How to help your first home buyer
Updated: Jul 22, 2020
Leaving the real estate section open on the kitchen table or playing your Fleetwood Mac 'Rumours' album on repeat are a start, but there are a few, more practical ways to help your first home buyer get into a property of their own.
Understanding the assistance available from both State and Federal Governments is important. However, getting your head around the First Home Loan Deposit Scheme (FHLDS) from the Federal Government, the various State level grants as well as the state based stamp duty discounts is a bit of a mission.
The short version is the FHLDS is great - if you can get one. The first release of 10,000 guarantees in February was gone in the first few weeks. The second release of another 10,000 on the first of July this year is nearly gone - most lenders such as CBA and NAB will only be able to wait-list you. However, a few smaller lenders still have access to a quickly diminishing supply. This scheme is a guarantee of your loan by the Federal Government to the lender. Essentially the scheme saves you the cost of lenders mortgage insurance (LMI) or up to about $15,000. Well worth it, but it is only available through a small number of lenders.
To get your first home buyers hand off the Xbox controller and onto this scheme please complete our FHLDS Rego form here and include the attachments.
The state level grants, like in NSW are usually restricted to brand new homes. From our vantage it seems that the benefit of these grants is lost to the developer's premium. More concerning is that new developments usually have very low or no capital growth for the first few years, so your $10,000 grant ends up costing you far more. These grants can be useful to the right clients in the right circumstances, but we suggest you discuss these options with us before jumping in.
Stamp duty discounts are a little easier to navigate. Having said that, I have recently assisted a new client get back the stamp duty they overpaid as first home owners. The key requirement here, is to stay under the purchase value caps. Even if you can afford a more expensive property, it's probably (not always) worth buying your first property under the threshold and get the stamp duty discount.
For a detailed list of purchase costs, including stamp duty discounts for every state, please check out our Purchase Cost Calculator here.
Chances are parents will need to add a little support to their first home buyer. There are two ways to best help out:
Gift - this should be paid into your first home buyers account three (3) months prior to applying for the loan or will need to be accompanied by a declaration stating the gift is not a loan and does not have to be repaid (we will supply this).
Family Pledge - you can use your home or an investment property as additional security to help your first home buyer with the cost of lenders mortgage insurance (LMI). We usually structure this with a split loan. The pledge can be removed when the loan is reduced or the property value increases to allow the remaining loan to be less than 80%.
Many parents will use their existing home to redraw the gift using their home loan. We are happy to assist in this process and it is usually a good time to review the parents home loan structures.
Some parents may want to protect this gift in the case of their child's relationship breaking down. We have assisted many families with similar goals and wishes and can work with your solicitor to assist in mitigating risk and protect your gift.
It's important to note that a Family Pledge is limited to just the 20% (or less) of the new property. Meaning that in the horrible, worst case scenario of a default and the property not covering the loan the parents cost will be limited to just the 20%. This is very different from parent guarantees in the past where the parents guaranteed the whole loan. Although this is a very unlikely scenario it is a little comforting to know the total debt is not on the parents.
One of the simplest ways to help your first home buyer is to help them setup a regular saving plan. Do not worry too much about the amount of the savings. The key is to start saving from every pay cheque. Set up a separate savings account that only has deposits - try very hard not to withdraw from this account. Several banks have bonus saver accounts that reward this behavior.
Regardless of the amount saved lenders reward this savings strategy when assessing the first home buyers application. Many FHB's are surprised with how quickly their savings grow once they get started.
As an absolute minimum you will need to save a little over 7% of the property you are trying to buy. The deposit will be 5% and you will need 2-3% to cover other costs such as your legal fees, building inspections, etc. However, the more you can contribute to the purchase the better. A 10% deposit is better than a 5% and a 15% or 20% deposit is better than a 10% deposit. Saving 20% or even 10% is beyond the vast majority of FHB's, this is where the government and parental support discussed above comes in.
Existing Loans & Credit Cards
Do not pay off your loans or credit cards until you have spoken to Blue Zinc. Parents, family or work colleagues will often advise FHB's to repay all their loans as soon as possible. This is not usually the best plan. Most FHB's would benefit from having a bigger deposit or savings rather than no personal loans or credit cards.
Yes, this does sound silly, but the lenders qualification tools or mortgage assessment software will reward bigger savings more than no loans or credit cards. Once you have spoken with us we can advise on the best strategy for your circumstances.
Lenders are slowly coming to the realisation that the workforce especially younger workers do not stay in the same job for their whole life or even five years. That said you will need to be in the same job or at least the same industry for at least two years.
If you have been in your job less than a year there are lenders that will be ok with this, but you will not have all the lenders available as some will want two years employment stability as a minimum. Again, its best to just have a quick chat with us. Lenders are continually changing employment requirements.
For some collating all the required paperwork to support the loan application is the hardest part. Post the Hayne Royal Commission and several other banking inquiries, lenders have increased their paperwork or proof requirements. For more detailed understanding of the supporting documentation required please read our article - Dreaded Documentation here.
I hope this information is helpful. Buying your first property is undoubtedly a big step. Over the past twenty years Blue Zinc has helped many friends and clients into their first homes and now we are helping their children do the same. Yes, it does make us feel a little old, but helping first home buyers still gives the Blue Zinc team a kick every time.
Good luck with your property search.