Top three tips for buying your first home

How much deposit do you really need?

A 20 per cent deposit is good but it’s not essential. If you have your sights set on a home but don’t have the full 20 per cent deposit, expect to pay lenders mortgage insurance (LMI).

Don’t let the name confuse you: this insurance protects the lender – not you – even though you pay for it. And pay you will, as it doesn’t come cheap.

While there are certainly merits to having a solid deposit in a rising property market, it can pay to jump in sooner rather than later.

And one way to save on LMI includes seeking help from the ‘bank of mum or dad’.

Guarantor loans allow individuals related to you to use the equity in their own property as security for part of your mortgage.

Alternatively, take a look at some first-home loan deposit schemes. If you qualify, you may be able to purchase a property with just a five per cent deposit. The government goes guarantor for the other 15 per cent to top it up to the necessary 20 per cent level to avoid lenders mortgage insurance.

The trap to watch out for with lenders mortgage insurance, though, is that it may lock you in with your lender. Until you get that 20 per cent equity in your home, you won’t be able to refinance your loan without having to pay for mortgage insurance again, as LMI is not portable.

Know where to stash your cash

With interest rates at record lows, it can take years to build a deposit if you’re only using a bank account.

One way to speed up the process is to use different saving ‘buckets’. This way, you’ll be able to expose some of your savings to investments with potential for capital growth. Here’s what a bucket approach could look like:

• First, use a high-interest, online saver as your ‘defensive’ bucket. Money in the bank is guaranteed but, of course, is not earning much.
• Your second bucket can be a blend of exchange-traded funds (ETFs). This gives your deposit the benefit of diversity plus much-needed capital growth. Of course, ETFs may not be ideal if you expect to be investing for just a year or two. For a share-based ETF, for example, allow a minimum timeframe of about five years.
• The third bucket for your first-home deposit can be the First Home Super Saver Scheme (FHSSS). This provides tax savings plus further diversity, coupled with more potential for strong returns.

It’s best to speak to an independent financial adviser if you’re unsure of any approach.

Manage your mortgage

Don’t underestimate the power of shopping around. According to Canstar’s database, the average rate on new standard variable rate loans is 3.24 per cent, but who wants to be average? You can do better. The lowest standard variable rate on Canstar’s database is 1.88 per cent. That’s a massive 1.36 per cent difference.

On a $500,000 loan repayable over 30 years, that difference could see you shave off more than $127,000 on your interest bill (assuming, of course, all things remain equal).

The number one thing to understand about home loans is that interest is calculated on your daily balance and charged monthly in arrears. Take advantage of this fact. If you can reduce the daily balance, even by just a few dollars, you will save in the long run on both interest paid, and the term of your loan.

The information provided in this column is general in nature only and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information in this column, you should consider the appropriateness of the information for your own objectives, financial situation and needs.