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The majority of hopeful first home buyers do not know what LMI (lenders’ mortgage insurance) covers, do not understand what conveyancing means and are not aware there is no cooling off period when buying property at auction.
Most people looking to buy their first home have low levels of financial literacy despite 70 per cent reporting they feel confident making financial decisions, a new survey has revealed.
The ME Bank survey of 1000 Australians – 325 prospective homeowners, 525 home owners and 150 investors – identified knowledge gaps at every stage of the buying process.
Eighty-eight per cent of surveyed first home buyers did not understand that LMI (lenders’ mortgage insurance) covered lenders, not borrowers.
And two out of three first home buyers did not know what conveyancing was, with 38 per cent mistakenly believing it referred to checking property boundaries or other physical matters with the property.
Before 23-year-old Ricardo Patane bought his two-bedroom apartment in the yet-to-be-built development Esplanade Norwest in Sydney’s Baulkham Hills he had “very, very basic knowledge” of the property buying process as a first home buyer.
Since then, with the help of his parents and solicitor, he’s armed himself with much more information, particularly about buying off-the-plan – the terms of agreement, government regulations and deposit requirements.
“Reading through the contract I learnt a few things. Prior to that I didn’t have any knowledge at all,” Mr Patane said.
He wasn’t surprised by the research, saying that among his friends there would be a “mixed bag” of results too.
“I’ve got a few friends who study business and commerce at university and they probably have more knowledge than others,” he said.
The survey results also pointed to a limited understanding of auction proceedings. Eight in 10 prospective buyers did not know there was no cooling off period at auction, while 78 per cent were unaware a deposit must be paid on auction day. However, it should be noted auctions are not as common outside of capital cities, and one-third of surveyed respondents lived regionally.
Taj Singh, founder of lobby group and mortgage broking service First Home Buyers Australia, said he was concerned by how little many hopeful first home buyers knew about the basics of buying a property.
“A lot of first home buyers that come to us have heard all the terms, but they don’t actually know what they mean,” he said.
Mr Singh recalled meeting a young couple from Sydney last year who were not aware there was no cooling-off period when they bought their first home at auction.
The couple had loan pre-approval but were not able to secure finance because the bank valued the property below the sale price.
“If you put down a five or 10 per cent deposit on auction day, you can lose it if you don’t get your finance approved after auction,” Mr Singh said.
“Luckily the vendor was extremely nice in this case and they only ended up losing 0.25 per cent [of the purchase price], which was just a couple of thousand dollars.”
Miriam Sandkuhler, director at buyers’ advocacy firm Property Mavens, said the survey results were not surprising, and the consequences of being clueless could haunt buyers for decades.
“It’s a gamble, and the scariest thing is they are gambling with hundreds of thousands of dollars,” Ms Sandkuhler said.
She said it could be risky for young buyers to rely on their parents for advice. “They might have only bought a home one or two times, and maybe not for 30 years,” she said.
Owner-occupiers and investors were more informed than their inexperienced counterparts but the survey identified several shortcomings in their knowledge.
Two out of three homeowners and investors were not sure what contributed to the amount of interest paid on a loan.
ME Bank’s Patrick Nolan said home buyers should seek independent advice. “Financial literacy is a valuable asset and one of the biggest money savers over time, especially when it comes to buying what is likely to be the biggest investment of your life.”
Mr Singh said Google also played a significant role in many buyers’ property research. “A lot of people are typing in ‘How to become a first home buyer’ in Google. They feel that’s the only place to go.”
Basic property terms every buyer should know
LMI (Lenders Mortgage Insurance): A fee paid by the borrower that protects the finance lender if the borrower defaults on the loan. Generally needed when the deposit is less than 20 per cent of property’s purchase price.
Conveyancing: The legal process involved in transferring real estate from one person to another. Conveyancers often provide advice on sale contracts, investigate property titles and assist buyers in meeting legal obligations.
Cooling-off period: A set number of days after a purchase in which the buyer can cancel the transaction. There is no cooling-off period for properties bought at auction.
Offset account: A savings or transaction account that is linked to a home loan account. The balance can be offset against the home loan balance, meaning borrowers are only charged interest on the difference between the two.
Home equity: The difference between the market value of a property and the amount still owed on the home loan. Some homeowners use equity to borrow more money to purchase an investment property or pay for renovations.
With this information you should be a bit more aware of what all the real estate jargon is about when you purchase your first home.
Click here for a copy of our Guide to Buying a Home