages increasingly unstable. While higher repayments are prompting many to switch home loans, others are becoming mortgage prisoners.
A mortgage prisoner is a borrower without enough equity to refinance their loan. If you’re at risk, assess ways to avoid mortgage stress, as escaping mortgage prison can be difficult once you’re in.
6. Compare Home Loans
You might be tempted to rush into a home loan with your long-standing bank. However, using a comparison site like Vantage Financial can help you compare the best home loan providers.
Whether you’re a first home buyer or a refinancer, we have you covered with our home loan comparison tools. Explore all your options to find the best deal.
Ready to take the next step towards buying your dream home? Contact Vantage Financial for expert advice and top home loan options tailored to your needs. Call us at 1800 595 500, email us at info@vantagefinancial.com.au, or visit vantagefinancial.com.au to get started.
