10 questions every first home buyer needs to ask

Whether you’re dreaming of an Edwardian semi in the inner east or have your heart set on a three-bedroom renovator’s delight on a quarter-acre block, budget is usually the biggest issue for first-home buyers.  

“Budget is everything and this comes down to your borrowing capacity,” says Steve Hooker, former Olympic gold medallist and now CEO of property company Resimax Group.  

Generally, if you buy an established home at auction you will be required to pay a minimum 10 per cent deposit. However Dan Peterson, chief executive of RACV partner iBuildNew,  an aggregate site that allows you to compare home builders and house-and-land packages, recommends buyers save up a 20 per cent deposit. He says having 20 per cent equity in your home not only provides a financial buffer, it also means you can avoid having to buy expensive lenders’ mortgage insurance, which is generally required on loans greater than 80 per cent of the property value. 

Dan says while it is possible for first-home buyers to pay as little as a five per cent deposit without mortgage insurance by using the government’s First Home Loan Deposit Scheme, he says the scheme is available only to limited numbers – the allocation for this financial year has been exhausted and a new allocation of 10,000 will be made available from 1 July. “And remember with such a low deposit your monthly mortgage repayments will be higher.” 

As well as the size of your deposit, how much you can afford will ultimately be determined by how much your bank or non-bank lender is prepared to lend you. Lenders will look at your income, monthly expenditure, any debts including credit-card limits, and calculate how much they will lend you based on how much they deem you can afford in monthly mortgage repayments. Most major lenders have online home-loan calculators to give you a guide.  

Steve recommends using the services of a mortgage broker to help you determine how much you can afford. “They will be able to tell you your borrowing capacity as well as suggest changes you could make in your personal finances that could improve your buying power. They will help set your budget which will help you to target the right homes for your budget.” 

“Stamp duty is the big one,” explains Dan Peterson. Stamp duty is the tax you will pay on a property purchase and is usually calculated at five per cent of the price of a home. However first-home buyers in Victoria may be exempt from stamp duty when the property value is below $600,000. 

Dan says other costs to keep in mind include legal fees ($1000 to $2000), property or building inspections ($400 to $500, but optional), landscaping and fencing (when building), and repairing the defects that can emerge when buying an established home. Building insurance should also be added on top of these costs.

If you are buying or building a new home valued up to $750,000, you may be eligible for a First Home Owner Grant (FHOG), worth $20,000 if the home is in regional Victoria and $10,000 if it’s in the city. To be eligible, the home must be less than five years old.

Additionally, the recently announced federal government HomeBuilder Grant provides eligible owner-occupiers, including first-home buyers, with a grant of $25,000 to build a new home or substantially renovate an existing one. 

This grant is available to individuals earning up to $125,000 a year and couples earning up to $200,000 who are buying or building a new home up to the value of $750,000, or making renovations costing $150,000 to $750,000 on a home worth up to $1.5 million. They must sign a contract before 31 December 2020 and construction must begin within three months. Visit: treasury.gov.au/coronavirus/homebuilder.

As well as calculating how much you can afford, buyer’s advocate Adam Woledge says buyers should think carefully about where they want to live, not just for today but also in the future. “A lot of people buy an apartment off the plan to save on stamp duty, but they need to ask where they see themselves in five years’ time. Am I in a relationship now or will I be in a relationship in the future? In five years, I may have children and need to get something bigger. Every move means more expense in stamp duty, fees and charges.” 

Adam, who has helped hundreds of people buy their first home, says buyers should also think carefully about neighbourhood amenities that are important to them. Proximity to public transport, schools, shopping and employment will not only make life easier for the buyer, they will make the home more attractive to future buyers if you decide to sell down the track.  

Once you’ve settled on a preferred neighbourhood, check out recent sale prices for similar properties in the area and speak to real-estate agents about recent auction results to see if it is within your budget. You may need to consider something smaller or move your search one or two train stations away to find something within your budget.   

Alternatively, Adam says many first-home buyers get a foothold on the property ladder through rent-vesting, where you live in a rental property in your preferred neighbourhood and invest in a property to rent out in a less-expensive suburb or regional centre. “If you want to live close to the city, you may be better to buy further out where there are schools, with a view to renting out that property and perhaps moving there if your circumstances change,” says Adam. “This can work out well, particularly if the investment property has good capital gains potential.” 

Once you have a shortlist of properties you’re interested in, it pays to do your homework. Even the most perfect-looking property may be encumbered with restrictive planning rules that could impact your ability to undertake renovations and affect future resale value. 

