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Buying your first home
You’ve done the research, have an expectation for price and value in the area, have your deposit (and extras) sorted and are feeling primed. It’s now time to organise your loan and buy your first home.
1. Get Conditional Approval on your Home Loan#
Conditional approval, also called pre-approval is a form of loan approval obtained from a lender that provides you with an indication of how much you can borrow. The lender will assess your eligibility according to your current financial circumstances and estimate your capacity to pay the loan.
Getting conditional approval on your loan early in the process gives you a realistic set of financial parameters to guide your shopping and, most importantly, means you are ready to make an offer or prepared for an imminent auction when you find your dream property. The all-important “How much do I need to buy my first home?” question is answered.
Now, conditional approval isn’t final – there will be a process after the price is agreed upon (see below) – but it is usually valid for 90 days, so long as your financial circumstances do not change. Ultimately, conditional approval means you can offer and bid with confidence. Even if things are moving quickly – for example, there are other interested parties in the property – IMB conditional approval can be obtained relatively quickly. This can be in as little as 48 hours, but may vary depending on your circumstances.
Find out all the steps to pre-approval here and apply now.
2. Types of Home Loans
There are hundreds of different types of home loan products, with various rate structures, features, packaged credit cards, offset accounts and more. Differentiating between them can be something of a headache, and deciding which type of home loan works best for you will depend on your circumstances and what you value most. For example, certainty, flexibility, lower repayments for a short period, basic features, or a little of everything. IMB’s Home Loan Specialists can help guide you through our home loan options so you can choose your loan.
What is a Variable Interest Rate?
An interest rate that moves in response to a variety of economic factors, including the cash rate set by the Reserve Bank of Australia, market conditions and the business requirements of the financial institution. This means your repayments could change over the life of the loan. Sometimes, they will lower, resulting in smaller repayments, but higher interest rates are also possible, making your monthly repayments larger. Check out IMB’s variable rate loans.
What is a Fixed Interest Rate?
An interest rate that is set for a period of time, usually from 1 to 5 years. Fixed rate loans allow you to know exactly how much your repayments are going to be each month, regardless of wider economic changes. You are protected when interest rates rise but will not benefit if they fall. Once the fixed rate period ends, the loan usually converts to a variable rate and is subject to fluctuations as explained above. Explore IMB’s competitive Fixed Interest Rate Loans.
How does a Split Rate Loan work?
A split rate loan allows you to put some of your loan in a variable interest arrangement, and some in a fixed interest arrangement. This could provide you more certainty in relation to repayments thanks to the fixed portion, but offer some flexibility if the market changes due to the variable part of the loan. You can split the loan in whatever percentage you like. For example, if you're keen for more stability but happy with some flexibility, then perhaps a 65%/35% fixed/variable split could work for you.
Interest-Only Loan
These loan arrangements require you to only pay back the interest over a set period of time – usually 1-5 years – while the principal remains the same. Once the interest-only period is over, the loan will revert to principal and interest repayments for the remainder of the loan term.
Depending on your circumstances and objectives, interest-only loans may offer some advantage in the short term, as payments are lower. They may appeal to first home buyers who are building a new home, as they can pay rent and the repayments at the same time during construction, and also to investors.
However, interest-only loans are generally more expensive in the long-term, as you still need to pay interest on the principal (which remains unchanged) after the end of the interest-only period. Both variable interest rates and fixed rate home loans can be supplied with interest-only repayment structures. Find out more about IMB’s interest-only rates.
What are Comparison Rates for Home Loans?
You will see this figure in advertising for home loans, so what does it mean? A comparison rate helps you work out the true cost of a loan, and compare apples to apples. It reduces to a single percentage figure the advertised interest rate plus fees and charges relating to a loan. There are a multitude of possible fees:
- Some lenders charge a monthly account-keeping fee for their mortgage accounts
- Some charge an annual package fee
- Some may also charge an establishment fee, valuation fee, mortgage documentation fee and settlement fee.
These charges are taken into account when calculating the comparison rate, as they affect the overall cost of the loan. Some loans may have lower advertised interest rates, but their fees will make the amount you pay over the life of the loan higher. For example:
Here, the comparison rate allows you to compare loans from different lenders to find out how much it will actually cost you, once the fees and charges are included. Comparison rates are required to be published alongside the advertised rates by law and are very handy when deciding the right loan for you.
Should I get an Offset Account?
Home loans often come with other features which can also affect the interest rate offered. An offset account is a linked transaction account that reduces the balance of your home loan by the amount in the offset account for the purposes of calculating the interest payable at that time. If you have savings in another account, you may wish to consider an offset account. While you don’t earn interest on your savings in an offset account, you could be charged less interest on your home loan, and this could help reduce the length of the loan term. Your repayments stay the same, but you can reduce the time it takes to pay off your property.
