Guide to buying your first home (in Australia)

Disclaimer: I am not a qualified finance/property professional. This post is of my own observations and experiences within the housing market in Victoria, Australia, in the year 2023. There are likely mistakes or missing information, there may be information not applicable/appropriate for you, and it is intended as a guide only. You must seek the advice of a qualified professional(s) before making any decisions.

The price of a house

Knowing what to budget for is not as simple as knowing the advertised cost for the house; there is:

• Sale price: the advertised sale price, which is negotiable.
• Stamp duty: in addition to the sale price is stamp duty, at roughly 5% (a very large sum).
• Fees: additional fees, such as the cost to change the house's title (ownership) to the new owners, the conveyancer, and building inspection.
• Lenders mortgage insurance (LMI): if your deposit is less than 20% of the sale price, you must pay a one-off fee which can be quite large (e.g. $4k - $12k). This fee does not contribute towards the amount you owe on the sale price however; it literally goes straight into the bank's pocket and you are saying goodbye to it.
• Concessions: A sizable discount if applicable via government concessions, especially if you are a first-home buyer. Look at your government's website.

The final house price is the sum of the above. Of course, it is not wise to purchase without leaving yourself a savings buffer.

To even begin, you'll need enough savings to pay the house deposit; usually somewhere between 5% - 20% of the sale price. The remaining amount is covered by a bank loan (covered in more detail later).

Example case study (using rough estimates): Emma hopes to purchase a house advertised for $730k - $770k. After negotiations, the vendor (seller) agrees on $750k. To calculate the final cost:

- Stamp duty, and fees: Add ~5% stamp duty, plus additional random fees. The new total is ~$800k. (Note: first-home buyers may be exempt from paying some/all of this).

- LMI: Emma opts to use $75k as a deposit (from her $85k in savings), which is 10% of the sale price. Because this deposit is less than 20% of the sale price (i.e. she must borrow more than 80% of the sale price from the bank to purchase the home), she is subject to LMI, adding ~$10k to the total cost.

The total price is ~$810k: the "real" number to consider when budgeting to buy a house.

Step 1: Get pre-approval for a homeloan

Before seriously looking at house listings, you must first know what total price you can comfortably purchase. Likely, you'll have 5% - 20% of the total price in savings, and need to borrow the remaining balance from a bank (lender).

You must get what's called "pre-approval". This is an agreement with a lender on how much they guarantee to lend you. This agreement lasts (usually) 90 days, giving you confidence to make offers on houses within your budget within this timeframe. Once expired, you'll need to re-do the pre-approval process.

How much a lender is willing to lend is complex. Roughly, they'll consider:

• Your (and your partner's) salary. Many lenders require you to have been in your job for at least 3-months, and have some kind of contract.
• Your savings.
• Your debts. This also includes things like student loans and credit cards.
• Many more factors.

Note that the amount each lender is willing to lend and the weighting they put on each factor varies considerably.

I recommend strongly to engage with a mortgage broker:

• They are free to use; they instead get a commission from the lender that you decide to go with.
• They should be impartial, and can query the range of lenders to find the one best suited for your situation. If they're pushing a particular lender, this may be a sign that they are being unethical.
• They'll gather your details and query how much lenders are willing to lend.

Note: How to choose which lender to go with is complex and outside the scope of this guide I'm afraid, as there are too many variables.

With a lender chosen, you'll be granted pre-approval. With this, you now know your purchasing power:

• Your investable savings amount, plus,
• The amount the lender will lend.

Example case study (using rough estimates): Emma's mortgage broker informs that lenders will lend $650k. That, plus her savings of $85k, brings her purchasing amount to $735k. She wants to keep $10k of her savings though (for a safety buffer), with her new total of $725k.

She cannot purchase a house advertised for $725k though, as we must incorporate:

- ~$40k in stamp duty and fees.
- ~$10k in LMI.

Therefore, she can afford a house at ~$675k.

(Note: again, this figure varies wildly, particularly if you are a first-home buyer where the government may waive (or reduce) the stamp duty amount).

Step 2: Search the market and make an offer

After visiting some open houses, you're ready to make an offer on a house that is within your purchasing power budget.

Visit scheduled open houses

Visit the house, ideally multiple times. Don't just look at the surface; be smart and look deeper. For example:

• Are there cracks in the walls/ceilings (both internal and external), and if so how major are they.
• Are the floors uneven.
• Does the house look recently painted, where it gives the impression that they're trying to cover up issues (e.g. cracks).
• What's the neighbours and neighbourhood look like. Are the gardens generally kept tidy? This can be an indicator of good/bad neighbours.

You can ask the agent to organise a private inspection also. This is excellent for getting a better feel of the house, such as how loud the road noise is.

I love to visit the house many times throughout the week at different times, and sit in my car for a few minutes. Particularly important during rush-hour (5pm as people are coming home), and on a Friday/Saturday night. If there are loud parties, or inconsiderate morons with loud car/motorbike exhausts (who have no regard for the invasive damage they do to all they drive past and cause immense grief to everyone around them), I abandon the house.

Vendors statement (aka Section 32) and the Contract of Sale (CoS)

When serious about proceeding, ask the real-estate agent for the vendor statement (often called the Section 32). It outlines the particulars of the house such as its size, location, what utilities are supplied and where, and more.

Additionally provided upon request is the Contract of Sale (CoS). This outlines the parameters of the transaction, and is very important.

