Pro tip: First home buyers can get $4500 at settlement & cheap LMI
For anyone contemplating buying a first home, or trying to help a friend or client crack into the property market, you’ll know that every cent counts – especially for those who only have a 10% deposit (or less). It seems recently that too much attention is being paid to comparison rate for first home buyers – and this is leaving those first home buyers with small deposits with poor information to make an informed decision.
Why is comparison rate a highly flawed measure for first home buyers?
Comparison rates are typically designed to model a scenario of a $150,000 loan size over a 25 year period. They try to take into account fees that will be encountered in establishment and annual fees. However, more importantly for first home buyers, they don’t take into account the cost of the lender’s mortgage insurance premium nor do they take into account any rebates that you might receive from your new lender. Furthermore, it is commonplace for young borrowers to take 30 year loan terms (not 25) and, similarly, it is commonplace for young borrowers to refinance or restructure every three to five years.
What should a first home buyer with a small deposit be looking for:
- LMI costs. They literally vary to the tune of thousands of dollars on a standard loan size. For example: The LMI premium for a $450,000 loan size at 95%LVR is ~$15,480 with ING and ~$12,645 with Westpac. It is also worth noting that there are ways to avoid LMI and this should be investigated upfront.
- Rebates. If you’re eligible for a rebate at settlement you’ll be starting off with a smaller loan amount (ceteris paribus). You’ll also have monies to pay the LMI premium. Given that a lot of first time borrowers look to personal loans and credit cards to fund their deposits (often at 10%-20%p.a. interest) – this will often save a lot of money in interest charges.
- Exit charges. Assuming you’ve found a deal with no LMI or cheap LMI – the headline interest rate may not be the sharpest. This probably means that when your LVR is below 80% you’ll want to refinance to a cheaper deal. Get clarity upfront as to what the costs to exit will be. For many scenarios, the costs of exit will fall to ~$500 within 2 to 3 years.
- Headline interest rate. It may not be the most important factor, but if you’re intending to make the contracted repayments, it will definitely be a factor to consider. The interest rate needs to be evaluated in the context of the total cost of the finance. Evaluating the rate in the context of all fees and charges over the likely period you will remain in the loan is often called the Average Annualised Percentage Rate (AAPR) or effective rate.
- Credit policy. Lenders have widely divergent hurdles and criteria for approval. The two most common hurdles we see for first time buyers is rental payments not being counted towards their genuine savings and small units not being acceptable to the lender. You simply need to enquire elsewhere or consult with a credit adviser if you’re encountering a decline because of these reasons.
How do I get $4500 at settlement and cheap LMI?
For a limited time only Naritas is offering a promotion in conjunction with Westpac’s Flexi First Option Home Loan:
- $4500 rebate at settlement (T&Cs here).
- 4.19%p.a. (CR 4.2%p.a.)^
- Only available to buyers eligible for the FHOG who are submitting their FHOG application with their home finance application.
- Maximum LVR 95% – LMI can be capitalised to 97% LVR.
- Unlimited free transactions across Westpac branches, Westpac Group ATMs, eftpos, Westpac Telephone Banking and Online Banking (Other fees apply including for the use of non-Westpac Group ATMs and overseas ATMs.)
- $0 establishment fee and $0 ongoing fees.
- Minimum 40sqm unit size.
- For LVRs over 80% a minimum of 5% genuine savings is required.
Who is this deal suited to?
- High LVR (90%+LVR) borrowers looking to offset the costs of purchasing a new home (conveyancing, pest and building inspections, LMI, etc). If you’re borrowing at 80%LVR (or less) deals like this one may suit you better.
- Borrowers looking to get a sharp price on LMI: Westpac LMI at 90%LVR+ on a $350K+ loan size is between 0.2% and 0.8% cheaper for that premium than low rate lenders like ING. Source: Westpac LMI rate card & ING LMI rate card. For example: LMI premium for $450,000 loan size at 95%LVR = ~$15,480 with ING and ~$12,645 with Westpac
- People who don’t qualify for low rate offers due to their high LVR (most discount offers require LVR lower than 90%) or because of their lack of genuine savings. NB: Westpac will allow up to 6 months of rental payments to be included towards genuine savings calculations if the applicant’s repayment history and credit profile is strong.
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^Comparison Rate. This comparison rate is based on a Flexi First Option Home Loan of $150,000 over the term of 25 years. WARNING: The comparison rate applies only to the examples given. Different amounts and terms will result in different Comparison Rates. Costs such as redraw or early repayment fees, and cost savings such as fee waivers, aren’t included in the calculation of the comparison rate but may influence the cost of the loan.