Purchasing your first home does not need to be a daunting experience with Clark Finance Group’s team to assist you along this journey. We pride ourselves on our dedication to nurture and team up with our clients, through the finance journey. Ensuring you are not just a transaction and that your dream is our focus.  We look forward to hearing of the satisfaction and joy you will feel when, picking up your keys for the first time and knowing you are home

In this guide, we’ll explore everything you need to know about financing your first home purchase. We’ll look closer at “The 5 C’s of Lending”, Savings, Borrowing vs Purchasing Capacity, and First Home Buyers Packages.

We’ll also examine other ways to help with down payments and closing costs. With the help of this information, you can make an informed decision about the best financing option for your unique situation and take the first step on your journey toward owning your first home.

The 5 C’s Of Lending

The 5 C’s of lending are used to convey the credit worthiness of you as a borrower. Lenders will weigh 5 characteristics of the borrower and conditions of the loan – they do this to estimate the risks associated with lending you money.

But what are the 5 Cs?

1. Character

Character is reflected in your level of responsibility and willingness to meet your financial obligations. It refers to your overall history.

In a lending scenario, your character is strongly influenced by your credit report. With your authority a perspective lender will run a credit report to gather information. The report shows how you have handled credit in the past and gives an indication of how likely you would be to repay a loan in full. Character also includes your stability in employment and residential history.

2. Capacity

Capacity is determined by a number of factors, it is the way a lender assesses if you can afford the lending you are requesting.

Some factors to be considered are:

• Sources of income – are you salaried, commission based, self-employed or a casual worker?
• Are your living within your means- this relates to your living expenses both discretionary and non-discretionary, for example, how much money do you spend on recreation, online shopping and eating out?
• What are your current debts – do you have personal loans, credit cards, or utilise Buy Now, Pay Later services like Afterpay?
• Debt to Income Ratio (DTI) – is your debt to income ratio within risk range (ordinarily between 5 & 6 for most lenders)?

How we live day to day can impact on our ability to borrow money. Clark Finance Group will review your expenses with assistance of your bank statements and discussing any areas that may be of concern with you directly

3. Collateral

When it comes to mortgage lending – your collateral is your property. Your property will then be used as security for your loan.

When offering your property to the the lender, they will review a few factors which will include:

• Postcode – is the property in a metro, regional or rural location?
• Type of security – is it an apartment, townhouse, detached home, house and land package?
• Physical aspects of the property you are presenting – does it need extensive renovating, is it near major powerlines?

Depending on some of these factors, the bank will also determine what loan to value ratio they are willing to offer you.

4. Capital

Capital is how much you have available in funds to put towards your purchase. What is your contribution? Do you have savings? Have you sold an asset? Are you using grants? Is your family giving you a gift?

Lenders will typically want a minimum of 5% of your purchase price as a contribution. Be mindful that your purchase price does not include any additional costs or fees associated with purchasing a property such as conveyancing fees, transfer of land or registration of mortgage – these need to be added to your total on top of your purchase price.

5. Conditions

This refers to the conditions of the loan you are applying for. What you are looking for, the purpose of your loan and the criteria surrounding it.

• The purpose of loan – Owner occupied or investment.
• The Interest Rate – This is the amount that a lender charges you for the use of money on top of the principal.
• The Loan Term – Standard loan term is 30 years – How many years will your loan be for?
• The Loan Amount – How much are you asking to borrow?

Genuine vs Non-Genuine Savings?

Genuine savings can be simplified to mean ‘money you have saved up over time’.

Lenders will want to see these funds in a dedicated account showing regular deposits for at least 3 months. By putting away a little bit each month, it demonstrates that you are able to budget and shows a good pattern of behaviour (which goes back to Character)

Non- Genuine savings may come from a sale of assets, family gifted funds or lump sum payments such as lottery winnings and sale of items (like books, bikes etc.) 

How much in savings do I need?

Lenders will typically want a minimum of 5% of your purchase price. This can be in the form of genuine savings or non-genuine savings – even a combination of the two is acceptable.

Does paying rent or making additional repayments on my personal loan count towards genuine savings?

Some lenders will accept rental payments and additional repayments under their genuine savings policy.

What this means is they can see a pattern of behaviour of funds that would be used to repay a mortgage being completed by you. In these cases, you will need to provide a copy of your rental statement for the last few months from your real estate agent confirming all your payments have been made in full and on time; or in the case of additional payments – statements for lending that show the additional funds being made on a regular basis and can be redrawn if required.

Borrowing vs Purchasing Capacity

As a first home buyer; its natural to want to know what your borrowing capacity is, you want to know how much a lender is willing to loan you.

A lender will ask you how much income you earn and what your current debt situation is, from there they can give you an indicative borrowing capacity. Sounds simply and easy, and in truth it is.

HOWEVER, there is a difference between how much you can potentially BORROW compared to how much you can PURCHASE a property for.

The main difference between a borrowing and purchasing capacity is the assessment criteria for each. When a purchasing capacity is being assessed savings/contributions, concessions and grants, the type and location of the property, and the debt to income ratio are all considered.

However, when assessing the borrowing capacity only your income, current commitments and your living expenses are a looked at.

It comes down to your affordability to repay the loan. Sure, based off your income, commitments, and what you might want to spend you COULD borrow $1 million dollars – but when looking at the whole picture can you AFFORD to repay that?

At Clark Finance Group we look at both what you able to borrow and what you can afford to buy for.

Your borrowing capacity does not take into consideration how much you have in savings to contribute or the property you are proposing to buy.

We look at your contribution, the concessions available, if you are eligible for any grants, and what type of property you are looking at. We then work backwards knowing what the maximum loan to value ratio including lenders mortgage may be available to you.

Help Is Out There

Being a First Homebuyer can be an exciting time, however there can be occasions where you get disheartened as you might have missed out on that perfect home because you were outbid or feel like you will never be able to reach your savings goals – don’t worry though, there is help available that can give you an extra edge

Government Assistance Programs For First-Time Home Buyers

Being a First Home Buyer allows you the option to take advantage of different Government funded schemes and incentives – both Federal and State.

• The First Home Guarantee (previously the First Home Loan Deposit Scheme)
• The Family Home Guarantee
• The Regional Home Guarantee
• The First Home Super Saver Scheme
• First Home Owners Grant Concessions (stamp duty)

Check out the below helpful websites for more information regarding Government Assistance:

• https://www.sro.vic.gov.au/first-home-owner
• https://www.vic.gov.au/our-plan-help-first-home-buyers
• https://www.nhfic.gov.au/what-we-do/support-to-buy-a-home/first-home-loandeposit-scheme/

Who Else Can Help You To Purchase Your Home

Could you dream of owning your own house but struggle to find the funds for a deposit? Luckily, other options that involve your family members’ generosity are available to you.

One option is gifting of funds, where a family member can give you a certain amount of funds to use towards your deposit or purchase. Lenders may request a gift letter to confirm that the funds were given unconditionally without expecting repayment. However, if the funds require a refund, this can be added to your ongoing commitments to ensure correct serviceability.

Another option is to have a family member act as a security guarantor. For example, if a family member owns a property (with or without a mortgage), they may be able to use the equity in their house as security for your loan. While parents are typically the go-to choice for security guarantors, some lenders may allow other immediate family members to take their place.

Conclusion

Being a first-time home buyer is an exciting time. But, preparing and taking the time to research and consider