New research has shown that a majority of first home buyers are financially illiterate. Resolve Finance managing director Don Crellin explains what conversations brokers should be having with first home buyers to help overcome this.
The ME Bank recently found that while 70 per cent of respondents to their survey said they felt confident about making financial decisions and 50 per cent said they were confident when it came to the property buying process and related costs, 61 per cent of first home buyers failed a property buying literacy test.
It’s worrying that first home buyers feel confident signing on the dotted line with a low understanding of financial literacy behind them.
They could be signing off on financial decisions that are inappropriate for their circumstances, ones which will really cost them in the long run.
Financial literacy is one of the biggest money savers over time, especially when it comes to the biggest investment of your life.
Understanding the real costs associated with buying a home, in addition to the purchase price, is imperative.
We know how hard people work to save a house deposit, only to find they need to take a string of other fees out of that sum.
The changing lending environment — including amendments around interest-only loans, expenses and the introduction of other guidelines such as loan-to-income ratios — has actually yielded a positive shift.
The discussion and media reporting around changes in the financial landscape have encouraged deeper conversations and helped to improve financial literacy across the board.
Ultimately, it leads to a more informed and educated first home buyer and it is strengthening what we will achieve in the longer term with the changes that are flowing through today.
Here are seven things all brokers should tell home buyers before they take the plunge:
- LMI is coverage for the lender, not the borrower. It covers the lender in the event of not recovering the full loan balance from the borrower, who for whatever reason becomes unable to meet their loan payments.
- There are additional costs to factor in other than the purchase price of a property. Buyers will potentially need to factor in stamp duty, conveyancing and legal fees, pest and building inspection fees, mortgage registration and transfer fee, loan application or establishment fee, LMI, council and water rates. This may need to be subtracted from their deposit.
- While buyers have the ability to get a bargain at auction, it is never a “change of mind” purchase. There is no “cooling off” period on an auction buy. They also need to pay a sizeable deposit, usually 10 per cent at the fall of the hammer, so it will require access to tens of thousands on that day.
- Conveyancing is the process of transferring ownership of a legal title of land (property) from one person or entity to another. It typically consists of three stages: before contract, before completion, after completion. It is wise to engage a conveyancer to handle this process. A conveyancer is a licensed and qualified professional whose job is to provide advice and information about the sale of a property, prepare the documentation and conduct the settlement process.
- If buying a new home is a marathon, settlement is the finish line. It’s where legal possession of the property is taken via a process which includes: conducting a pre-settlement (or final) inspection, checking and signing the transfer documents, registering the transfer of ownership with the relevant government agency and making final payment to the seller. Most people use a conveyancer or solicitor to assist them through settlement, which generally takes between one and four months.
- An offset account is a savings account or transaction account linked to the home loan account. The account’s balance is “offset” daily against the home loan balance, and as a result, the buyer is only charged interest on the difference between the two. When it comes to a home loan, savings (however small) can accrue to a big difference over time.
- A mortgage broker helps customers identify the most appropriate lender (who is often a bank) and product for their unique situation. A broker negotiates the home loan on a buyer’s behalf, does all the legwork on researching the loan products, and supports clients through the application and settlement process. In addition, a reputable mortgage broker should guide a buyer on becoming financially literate. For example, Resolve Finance partners with customers over the process of saving for their deposit through to purchase via a range of flexible products from low deposit loans, Guarantor Home Loans and Parent Assist and My Home Plan (a specialised savings program dedicated to coaching first home buyers to save their deposit and get into their first home sooner).
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Don Crellin is the managing director of Resolve Finance.
After completing a double major in banking and finance at Curtin University, Don has been an executive manager for broker distribution at ANZ and an experienced finance executive in both Australia and New Zealand mortgage markets.
Resolve Finance has been operating within WA and Victoria for 20 years and is owned by Dale Alcock, owner of the ABN Group of Companies