Pros and Cons of Building Your First Home
Make 2022 The Year You Start Your Journey As A First Home Buyer
Transcript of: Pros and Cons of Building Your First Home
Building your first home can be a daunting experience. It’s a lot different than buying an established house where you basically go and buy it, and you move in within a couple of months. Before you embark on this process, it’s important to know the pros and cons of building your first home, and that’s what we’re going to talk about today. Let’s roll!
Hello, and welcome to the First Home Owner Concierge podcast, where our sole target is to get you into your first home. Now onto today’s topic.
Today, we’re going to go over four pros and four cons of building your first home. The idea is for you to get a solid understanding of what you’re in for.
Just briefly before we start, if you’re thinking about buying your first home, then you need to engage a good mortgage broker, like the team here at Will Bell Mortgage Broker, a good broker will do the heavy lifting for you, and help you into your first home. If this is you, we’d love to hear from you. Now, onto the show.
First, I’m going to go over the first four pros, and then I’m going to go over each point in more finer detail.
Pro #1: Get to live in a home that you designed.
Pro #2: Get in the market off a lower deposit.
Pro #3: More government incentives.
Pro #4: Save on stamp duty.
Pro #1: Get to live in a home that you designed
There is a satisfaction you get when you design your own home. No doubt about it.
For some people, that feeling is going to be more of a pro. But in terms of the actual pro, that isn’t much that needs to be said about it. Something that you live in that you designed yourself, you feel that ownership and kind of feel a sense of accomplishment over what you’ve done.
Pro #2: Get in the market off a lower deposit
There are few reasons for this, which is related to the third pro of government incentives.
I made it a separate pro because the reality is that, for a lot of first home buyers, purchasing an established property is not an option because they are unable to save the amount required for deposit, or it will take a really long time to do so.
The major disadvantage of waiting until you’ve saved the amount that you need for an established property is that the property market increases which will then mean you need to go back and save more money.
I’ve literally seen people do this over periods of years whilst the markets moved one or $200,000 up.
The other disadvantage is that it is hard to predict if the same government incentives will be there. By the time you’ve saved up enough deposit and are ready to buy.
Pro #3: More government incentives
Right now you have access to the New Home Grant. What that does is allow you to put 5% down as a deposit without the requirement to pay any lenders mortgage insurance. I won’t go into how this game works because it’s pretty much the same as the FHLDS (First Home Loan Deposit Scheme) which I’ve talked about in detail in previous episodes.
What you need to know is that you need to qualify for it and it is limited to a certain amount of spots. Right now the spots are plentiful. So if you’re buying soon, you probably won’t have any problems there.
The issue is that if the grant expires, which is what we’ll talk about when we get to the con of buying untitled land.
You also have access to the First Home Owner Grant, which is the original grant that started over 20 years ago. Since then, it’s morphed into an incentive for new homes.
If you’re in Metro Melbourne you get $10,000 as a part of your grant. And if you’re classed as regional, you get $20,000.
Pro #4: Save on stamp duty
Stamp duty costs vary from state to state. In Victoria where I am, the state government allows for first home buyers up to $600,000 on a purchase to be free of stamp duty, and then up to $750,000 you get a discount.
What a lot of people don’t know is that the stamp duty is calculated off the land value only.
What this means is that, if you’re buying a land under $600,000, you pay nothing for your stamp duty.
To give you some idea of the savings, your stamp duty would normally be about $300,000 on a $600,000 block of land. This is money you would have previously had to save up to get into the property.
One thing to note here is that if you are going for other schemes, it will have to comply with the rules of those games as well.
For example here in Victoria, the New Home Grant cap is $850,000. If you’re buying a block of land for $600,000 Then you’d only be able to build for a maximum of $250,000 to access that scheme.
Now $250,000 obviously isn’t that much for a build these days, so you need to be aware of these things.
Hey guys, I hope you’re enjoying this episode. I quickly wanted to send an important message to you as a potential first home buyer, which is that in my 15 years of helping first homebuyers with home loans, I’ve noticed the winners aren’t necessarily the smartest, it’s the ones who take action.
If you’re looking to get into the market, please book a time and have a chat with us today and we can explore how we can get you there as soon as possible. Also, we have plenty more content on our Facebook and YouTube pages, so if you like what we’re putting out, please follow us for more awesome information.
