It’s fair to say it’s an unusual time to be a first home buyer. But there are still opportunities out there for those whose jobs haven’t been affected by COVID-19. 

Here are five key talking points we’ve been regularly discussing with first home buyers in the current market.

1. Is the First Home Loan Deposit Scheme (FHLDS) still available?

Many first home buyers have been saving their home loan deposit over the last 5-10 years, trying to reach that magic 20% figure where you don’t have to pay Lenders Mortgage Insurance (LMI).

But a new path recently opened up for first home buyers: the FHLDS.

Places in the scheme, are still available and can allow eligible first home buyers to purchase a property with a deposit of just 5% without having to pay LMI.

If you’d like to take advantage of the scheme, give us a call and we can help you through the process.

2. Has it become tougher for first home buyers to get a loan in recent months?

This will depend on your individual situation and how much coronavirus has impacted your household’s bottom line.

Interestingly, though, the latest Australian Bureau of Statistics data doesn’t suggest it was any tougher for first home buyers to get a loan in February than the previous few months.

Indeed, over the month, home loans for owner-occupier first-home buyers increased by 0.4%.

That said, COVID-19 didn’t really start impacting the Australian economy until March, so we’ll keep monitoring the data for you in coming months.

3. I heard QBE is no longer insuring borrowers from distressed sectors?

One of Australia’s largest insurance groups, QBE, has temporarily suspended offering LMI to specific groups of new mortgage borrowers, such as those working in hospitality, tourism, gyms and beauty salons.

The good news is that Australia’s other major LMI provider, Genworth, told the AFR it has no plans to change its existing position on LMI, stating that it trusted lenders to “apply responsible lending standards and assess applications on their merits”.

Also, if you’re taking out your first home loan through the FHLDS, remember that the whole point of the scheme is that you don’t have to pay LMI – so that’s another reason to consider applying.

4. Are lenders requiring evidence that my income will be stable?

In the current COVID-19 climate, it’s safe to say that lenders will be scrutinising your income and will require sound evidence that your income will be stable.

This shouldn’t create too big a headache for those employed in essential services, such as a Coles permanent employee, a pharmacist, or an IT professional in a government department, for example.

But others in less coronavirus-proof industries may find it more difficult to prove their income is stable.

For example, some lenders are no longer accepting bonus income for borrowers outside essential services, unless their employer can write a letter to say that the bonus will continue to be paid out at the current level.

Your best bet is to give us a call – we can run through your situation and help you identify

any areas that may be an issue in advance.

5. I heard valuations are coming in lower than the contract price?

There’s no shortage of recent stories out there of valuations coming in lower than the contract price, and the gap is proving difficult for some off-the-plan buyers to make up.

So if you’re a first home buyer and you’re worried about a lower valuation then please get in touch. We can run through the options that may be available to you to make up the shortfall, including going through the FHLDS (mentioned above).

Give us a call

Buying your first home can be a bit overwhelming at the best of times, let alone during a period of uncertainty and rapid change. Rest assured though that we’re on top of it.

So if you’d like us to help you explore your options and secure a competitive home loan then please get in touch – we’re ready to jump into action and make it happen for you.

For some homeowners, mortgages are a set-and-forget proposition. They get what they think is a good rate, before then turning their attention to other priorities. This is not a good strategy at any time, much less the time we’re in now.

Rates and lending conditions change significantly many times during the life of a 30-year loan. And now is as good a time as any to get the best deal.

It’s important for people to refinance because the rates have come down so significantly, and we’re seeing a lot of customers on old rates,

For those looking to refinance, the pandemic has been a blessing in disguise, with central banks taking a sledgehammer to rates in an attempt to stimulate their economies.

Further still, the Reserve Bank has signalled that it expects rates to stay this low for the next four years.

The board will not increase the cash rate until actual inflation is sustainably within the 2%-3% target range, RBA governor Philip Lowe said in his policy decision statement. The board does not expect these conditions to be met until 2024 at the earliest.

In 2020, at the peak of COVID, not only did we see a number of rate cuts, but there was a lot of government support around the whole self-funding market.

Banks have passed along most of the cuts.

We’re now seeing a number of the big banks with 1.99% fixed rates for four years. If we rewind a year, rates were 1%-2% higher across the board, so it’s the best time in history for someone to look at refinancing if they haven’t already,

Competition heats up

The majors are very competitive at the moment due both to the rate cuts and favourable lending facilities.

The RBA subsidised some of the wholesale lending market through its term funding facility (TFS), which it introduced at the height of COVID as one of the fiscal stimulus measures that underpinned lending in the economy, Effectively, it’s a 0.25% lending facility.

