HOW TO BUILD A CABIN: THE FACTS ABOUT HOME LOANS IN AUSTRALIA
As some of you may know, I am currently saving for a deposit to buy land on the Sunshine Coast hinterland and plan to build a cabin. I’ve been saving since late last year and whilst the savings are coming along slowly, I still have my eye on the prize. Even though I have been putting money aside and planning, a cloud has been hanging over my head. I want to know what I can afford to borrow financially from the bank in order for my dream to come true. But I also want to know if the Stamp Duty applies to me, and if I am eligible for the Great Start Grant, and what is the minimum deposit I need to save before I can get a home loan.
Microsoft recently organised meeting for me to speak with a home loan expert from my bank – so good! As you already know, I am part of the Microsoft #WorkWonders influencer network this year and when they recently asked me how they could help me work wonders, I told them about my concerns about getting a home loan for my land and cabin.
Armed with my Surface Pro and a hundred questions written down on OneNote, I was ready to finally debunk many of the terms and myths about getting a home loan in Australia. So read on to find out what I learned from the meeting - aka the facts about home loans in Australia.
Bonus Tip: Do you think I just relied on what one bank told me? Absolutely not! I also called my parents after to get their opinion, as they own a few properties. I will also be chatting to Aussie Home Loans to get a great comparison report against all Australian banks. My parents said to shop around for the perfect home loan and not to feel obliged to stick with my bank.
- Australian banks require a 20% deposit on the total value of the home/land in order to lend money towards a home loan
- Australian banks can lend up to 95% of the total value of the home/land, however if I need to borrow between 80% and 95% I will be required to pay Lenders Mortgage Insurance
- Lenders Mortgage Insurance is insurance taken out on the loan by the bank and the amount is determined by what I borrow from the bank
- I was advised that I could pay the loan off in 30 years, however most people set to pay their home loans off in 20 to 25 years. Bonus Tip: The longer the term of the home loan, the more compound interest you pay to the bank. So don’t let them suck you into a 30 year loan, it could mean more than $50,000 in interest!
- I am eligible for the Great Start Grant, which is $15,000 given to new home buyers who build a new home or buy a brand new home. Unfortunately even though I am looking to take a home loan with my other half, we both don’t get the GSG – we only get it once for this loan. Still, it’s better than nothing!
- I asked if it was a problem that I am self-employed, and it wasn’t. I will need to prove my serviceability and provide my last two Tax Returns to determine exactly what I have been earning and what I will be able to afford.
- If I am gifted with a large sum of money to contribute to the loan, I will need to show 12 months rental history to prove I am capable of making regular repayments. This happens when parents assist their kids by paying their deposit for them.
- I could get my parents to go guarantee but I have already saved over $20,000 so there’s no point. Plus you actually end up owning the bank more money because interest is charged by compound – not by the variable or fixed home loan rate I might have on the loan.
- My other half and I have no credit debt or children (dependents), which is a big plus
- Stamp Duty is only applied to those buying property as an investment, where as we are buying property to live in ourselves, so we don’t have to worry about paying this. We also have no building or pest costs to worry about.
- We will be required to pay our solicitor to manage the paperwork and we will need to pay a registration cost to get the land put in our names once we make a purchase
- There are no restrictions for paying off the mortgage earlier – woo hoo! Although the banks will do everything they can in their power to keep you on the loan for as long as possible, so be mindful of this.
- If we initially choose a variable home loan, we can change it to a fixed home loan when we want to. But if we initially choose a fixed home loan, then it stays the same until the term is finished – most end after ten years as so much happens in the global market.
So what can we borrow? Based on our combined incomes, we can afford to borrow $660,000 – but we are capping this at $500,000. We don’t need a big home - smaller living, bigger lifestyle. Then we need to work out if we want a fixed or variable interest rate. We’ve been advised to go fixed for $250,000 and variable for $250,000, but with the variable pay more than we have to. And to choose fortnightly repayments as we’ll be paying 26 times a year as opposed to 12, and therefore reducing the compound interest/paying the debt off quicker.
For a 30 year term at $500,000 our weekly repayments will be $563. If we choose to take out a 20 year term at $500,000 our weekly repayments will be $704. We would both prefer to pay a bit more each week and get the loan paid faster to avoid paying the bank so much interest. Speaking of which, compound interest sucks. By the time we finish paying off our loan on a 30 year term, we will have paid the bank $390,000. Yup. So where possible, always pay more and quickly.