Back to the episode.
Now we’re going to move on to the cons. Again, I’m just gonna go with the first four and then I’m going to go into them in finer detail.
Con #1: It is a lot more complicated. Finance can be harder to achieve.
Con #2: Unexpected costs are not financed.
Con #3: Untitled land.
Con #4: Rising build costs.
Con #1: Building your first home can be a lot more complicated
So number one, it is more complicated. When you buy an established property, it is as I mentioned at the top, a very easy process compared to the construction process. You bought a house then usually 60 days later, assuming finance goes well, you’re into the property.
When you’re building however, it’s a lot more complex.
You quite often have to wait for the land to title, the finance has to be ready when the titles are ready, which is hard to predict. The finance also has to be ready when the building plans have been approved by the council. And the builder is ready, which can also be very hard to predict.
This may mean home loan approvals can expire and loan applications have to be resubmitted, and re approved.
If the home loan applications are declined, it would mean having to move to a new lender to get the home loan approved.
This particular risk can come up if you haven’t sold your building contract prior to the land settling. So what happens in this scenario is you need to get the loan approved for the land because obviously it’s settling, you need to pay for that. And that’s what the home loan does.
But then once the build contract is ready, then you need to get a second approval for the construction.
The fact that in this scenario that you have to get two approvals is a risk because you’ve got the risk of getting your first loan approved, which is your land loan, and then you’ve got a risk because if the second loan doesn’t get approved, and say for example, you’ve paid mortgage insurance already on the first one, you don’t get that refunded.
It can also be complicated dealing with builders. If you’re working to a budget, you need to be very clear with them.
Quite often sales people for builders will get you to sign up too early just to get you to sign on the dotted line, then they can change and personalize things to your liking. These are known as post contract variations.
This brings us to our second issue.
Con #2: Unexpected costs are not financed
The problem here is that once you have the contract, you should seek to get your finance sorted as soon as possible, assuming the land has already been titled or will be titled soon.
The issue is that once the loan is approved, it does not include any changes you make. Therefore, any increased costs in the changes you make will have to be paid out of your pocket.
There can also be additional costs which were there in the contract. For example, things such as fences, driveways, curtains, are things that can be left out.
These additional expenses can leave you financially strapped right at the point when you’re settling, and you actually need that money to pay for things like furniture and white goods.
Con #3: Untitled land
During the process of developing land, there comes a point where the government has to authorize the creation of the individual lots. This part of the process is known as “registration of title”.
When you’re buying land that is not yet registered, you don’t know when the title will actually be ready. And the bank can only settle on the loan once the title is ready, and that is what they’re going to hold the mortgage on.
The land developers will tell you when they estimate the titles will be ready. But that can often just be a guess.
I’ve seen these guesses out by over 12 months on a regular basis. I’ve seen probably two years. I’ve definitely seen more than two years before.
If the land will not title for 12 months, even if you can manage to get an approval, the approval would just expire as too much time has passed and the lender will want to reassess you for the home loan at a time closer to the settlement of land. This can be an issue if your circumstances change and you can no longer get the loan.
Con #4: Rising build costs
Con number four is rising construction costs. This has been more of an issue in recent years as the pandemic has led to the supply of materials to be short. This has meant the cost of materials has increased.
I’ve witnessed costs increased by more than $100,00 for some builds. You’re generally okay if you can sign a contract within a quick timeframe, as the builders have to give you what is known as a “fixed price building contract“.
If there is time to go until you get your contract sorted, then you can be subject to price rises. Again, this is concerning if you are working to a budget.
That’s it for the cons.
The Wrap Up
That’s it for another week. I could have spent an hour or two on this topic because once you go down the rabbit hole, there is a lot of things, it is a complicated process. My intention here is just to get you to understand the major points when it comes to building your first home.
If buying new is something that you are deciding on, then feel free to contact us. Helping first homeowners get into their first home is what we do so please don’t hesitate to reach out for help. Till next time!
Thanks for listening to today’s episode of the First Home Owner Concierge podcast.
If you’ve got any questions or you would like to get into your own home, or you just want to stalk me online, you can search Will Bell Mortgage Broker on either Google or Facebook.