27 September 2023

What you need to know before applying for your first home loan

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Applying for your first home loan can be nerve-wracking, confusing and disempowering, Meg Watson* shares the lessons she learnt the hard way.

My partner and I just got pre-approved for our first home loan, and I feel like I could spew any second.

That’s partly due to my excitement: it’s a privilege to be in this position and the thought of hanging a picture on a wall without asking for permission brings me a truly profound (and kind of depressing) amount of joy.

But, mostly, I feel sick from stress.

I don’t come from a wealthy family, and both my parents rent.

No one ever taught me how this process works and, to a total newbie, it’s really confusing.

Here’s everything I’ve learned so far.

You need more money than you think

I figured I needed to save 20 per cent of the house price as a deposit.

That’s what people say, right? So a nice (but completely terrifying) round figure formed in my mind: $100,000.

I fixated on it while flipping through the “cosy” and “unique” $500,000 two-bedroom units in Melbourne’s inner-north.

(Hot tip: always look at what places sell for, not what they’re advertised for.).

As time went by, there were fewer and fewer of those places available.

The market was exploding and suddenly the same two-bedders were going for $550,000.

Then $600,000.

Then $650,000.

When I finally got a deposit together, I was so proud.

I’d saved more than I ever thought I could.

But when I sat down with a mortgage broker, he told me it wasn’t enough.

If I wanted to avoid paying lenders’ mortgage insurance, I needed to add a cheeky $11,000 up front to cover the stamp duty, as well as a few hundred more for additional costs like mortgage registration and land transfer fee.

My initial goal of $100,000 has now blown out to $144,000.

And I still don’t have a house.

Banks really have an ‘ideal’ customer in mind

Lenders don’t just want to know how much money you have, they also want to know how you earn it and what you spend it on.

You have to provide pay slips, which is very tough as a casual worker or freelancer, as well as recent bank statements.

The former made me nervous because, though I’m working full time, I’m on a contract.

And the latter made me stop and think every time I went out for a big night or ordered clothes online.

In the end, it was fine.

But that was partially because my mortgage broker found a lender who didn’t care so much about contract work.

It turns out some banks just vibe differently on certain things.

Pre-approval doesn’t mean what you think it does

My partner and I now have a letter from a bank that says we are “conditionally pre-approved” for a loan.

As nice as that sounds, pre-approval doesn’t guarantee you anything.

Your lender doesn’t have to offer you a loan once you’ve found a place.

Instead, they’ll make a decision once they confirm all your information hasn’t changed and the property you’re keen on is actually worth the investment.

It’s why I have to make sure any offers I make are “subject to finance” — in case something goes wrong and I can’t get a loan.

And here’s the kicker: all bids at auctions are unconditional.

It doesn’t matter if you can’t get the loan, or you have questions about the building inspection.

If you yell out a number in the street one Saturday morning, you have to follow through.

Finally, once you’ve done all this work to save the deposit, inspect houses, check out lenders, decide on a loan and file the paperwork for pre-approval it … only lasts three months.

There’s an enormous pressure to just buy something quick.

Take the plunge! Why not spend more than half a million dollars I don’t have on a house I walked through for 10 minutes once?

It pays to turn on your ‘bullshit detector’

Craig Morgan, an independent mortgage broker, knows how disempowering the process can be.

“Buying your first home is an emotional rollercoaster,” he says.

“And there’s sadly not much you can do to keep the levers in your hands.”

But he does have some useful advice:

  • Set your absolute maximum price (and be firm on it): Mr Morgan suggests discussing this figure with your mortgage broker, so they can tell you how realistic it is — but never share it with a real estate agent.
  • Shop around for a lender: Something that’s a deal-breaker at one bank (i.e. your credit profile or income type), may not matter so much somewhere else.
  • Shop around for a loan: He suggests making the extra effort to find not just a low interest rate, but also the type that fits your needs (is it fixed or variable?)
  • Be prepared for rates to go up: “Get your online calculator out, bang it in at 5.2 per cent, and see how you feel about that repayment figure,” he says.
    “You might think that’s ridiculous.
    But 5.2 per cent is still way lower than the 10 year average.”
  • Have your ‘bullshit detector’ set to max: The real estate agent works for the people selling the house; a lender only has to find you a loan that’s “not unsuitable” (i.e. not necessarily the best); and mortgage brokers get paid commission by the banks.

“There’s a big sales industry out there that wants to make you think it’s all easy.

“But it’s a confusing world,” Mr Morgan says.

*Meg Watson is a journalist at ABC Everyday.

This article first appeared at abc.net.au.

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