Buying a first home in NSW

Buying your first home is simultaneously exciting and daunting. There are some great benefits available to help NSW first home owners get into the market. Here are some of the more popular strategies and tips:

Historically, banks would not lend you money to buy a home unless you had 20% deposit plus stamp duty. As property prices began to rise the notion of 20% deposit became more difficult. The banks are in the business of lending money, but they are also wanting to maximise their profits. Their solution was Lenders Mortgage Insurance (LMI).

LMI is a once off premium, added to your home loan, it protects the lender in the event you default on the loan. The cost will vary depending upon the lender, your loan size the size of the loan relative the property price. Ballpark is anywhere from 1 – 3.5% of the property price.

For example, if buy a home for $800,000 and borrow $720,000 the loan is 90% of the home price. As this is more than 80% of the purchase price the bank will charge LMI. The premium would be about $15,000 and is added to your loan. So now your total loan is $735,000.

If you default on the loan the bank can sell your home to repay the outstanding home loan. Assuming the bank sells the property for $700,000 then the mortgage insurance pays the claim to the bank. LMI protects the bank in the event of default. It does not protect the borrower.

How to avoid LMI

Some banks will allow parents to guarantee the home loan. This means the parents take on the role of mortgage insurer. The bank terminology is Security Guarantor. Just as in the above example, if you default on the home loan and the bank makes a loss on the sale, the Guarantor is liable to pay the bank for their loss (there are limits on how much the bank can claim against the Guarantor). The Guarantor would use a property, the family home or investment property, the support the borrower. The important thing to remember is that if the Guarantor is subject to claim from the bank, they need to pay the bank in cash. So the Guarantor should have available funds in case of emergency and the borrower should make sure they have income protection and life insurance in place. These insurances reduce the risk to the Guarantor.

Family members are also able to Gift funds to the borrower to ensure they have 20% deposit.

The final option to avoid LMI is to access some of the government guarantee schemes. These vary depending upon location and earnings, but is general you may be able to purchase a home with only 5% deposit and pay no LMI.

For example the First Home Guarantee allows purchases for up to $900,000 in NSW Capital Cities and Regional Centres with as little as 5% deposit. In this case the government acts as mortgage insurer which means LMI is not required. Not all lenders have access to the First Home Guarantee and there are other qualifying criteria. However these schemes can represent good value and assist people access the property market instead of renting.

There are many ways for First Home Owners to access the housing market for the first time in an efficient way. Here are some of the more popular approaches:

Purchase first home as Investment whilst living rent free with parents. The positive is that you can borrow up to 50% more money. This means you may be able to purchase a home in a more desirable location. If your career is on an upward trajectory, as you earn money you may be able to move in after a year or two. The downsides are, you are not living in the property right away, there is no government assistance such as LMI waiver or Stamp Duty waivers. If you rent the property out as Investment there may also be tax consequences to consider
Use Security Guarantor to access property with less than 20% cash deposit and avoid LMI. This may be possible for Owner Occupied or in some instances, Investment purchases. Whilst the lenders who offer this are limited, and some need the Guarantor to be working, this is not always the case. The eligibility to this option is open to most first home buyers
Gift funds. It’s not always possible to save a 20% deposit for your home purchase and often parents are in a position to gift some additional funds to get the deposit amount up and avoid LMI. Gift funds can be a very effective way to access property in a faster way and cease renting.
Government supported schemes. There are a number of excellent schemes for First Home Owners including stamp waivers, stamp duty concessions, LMI waivers and assistance for single parents to enter the market.

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