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First Homebuyers: how to finance my home

Mortgage rates at rarely-seen-before lows combined with lower housing prices and extra State first homebuyer grants on new buildings sounds like the perfect recipe for first homebuyers, but December figures show that first homebuyers' activity reached the lowest levels in several years.

First homebuyers only made up 14.7% of housing loans in December 2012, compared to 21% the previous December and even higher in December 2010.

While there are many reasons why this has happened nationally, one of main hindrances is not so much the lack of interest and activity on the part of the first homebuyers – which has actually been strong in the CBD during January/February – but it's often the lack of finances and not being able to get a home loan.

Gone are the days of 100% home loans and, in general, most lending institutions require that the buyer has enough saved for at least a 20% deposit.


What if I don't have the full 20% deposit?

Many first homebuyers are opting for Lender's mortgage insurance (LMI). In fact around 20% of buyers pay LMI in order to secure a loan and most of these are first homebuyers. This insurance (sometime costing thousands $$) then puts them in a position to obtain a loan. "Lender's mortgage insurance is used a lot for first home buyers who are in a good job but haven't managed to save a deposit of 20 %", explained Ellie Comerford, CEO of Genworth, Australia's largest provider of LMI. "They can borrow at 90% loan-to-value ration and pay the same interest rate, except on top of that they need to pay mortgage insurance."


Are there any other options?

Your financial adviser can help you further with other alternatives, and remember to take advantage of federal and state government First home buyer grants and schemes.

Just because you have had your accounts with Bank X all your life doesn't mean that they will necessarily get you the best rate or loan payment scheme.

Shop around! ... is my advice, and don't be afraid to go back to your home bank with other offers. You never know, they may even match it 

If you are lucky enough to have your parents' support, here are a few interesting options for parents wanting to help finance their child's first home, from Mark Armstrong, Director of iProperty Plan in a recent Property Observer article.

For these options let's look at the scenario of a first homebuyer (child) wanting to buy a $500,000 property. Let's also assume the buyer needs to finance 95% of the price, which is $475,000. LMI for a loan of this size would cost roughly $15,000. To avoid this the buyer would need around $125,000 - a $100,000 deposit plus approx. $25,000 for other fees and costs.

"Option One is to put the funds into a term deposit and offer that as security for the loan. This carries relatively little risk for you because it doesn't make you responsible for paying back the loan.

In this scenario, they borrow 100% of the property value with a principal and interest loan in their own name. Over time, with the combined effects of loan repayments and capital growth, the loan balance will drop to 80% of the property's current value.

They should keep an eye on sales results for similar properties in the local area, and ask a local estate agent to give an opinion on the property's current market value. If it looks like the value has grown to the level where the loan is less than 80%, they can ask their lender or broker to arrange a new valuation. No need to pay for it as many banks now provide free upfront valuations.

If the valuation confirms that they have reached the 80% mark, the lender can release the term deposit and the money is yours again to do with as you choose.

What if you don't have a lazy $125,000 in cash?

"Option Two is to take out a line of credit against your family home or investment property. You transfer them the funds, and they take out a $400,000 loan in their name. This option is relatively low risk for you because you are not responsible for the loan repayments. However, you need to understand that lenders charge interest on funds withdrawn from a line of credit. The rate is generally around .15% higher than a normal home loan

"Option Three carries more risk for you and should not be entered into lightly. Under this option you put up the family home or investment property as security for their loan. In this case, you become guarantors and therefore responsible for the loan. If they don't meet the repayments, you could lose the property, though this only happens in extreme situations.

If you choose this option, it's preferable to ask for a limited liability guarantee, which means you are not liable for the whole loan amount. In addition it is better, if possible, to use an investment property as security. This way, if the worst happens, the family home won't be jeopardised.

"No matter which option you choose, you should aim to minimise the level of risk and the length of time your funds are tied up. The sooner they can take full responsibility for their financial affairs, the better off everyone will be."

Remember: these are just some very general ideas and tips to get you thinking and perhaps looking at 'outside the box' options. Please contact your financial and legal advisers regarding the best options for you in buying your first home.

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