Adam Gandolfo, CEO of online property information tool Landchecker, an RACV partner, says: “For example, a heritage overlay may restrict your ability to alter the exterior of a home while an Environmental Significance Overlay may prevent you from removing vegetation or constructing a fence. The Land Subject to Inundation overlay identifies properties that may be affected by a one-in-100-year flood, which could impact the future value.”      

While it used to be fairly time-consuming to check planning restrictions, easements and nearby planning permit applications, it’s now easy to download a Landchecker report with all this information in one place. Get a free property report on any property in Victoria or New South Wales. 

Information is power in the property market, and knowing why the vendor is selling the home you have your eye on, and how quickly they need to sell it, could save you thousands. If the vendor has already bought a new property, they may be anxious to sell quickly and therefore reluctant to hold out for a higher price. Similarly, if the property is part of a deceased estate or there is a divorce involved the vendor may be keen for a quick sale. If, on the other hand, the vendor is still looking to buy a new home, they may want a longer settlement period on the sale. 

"Absolutely,” says Adam Woledge, who has helped hundreds of people buy their first home.

“It may cost $400 to $500 for a building inspection, but it will be worth the money if you find out that there is something wrong with the house, like it needs a new roof or it has termite damage which may cost many thousands of dollars to repair.”

“You’re about to make the biggest purchase of your life, so you want to be completely confident in your decision,” says Dan Watts of RACV partner Rapid Building Inspections . 

He says for pre-existing homes, a professional building assessment will involve checking for signs of major and minor defects, as well as identifying any safety hazards, structural problems, hidden moisture issues and presence of termites or other pests. Even if you’re buying a brand-new home, it’s important to get a professional inspection to check the quality of construction and give you peace of mind that you’re getting what you paid for.

Transferring the ownership of a property title from one person to another is a complex undertaking involving a raft of legal and administrative requirements. While you are not required by law to use a conveyancer or solicitor when buying a property, trying to navigate the requirements without expert advice could lead to all sorts of pitfalls, even losing the property and forgoing your deposit.

A conveyancer is a licensed professional who specialises in providing advice and information about the sale of a property. They will undertake such tasks as reviewing the contract of sale for any errors or red flags, undertake title searches to confirm the property is legally owned by the seller and there are no debts or liabilities attached to it, and help organise supporting documents needed by your lender for settlement.

Chris Lane from RACV partner ThinkConveyancing explains that the key difference between a conveyancer and a solicitor is their level of knowledge and experience. Conveyancers must complete two years of study plus two years of supervised practical experience before they can be licensed, whereas a solicitor will have completed a four to six-year university degree which equips them to work in property law as well as general law. “Choosing a lawyer means they will be able to provide legal advice if things don’t go to plan,” says Chris. ”This greatly reduces the risk and cost if complications do arise during the purchase process as you won’t be charged extra for a lawyer’s time.”

Newcomers to the property market may not realise that the real-estate agent’s job is to represent the seller, not the buyer. So while an agent might be very helpful directing you to properties in your price range, providing information on the market and offering details of similar sales in the area, at the end of the day their job is to get the highest price for the seller. A buyer’s advocate or agent, on the other hand, represents you, the buyer.   

First-home buyers nervous about bidding at auction may contract an advocate just to do the bidding for them on the day, or they may opt for a complete service where the advocate identifies suitable properties (advocates often know about properties before they are publicly listed for sale), does due diligence on the property, and negotiates with the vendor.   

Having an experienced property expert to help you navigate the market and negotiate on your behalf can bring great peace of mind, however the service comes at a cost, with advocates typically charging one to two per cent of the price of the property.   

The idea of bidding at auction can be daunting for even the most seasoned property investor, let alone first-home buyers. Making one of the biggest purchases of your life in the heat of the moment, with dozens of strangers looking on and a zealous auctioneer urging you to pay just that little bit more than your budget, is hardly an ideal environment for making a cool and considered decision.  

It’s little wonder some buyers are tempted to make a pre-auction offer. As well as avoiding the stress of a public auction, a prior offer can also help you stick to your budget, something that’s tricky to do on auction day. Also with a five-day cooling-off period generally written into pre-auction sale contracts, you will have time to have the property valued and loan approved by your bank.  

But the experts warn you need to be careful when putting in a pre-auction bid. Pitch it too high and it might raise the vendor’s expectations of what they are prepared to settle for on the day. And by revealing what you’re prepared to pay before auction, making an early offer may erode your negotiating power if the property does go to auction but doesn’t sell.