How does Redraw on Home Loans Work?
A redraw facility allows you to pay more into your home loan account than the scheduled repayments, then redraw funds from that surplus for other uses, such as renovations, car purchases, school fees or a holiday. For example, if your home loan repayments are $1000 per month and you are paying $2000 per month then the redraw amount after 10 months would be $10,000.
Can I Make Extra Repayments?
For many principal and interest loan types you can pay off your loan sooner when you have the financial power to do so. Variable interest loans often have more flexibility with regards to the ability to make extra repayments. Fixed interest rate loans often have capped values on the amount of extra repayments you can make during the fixed period of the loan.
Got any questions? We have answers. Talk to a Home Loan Specialist today.
3. Make an Offer
With pre-approval in your pocket, you are ready to act. When the home you love becomes available, go to an inspection and inspect the property closely. Ensure that all aspects of the property are in line with your expectations: for example, test the water pressure, ask to turn off the lights to check natural light, and quiz the agent as to why the owners are selling.
This can be a powerful bargaining tool when making an offer, as the owner may have already bought their next home and can be motivated to lower their expectations. At this stage, getting an independent valuation gives you an objective idea of the property’s worth and empowers you to bargain with confidence.
If the property is going to auction you can try and make an offer prior, and, if the offer isn’t too low, the seller may consider it. However, if the property is still going to auction, you may find this information on how to buy at an auction useful.
4. Hire a Solicitor/Conveyancer
A solicitor will guide you through the legal process involved in buying a home. Ask your friends and family who have had experience in the home-buying process to recommend a good conveyancer. Or Google search and shop around.
5. Get a Contract of Sale from the Agent
You will often hear agents talk about “numbers of contracts handed out” at inspections. They are referring to the Contract of Sale, the legal document that sets out the terms and conditions agreed between the buyer and the seller. Once you have the Contract of Sale, have it reviewed by your solicitor and send a copy to IMB to move your loan from Pre-Approval to Formal Approval.
6. Get a Building and Pest inspection
One of the most dependable ways to ensure a property is shipshape is to conduct official building and pest inspections. In many cases the real estate agent selling the property will provide this. If not, ask them to. Failing that, consider paying for your own inspection, as this could save you money down the track and will provide official documentation when taking out home and contents insurance.
The inspectors usually check structure, moisture, termite and pest damage (and the potential for it), asbestos, roofing, and many more critical factors. This way, you have an objective assessment of the home’s quality.
Remember, if you are going to auction, get a building and pest inspection completed beforehand, as at auction you buy the property like it is. If it is a private treaty sale, there is a cooling-off period where the sale is subject to financial approval and building and pest inspection. Your solicitor can provide advice on the details of the cooling-off period.
7. Get Formal approval
Your lender will now need to formally approve your loan application. This process takes a few days as the lender organises a property valuation and ensures that everything is in order. Once your loan is formally approved it's time to see your solicitor about signing the Contract of Sale.
8. Review Contracts of Sale
Now that you have agreed on the price, the real estate agent will request a copy of the Contract of Sale be forwarded from the vendor's solicitor to your solicitor, unless this has already happened. Your solicitor will review the contract to determine inclusions and council regulations concerning the property and factor in the building and pest report.
9. Exchange Contracts
Your offer has been accepted, the property has been valued and checked, your loan has been formally approved and you have signed the Contract of Sale. Next, your solicitor and the vendor's solicitor will arrange for the contracts to be exchanged.
This is when you put the bubbly on ice. When you exchange contracts, you will also set the date for the settlement and if you haven't already given a deposit, 10% of the total sale price is usually expected. Next, formal home loan contracts will be issued to you for signing and completion prior to settlement.
10. Cooling-off Period
What happens if you change your mind after the contracts have been exchanged? It really depends how you bought your property and the terms of the sale, but non-auction sales usually have a cooling-off period. The cooling-off period is a specific number of days (usually 5 business days) after contracts are exchanged, during which the purchaser can terminate the contract. Pulling out of the purchase may invoke a termination fee. Be sure to speak with your solicitor regarding the complete details of the Contract of Sale, and remember – there is no cooling-off period at an auction!
11. How long is settlement?
Settlement is usually agreed upon 42 days from the date of exchange of contract. Longer or shorter settlements can be requested by either party. The settlement period will be negotiated before the exchange of contracts.
In the lead up to settlement, the tip is to not go crazy with nerves – it’s seriously an exciting time. You will want to organise Home & Contents Insurance (some lenders will require this), book a removalist, arrange for your power, internet or phone to be connected, and schedule a redirection of your mail.
Your First Home Buyer Specialist will liaise with your solicitor and the loan amount will be transferred upon settlement. The home is then yours! Pick up the keys! Congratulations, Home Owner!