Before proceeding further, it is strongly recommended to engage a conveyancer. An expert at reviewing the Section 32 and CoS, they can advise of unusual conditions as part of the sale, or if there are conditions that may hurt you.

A conveyancer is not free like the mortgage broker; their fees will be added to the sale price (~$1k to $2k).

They are also a great resource to learn your rights. For example, can you cancel a deal once you've already made an accepted offer on the house?

It is very important to understand the legal ramifications of making an offer on the house, before you make an offer. Talk to a conveyancer and/or other legal professionals.

Make an offer

To make an offer, talk with the agent. Be smart and informed by first doing your market research! Evaluate whether the asking price is fair, based on:

• What have similar houses nearby sold for in the past 6 months.
• Are there issues with the house that may cost money to rectify (e.g. replacement of carpets).
• How "valuable" is the house. House prices (like any commodity) is based on "how much someone is willing to pay". Maybe the house is beautiful, but it is a on a busy road; lots of people are going to be out-off by this, thus there is a noticeable decrease in the house's desirability therefore its price.

Feel free to make an offer below the asking price/range. It is a negotiation. You don't want to have your first offer accepted, as this implies that the vendor may have been willing to accept a lower amount.

If your offer is accepted, congratulations! However, do not sign anything yet (even if the real-estate agent pressures you into it). There is still more to do.

Building inspection

The seller... unfortunately, is not legally obliged to list house defects. Major issues not obvious during the open house visit may exist, such as water damage under the house. Such defects may be discovered too late, and can be extremely costly.

A building inspector thoroughly inspects and generates a report on identifiable defects. It is up to you to research these defects, and decide whether they are acceptable to proceed with. Inspections cost ~$500... which is ridiculous, but potentially worth it.

Be sure to organise whether you'll get a building inspection complete before making an offer, or before signing the CoS. You can add a Subject to Building Inspection clause, allowing you to backtrack from the CoS within 14 days if major defects are found that you are not prepared to accept. However, ensure to engage with a conveyancer before making any offers or signing contracts, and to scrutinise the wording in the CoS.

I cannot stress enough how important it is to get professional advice before signing any contracts. Failure to do so many result in losing your desposit, or worse.

Example case study (using rough estimates): Emma is keen on a house within her budget. She's been to two open houses, and visited the neighbourhood during the week.

She requested the vendor statement and CoS from the real-estate agent, and sent them to her conveyancer. The coveyancer advised of a concern with one of the conditions. Emma states to the real-estate agent that she is willing to make an offer granted the identified condition is amended. The vendor agrees.

Emma schedules a building inspection. The resulting report states that the house is in generally good condition, but the back verandah is unsafe (the posts are rotted) and the whole thing needs replacing. Emma is prepared to accept this.

Emma contacts the agent with her offer, who passes it on to the vendor. There is a back-and-forth over the coming days as they haggle on price. Emma leverages the fact that there are issues with the house requiring fixing. A price is agreed upon, and the agent sends the amended CoS, which again Emma sends to her conveyancer before signing. When given the all-clear, she signs it.

Step 3: Finalising the purchase

With the offer accepted by the vendor, the building inspection complete, and the finance approved by the lender, the final stage is confusing.

Follow the guidance of your conveyancer, who will walk you through what documents need signing and when. If ever unsure, reach out to your conveyancer, your mortgage broker, and even the real-estate agent. Be sure to proactively chase up any steps.

Roughly the process is:

• Contracts are signed by all parties. You'll agree on a settlement date, and pay the purchase deposit (~10% of the total price).
• You'll be asked to fill out various forms by the mortgage broker and the conveyancer.
• About one-week before settlement, you'll work with the conveyancer to transfer the remaining balance that you owe.
• On settlement day, you'll get confirmation from the conveyancer/real-estate agent that everything has been approved, and you can pickup your house keys.

Other considerations

To pay, or not pay, LMI

LMI is a multi-factored topic. On the surface, it feels like a waste of money, an unfair fee that goes straight to the bank.

The supposed upside is that it gets you (in theory) a house sooner. Houses are (usually) appreciating in value every year and this appreciation may offset any LMI you paid, so the earlier you get into a house the better. Again, this is extremely variable and situation specific.

Best to speak to your mortgage broker about LMI to learn more.

Rent a room out

Before buying my first home I'd been renting various houses 10 years, always living with roommates. My first owned house had three bedrooms; my partner and I lived in the master room.

For the next five years we rented out one of the rooms (and at brief times both of the rooms). It was certainly a sacrifice and at times an annoyance, but the financial gain made up for it.

Understandably not every homeowner would be comfortable with this arrangement, but it is certainly an option to consider for the short-term, to set you up better for the long-term.

Learn about finance and budgeting

Knowledgeable people make smarter decisions, thus live easier lives. Do your research and learn about finance and budgeting, before buying a house and even afterwards. My partner's favourite podcast is "She's on the money", but there are multitudes of others.

Be knowledgeable about fixed and variable term mortgages, principal and interest payments, offset and redraw accounts, equity and capital, tax concessions (and what tax claims you can make), and much more.

Scams

Scams are becoming more sophisticated. Common is for email or phone correspondence to be highjacked by a scammer to impersonate your conveyancer or mortgage broker, to trick you into transferring funds into their own bank account.

Be smart with your communications; always use the official phone number to call them (listed on their website, not on their email!), visit them in person before making key decisions, and confirm any bank details (ideally in person) before making any transfers.

Conclusion

It is a long journey, and I wish you luck. My best advise is to do your research and be informed.