For a customer with a $400,000 mortgage, refinancing to an interest rate of 2.54% represents a saving of $219 per month or $2628 over 12 months [for a 25-year loan, paying principal and interest],

Refinancing is about more than just the rate. There are a range of reasons why customers may want to refinance their home loan,

The traditional way of looking at refinancing is to get the cheapest interest rate. Today, the best approach is to understand what your goals are over the short, medium, and long term, and whether the refinancing meet these goals.

It can be as simple as wanting a better interest rate or, as we are seeing at the moment, a cashback offer. It may be that they are wanting to draw some equity but the existing lender is not willing to lend the additional funds, or the customer may have had to go with a non-mainstream lender for their loan and is now in a better financial position to move to a mainstream lender.

The length of the loan term is also a key variable that will influence how much you pay in the long run. If a consumer refinances to a cheaper interest rate but reverts back to a 30-year loan term, they may end up paying more than if they stayed in the higher interest rate.

Getting started

Hemmings says any time is a good time to look at refinancing. Consumers should be reviewing their loan annually and deciding whether the existing loan continues to suit their needs.

Like any process worth doing, it takes some homework. Any new lender is going to want to see if the consumer can afford the loan, so will verify all income and living expenses. They will also want to see the repayment history of the loan being refinanced to make sure the consumer is repaying the loan on time.

“s it stands at the moment, it is no faster doing a new home loan application than it is a refinance, and come loan settlement it can actually be slower as the lender losing the consumer can wait up to 20 days before processing the settlement.

A mortgage broker could be the next port of call.

As of January 1, the ‘best-interest duty’ applies to mortgage brokers, so consumers can be assured they’ll have someone acting in their best interests, whereas banks don’t have that obligation.

Brokers will help match your short-, medium- and long-term goals with the loans on offer. They’ll help ensure you’re getting a great rate and low fees, while also matching other features to your needs.

They should then stay in touch with the client to make sure the loan continues to suits their needs.

Fixed versus variable

Borrowers then need to decide whether to go with a fixed or variable rate. There are pros and cons with each.

Variable rates provide the borrower with far greater flexibility over a fixed rate. In the end, you may be able to pay off your loan faster because refinancing is easier and doesn’t incur the break fees usually incurred when refinancing from a fixed-rate contract.

In addition, the holder of a variable-rate contract stands to benefit if the bank’s funding costs drop. Funding costs are made up of more than simply the cash rate. It’s also dictated by things such as the rate at which banks lend to each other, the credit spread demanded by institutional investors and deposit pricing.

By the same token, variable rates can increase for the inverse reasons.

It’s a complex mix of variables and a change in any of these components may cause banks to adjust their lending rates in either direction.

A strong case can be made for fixing your rate. The Reserve Bank has signalled that rates are unlikely to drop further, providing guidance only as to the conditions that would need to be in place for them to go up.

Given where we sit in the interest rate cycle, and if you don’t think the cash rate will go into negative territory, currently fixed rates are well ahead of variable rates. So, we’re seeing fixed rates well below 2% while variable rates are in the mid 2%.

If you sit in the category of a borrower who’s in an owner-occupied property, not looking to sell in the next few years, then a fixed rate is something to look at closely.

On the other hand, by fixing the rate you give up some flexibility.

Generally, the more interest rates have come down since you took on the fixed-rate loan, the higher the break fee will be.

Fixed-rate loans also have fewer features. It’s unlikely you’ll be able to redraw funds or link to an offset account.

Choosing between fixed and variable isn’t a totally binary decision. You can have a bit of both worlds by splitting the loan.

You take advantage of two different types of facilities, playing both sides, where you get the fluctuation of the variable rate but the fixed component adds some stability to your cash flow.

Equity plays a key role

The loan-to-value ratio compares the size of the loan to the amount of equity in the property. At times when the market value of the property may have dropped, this becomes important in any refinancing offers.

It is best to have at least 20% equity to avoid paying lenders mortgage insurance. However, even a loan that has an LVR above 80% can be refinanced, but new lenders mortgage insurance will be payable thereby increasing the cost of the new loan.

Establishing equity is not consistent across the industry; lenders assess it differently.

Although you may have more than 20% equity with one lender, when you apply to the new lender the valuation on your property may come in a little lower and move you over the 80% LVR hurdle and lenders mortgage insurance will become payable.

Some banks may ask you to inject capital to reduce the LVR. Again, whether you go down this road will depend on weighing up whether this is the best allocation of funds for your circumstance.

The conversation may be, If we do inject that capital into the loan, we may lose that liquidity until you reapply for a facility to take the cash back out. Maybe you want to use that capital to buy a car or make some other investment.

At the end of the day, it’s about matching your goals and needs to the products offered by the market. Both will change as we move through life, so your mortgage should too.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.

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