First Home. Doable? Advice Please.

This isn't so much about property investing, buying our first home...but this seems the most appropriate place.

And just FYI, we haven't been to anyone for advice or talked to any lenders yet as we've just started looking at this. Looking for some advice from you all before we do to see if we should even proceed to seek that advice as we really have no idea.

What we want: a 10 year, ~$133,000, 95% LVR loan to totally cover land and small house build.

Our situation: Two of us applying for joint loan with combined income of only $55,000 after tax. We're eigible for the FHOG. We've been renting together for over 5 years at the same place at $320 per week. One working FT, the other working PT from home. No kids.

We currently live in melbournes far outer eastern suburbs and are looking at land that's about an hour and a half drive further north east. We're looking out there primarily as the land is super cheap from $40-50,000 depending on size and how flat the block is. This will result in an hour and ten minute commute each way for my partner, for which he is happy to compromise on considering the money saved.

So are 10 year loans even possible? Are they harder to get or just less common? After a quick search around I haven't found anything referring to 10 year home loans. The closest I've seen is for 10 year fixed periods (for longer loans). But all the banks calculators allow you to choose 10 year so I figure yeah.

The interest rate would be increased I assume? But by how much? During the quick search from the paragraph above I saw the ten year fixed rates at ~6.7%. Would that be about right?

Stamp duty is paid only on land right? And is reduced for first home owners? I went to an online stamp duty calculator and it spat out something in the $900 range...so stamp duty seems negligible.

This is our back of the envelope calculation based on the stuff above:
+ $144,000 House and Land Cost
+ $1,000 Stamp Duty
- $10,000 FHOG
- $7000 Deposit
= $133,000 Loan at 6.7% for 10 years.

Which would result in repayments (according to online repayments calculstors) of about $351 per week, plus mortgage insurance at about $7 per week.

Similar properties to what we want to build in the area are selling in the $180,000-250,000 range. We plan on being here for a while, but for arguments sake even if we sell after 3 years I figure this will still be worthwhile. Say the total cost we've put into the house and what we owe is $205,000. We sell for $180,000 and after taxes and fees etc we have $162,000. At this point we're $43,000 down. But we paid $351pw in repayments for three years which is $54,756. So all in all we'd be +$11,756. Which over the three years averages to about $75 per week, so we'd still be better off than if we'd just continued renting.

To me this all seems doable, but Im proably missing something. In your opinion, should we proceed with this and get some professional advice?

 

Your situation seems a little unusual to me - you want to pay more money to live another 90 minutes further out from the city? Seems like a classic example of when renting might be the better idea.

Is the problem the lack of deposit?

 

30 Year loan and pay it back in 10 if that's what you want to do. A lot more flexibility

 

But at least we can get some of that money back. Even at worse case scenario we'll get back $75 per week so we'd have paid less than we would have for rent anyways. No? After ten years of renting at 320pw we could have nothing. Or after 10 years of paying a mortgage at 358pw we could have a property worth ~$200,000. Seems worth it to me.

And doesn't a 30 year loan mean a lot more interest paid though?

I don't know haha

 

10 year loans are possible but I would recommend considering if its going to give you the best outcome - here are my thoughts:

1. Would it be better to jump on a 30 year loan so that a) you have stronger servicing for future loans and b) you have a lower commitment in case something happens, i.e. god forbid you lose your job, etc.

2. Instead of paying down the loan would it be better to save all the principle repayments in an offset in order to have more funds to execute other investment goals? We are heading into very low CG territory so we can't rely on increased CG to fund future purchases. Accumulating funds becomes ever so important.

Paying the loan off in 10 years may still be the best option for you but first consider your strategy (e.g you want to purchase anther 3 properties within the next 24-48 months, etc) and then make sure the correct structure is in place to support the strategy.

 

Just to be clear. This is not an investment property. This will be our home...hopefully for at least 10 years.

 

@DBos - some obviously see property as an investment so have a one size fits all response.

You're clearly after something as your ppor not an investment. The suggestion that a 25-30 year loan is a good one reasons being:

• Standard length of loan
• Low interest rate
• Offset account (for any spare savings)
• You can pay this off as slowly or quickly as you like provided you meet the minimum monthly repayment

As you're looking to pay out the loan in 10 years, stick with this goal and make the repayments at the higher amount.

As you're not seeking further investment opportunities, concerned about growing a portfolio, leveraging etc, then an interest only loan would leave you owing the same amount in 10 years as the original borrowed amount. As the area may not experience strong capital growth, ot may mean that you could owe more than the house value in 10 years if you sold - always a risk with interest only loans. On the upside, the repayments may be slightly lower than p&i loans.

 

I guess what I don't get is you say that if I want to pay it off in ten years, then do that but on a 25 year loan just paying more than minimum repayments. But if I intend to pay it off in 10 years regardless, why wouldn't I go with the 10 year that includes $50,000 interest vs the 25 year that includes $90,000 interest. If it's 10 years regardless why not go with the one that is $40,000 less? You're saying choose the 25 year loan, paying it off in 10 years, but for more per week than the 10 year loan would have been? That doesn't make sense to me. I obviously don't get it. Can you explain why that's a better option?

thanks for the replies so far btw

 

If it's not going to be home for ever, it's even more important to not pay it off. If you decide to turn it into an investment and move into a new home, your would have a non-deductible loan on your new home and a fully paid off IP.

I know you might sell, but if there's no capital growth and it's a way out of town, selling might take time and having funds available to buy when you want to gives you many more options.

So much can change in 10 years, it's worthwhile keeping your options open - and having ready access to cash does provide that flexibility.

Offset accounts have the same effect as paying off your loan, so work out what your payments will be to pay it off in 10 years, and save this into your offset account.

 

If you pay it into your offset account as though it's a 10 yr loan, the interest you pay will be the same as if it's a 10 yr loan. It's only more if you take longer to pay it off.

 

Yeah thanks. After your last post I realized I don't know what an offset account is. So off to do do a little more research.

thanks

 

You will only be paying interest on the period & principal outstanding ie if you pay it off within the first year you will only have paid a year's interest but if you drag it out then yes it may be $90k over the term of the loan.


An offset account is an account where any money banked in it isn't considered a repayment but is offset against the loan when the bank calculates the interest owed. That is, if you have a spare $10k the bank calculates the interest on your loan as if you ha d paid this money into the loan ie offsets the loan. The downside is that you get zero interest.

 

I do a lot of low deposit construction loans for fhbs.

I have some concerns about the cost of your home. What sort of construction method are you considering?

Banks only lend on a fixed price contract, and I haven't seen many under $150,000 (for the build alone, no land) for about 10 years.

Build costs are generally more expensive the further you go from established areas (suburban fringe excluded) as the builder needs transport materials and organise trades outside of their usual area.

If it's a kit home, relocatable home, or owner build you will struggle getting finance. You may struggle anyway based on the postcode you are looking at, or comparable sales for the banks valuer.

As others have said take a 30 year loan and pay it off over ten years. It is possible to get a 10 year loan, but with your income the lenders may not seem you eligible for the higher repayments on a shorter term anyway.