So you’re about to buy your first house or invest in another property? Before you start your search or visit any open homes, find out all the things you need to have in place so that when you do find that dream home, you can go for it.
Our latest Masterclass Online speaker Emily Power writes…
These steps will set you on a path to saving in earnest, before the fun stuff – the property search, and winning the keys – starts.
1. How low can you go?
The amount of debt you carry will influence how much a bank will loan you for a mortgage, so reduce your debts, such as credit cards and personal loans, by as much as you can, as fast as you can.
Before you start saving in earnest, you may want to chip away at your debts first (as I did) by allocating the amount you would wish to save to instead paying down those obligations. Find the wastage in your spending and decide, ‘what do I need each week?’ and ‘what do I want?’.
Forty40 Finance principal Will Unkles (a financial advisor and mortgage broker) specialises in first home buyers, and in the book he says he recommends to his clients establishing ‘needs’ and ‘wants’ buckets, with lists on paper, to work out where significant savings can be made. He also sticks a motivating reminder note to his clients’ bank cards, to help stay their hand at the shop register if they whip out the card out to pay for an item which is a want, and not a need.
2. Target practice.
It is never too early to have a chat with your bank manager about how much you could borrow, based on your personal circumstances (debts, salary and other assets). Give yourself a target. Saying “I want to buy a home” is not specific-enough motivation, and puts it in a seemingly insurmountable, too-hard basket. Like a football team aims for a premiership, have a clear goal to strive for.
3. Honesty is the best policy.
Be truthful with real estate agents on your budget (not to the pin, but in a price range) and desires in a property. Draw up a specific list of what you want; what is non-negotiable, what you can compromise on and what you can live without. For example, I can go without an ensuite, I would compromise on a kitchen island bench, but I absolutely would not buy a property that shared a communal laundry.
Do not be backward in sharing your financial realities with an agent. They may not have a home on their books, now, that is right for you, but if you can demonstrate that you are a serious buyer, with your finances in order, they will contact you when something more appropriate is listed with them, and before that property is publicly advertised. You can get ahead of the pack by being transparent with real estate agents. They are not the enemy.
What are some of the hidden expenses?
Saving for the deposit isn’t the crunch, and these extra expenses can pinch, or delay your purchase, if you are not factoring them in as early as possible in your saving process.
Be aware of:
There are exemptions in some states and territories for properties priced under a threshold, which means you can buy under that price without paying stamp duty (which is a sort of administrative fee to the government when a property changes from one owner to another). To get an estimate of stamp duty on a property you have your eye on, a quick Google will throw up online calculators, from reputable organisations like National Australia Bank, AMP Capital and more. Punch in the numbers and hold your breath!
The average home loan in Australia is $488,875. The stamp duty on that for a first home buyer varies wildly, depending on where you live (for example, $12,000 in the ACT, zero if you are buying in New South Wales or Victoria, and $17,000 for Tasmanian buyers, all for existing properties). If you are buying a newly built home or an off-the-plan apartment, the numbers are different again. Registration and transfer fees can be a few hundred dollars or the price of a pair of Christian Dior heels (upwards of $1200).
The 20 per cent deposit – you don’t need it and can buy a home with less. However, in that scenario, lenders mortgage insurance (LMI) is a significant sting to be aware of. This fee applies to mortgage applications on less than a 20 per cent deposit. The bank will consider you as more of a risk and will slug you LMI as protection.
Warning: this fee is not to be confused with mortgage insurance that safeguards you – the LMI is a safeguard for the bank, should you struggle to pay your mortgage and default. Chat to your bank as soon as possible to determine if you will need to pay LMI – and if so, how much – for your goal deposit amount. It can be rolled into your mortgage or may need to be paid upfront.
Finder.com.au money guru Bessie Hassan explains all of this in my book; you’ll be able to recite the 101 on LMI as easily as you can remember all of Whitney Houston’s lyrics after a couple of rieslings. To find out more on LMI, I recommend reading this.
As property prices have sprinted along like Olympian Usain Bolt in full flight, it’s been challenging for savers to keep up. Determining if it is worth continuing to save a larger deposit, so you can wriggle out of paying LMI, or cop paying the LMI to get into the market quicker (before any more potential price prices) is a question to ask your mortgage broker or financial planner.
GFM Wealth Advisory senior financial advisor Paul Nicol, who is interviewed in my book, says that if the difference between saving a 10 per cent and a 20 per cent deposit is 12 to 18 months, he is comfortable with his clients pressing on and continuing to save, to reach to a 20 per cent deposit. If you expect that jump to take longer,you might wish to consider stopping at a 10 cent deposit (or less) and paying LMI.
LMI sometimes does not have to be paid by applicants in high-flying professions, as they are considered less risky candidates for a mortgage. Get some professional advice – or chat to your bank – for an insight on your individual circumstances.
If I’m first home buyer, what kind of incentives do I get? I can I maximise on my first investment?
A one-stop shop for finding out what you are entitled to can be found here: firsthome.gov.au
Your bank or mortgage broker can help you fill out the paperwork for these applications to get the most out of your first property purchase.
Look at these lists of incentive sooner rather than later; perhaps buying in a rural area, or a newly built home, wasn’t on your radar, but the government grants are enough to tempt you and that first home is more realistic that you thought. Don’t discount any possibilities during your search, including satellite cities and regional hubs (particularly those with infrastructure being built, like railway upgrades into CBDs).
Emily Power is an author, property commentator and editor of Domain magazine. She’s talking all things property on our next Masterclass Online: How to Buy a Home this Thursday 12:30pm AEST. If you’re wanting to invest, buy your first property, or increase your portfolio it’s a must-watch. Premium members can register for FREE to watch Our Masterclass Online webinars.
Emily’s first book, How to Buy a Home ($29.99 Penguin), is available for pre-order now, head here to find a stockist near you.