6 Things to consider before buying a house

So you’ve worked hard to save up for a home loan deposit and you’re probably concerned about the potential pitfalls ahead. It's clear that 2023 could bring some headwinds.

On top of higher interest rates, the risk of becoming a mortgage prisoner—somebody who cannot refinance their loan due to a lack of equity—is becoming a reality for an increasing number of borrowers. 

So, if you’re just getting started and feel anxious about the challenges you may face, we’ve compiled a list of mistakes to avoid and strategies to implement. With the right guidance you can achieve your goals a lot easier and with a lot less stress.

1. Figure out your housing expenses

Are you earning enough to take care of the regular repayments? Be sure to use a home loan calculator to figure out your monthly repayment expenses. Do keep in mind that the size of your initial deposit and the length of the loan length can increase or decrease repayments.

While you may be able to afford the monthly repayments of a home loan with a smaller deposit - say, lower than the 20% LVR (loan-to-value ratio) mark - there are other expenses to consider. For example, you’d typically have to pay lenders mortgage insurance (LMI) on a deposit below 20%. 

It’s important to look at the purchase price of the property that you want, but that isn’t the only thing you should consider as you enter into this investment. Keep an eye out for additional expenses such as stamp duty, building inspections and strata levies.

2. Consider a home loan guarantor

Are you going to buy a home but don’t want to spend the time waiting to save up the 20% deposit? With a smaller deposit your principal will be larger, but as long as you have the financials in check you should be okay. 

Still, you might be wondering if there is a way to avoid lenders' mortgage insurance for having a lower deposit. That’s where home guarantors come in. In short, a home guarantee is where someone offers part of their own equity as collateral in case you can’t pay back your loan. This means that you can pay a much lower LVR (like 5% of the deposit) without having to pay LMI.

3. First home buyer schemes

While you can have someone guarantee your loan, the federal government actually offers a “first home guarantee” (FHLDS) scheme that functions in a similar way. The difference is that—while a home loan guarantee is usually a family member—the FHLDS scheme has the government act as a guarantee. Keep in mind that this is restricted to first home buyers earning below a certain threshold so be sure to read the conditions. 

Also, state governments offer their own first home buyer grants. Usually, these have exemptions to stamp duty, or a lump sum payment. However, they vary on a state by state basis so check the details of your specific state.

4. Check out auctions

While looking for a new home to buy, it’s likely you’ve passed over auctions. While it may be better for most people to participate in private sales, auctions do have their advantages that may work well for your personal circumstances.

One advantage is that the process is usually a lot faster, taking far less time than the sometimes months-long process of private sale. You can also end up paying a lot less than you otherwise would have if there is a lack of demand. 

However, with auctions you need to make sure you have the deposit (usually 10%) ready on the day. Combine this with prices that can ramp continually for in-demand properties and you can see how those on a tighter budget may find auctions too far out of reach.

5. Make sure you’re not at risk of becoming a mortgage prisoner

With a sharp increase in interest rates from the RBA’s hikes, more borrowers have begun to find their mortgages increasingly unstable. While higher repayments are encouraging more to switch their home loans, a lot more are finding themselves stuck into the mortgage prison trap. 

So what are mortgage prisoners? In short, a mortgage prisoner is a borrower who doesn't have enough equity to refinance their home loan. If you’re at risk of becoming a mortgage prisoner, it’s best to assess ways to avoid mortgage stress as once you’re in mortgage prison it can be difficult to get out.

6. Compare home loans

You may be tempted to rush into your home loan and take out a mortgage with the bank you’ve been a part of for ages. 

However, utilising a comparison site like Mozo can help you to make comparisons on all the best home loan providers. Are you a first home buyer? Or maybe you’re a refinancer? Either way we have you covered with our home loan comparison tools.