The decision to purchase your first home is not one to be taken lightly. In the first step of our Home Buying Guide, we discuss how you can conduct a preliminary lifestyle check to see if you’re ready to own your castle.
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Owning your first home requires persistence and passion, not only to navigate the costly and time-consuming purchase process, but also to learn the ins and outs of being a financially responsible homeowner.
Before you start researching different markets and properties, step back and reflect on your readiness to buy a home both emotionally and financially.
This involves evaluating your lifestyle, conducting a financial health check and identifying your homeownership strategy.
So how ready are you? Take our interactive questionnaire to find out (exit out of the tab once complete to come back to the guide).
Pre-research lifestyle check
When determining whether it’s the right time to own the roof over your head, you need to carefully consider your lifestyle needs both now and in the future. Your job security, number of dependents and lifestyle habits will influence your borrowing capacity when you submit a home loan application, and can indicate whether you’re in a sound position to buy a home.
Here are some key points to think about when deciding if you're ready to buy a home.
Life stage reflection
When reviewing a home loan application, most lenders prefer that you’ve been in your current job for at least 12 months as this demonstrates that you have a stable source of income that can be used to service your mortgage repayments. If you have high job security, then you represent a lower risk to the lender.
It’s worth considering where you are in terms of your career path, whether your income is sufficient to service mortgage repayments and other associated costs of purchasing a property. Sit down with an accountant and a financial planner to see whether you could afford to service an average mortgage.
Lenders will also be interested to know about your type of employment (casual, part-time or full-time) and the prospect of your continued employment.
Depending on your occupation, some lenders may offer professional package home loans and in some cases it may waive lender’s mortgage insurance (LMI) if you’re a doctor or accountant, as you are perceived as a low risk borrower due to your high earning potential.
If your employment is secure, then you may be ready to buy.
On the other hand, if you’re a low-income earner or you’re receiving Centrelink benefits, it may be more difficult to qualify for a home loan. If this describes your situation, seek independent advice about your readiness to buy a home. While it may be possible for you to qualify for a home loan with a specialist lender if you can prove that you have a secondary income source to repay the mortgage, you need to think about whether this is a financially responsible move.
One of the biggest lifestyle changes comes with the decision to settle down and have kids.
While this can be an exhilarating time, you need to think about the cost of extending your family and how this will influence your ability to purchase a home. This is because the number of dependents that you have can affect your borrowing capacity.
In general, each dependent that you have will lower the amount you can borrow by $50,000-$60,000.
Recognising the sharp rise in costs that will result from having kids, many lenders will request that you factor in the cost of childcare, education fees and unexpected medical expenses when listing your day-to-day expenses.
If you plan to receive government benefits such as Family Tax Benefits, keep in mind that some lenders only consider this as a secondary source of income and you’ll need to supply supporting documentation when completing your home loan application.
It’s important that you're honest with your lender and your mortgage broker when discussing your lifestyle situation. If you intend to have kids in the near future, this can significantly affect your ability to service the mortgage.
Your intended length of stay in the home you purchase can help you determine whether you’re ready to buy.
Due to the significant transaction costs of servicing a mortgage and owning a home, many financial advisers believe that you should only buy a home if you intend to live there for 5-10 years. This is enough time to build up equity in your property and to allow your property to appreciate in value.
From valuation fees and application fees, buying a home requires significant financial resources. If you don’t occupy the home for long enough, then you may not generate a profit when it comes time to sell (assuming an owner-occupier strategy).
If you don’t believe you can settle down in one location for an extended period of time, then renting may be a better option for you.
Your enthusiasm for travel may not fit into your homeownership goals. You need to evaluate any future travel plans that you have in store and consider how this will affect your finances.
Speak with your trusted accountant or financial adviser about any overseas trips you have on the agenda and whether or not this can remain a part of your lifestyle. Remember that frequent trips may put you in further debt, which could affect your capacity to repay your home loan.
If you have multiple overseas trips planned and you’re not sure whether you’ll be able to afford your repayments on top of your travel debt, then you may not be ready to buy a home.
However, some homeowners rent out their home while they’re overseas and use the rental income to go towards their periodic repayments. With careful budgeting and planning, it may be possible to maintain your travel lifestyle while servicing a mortgage.Back to top
Taking out a home loan will probably be the biggest financial decision you’ll make in your lifetime, so you should sit down with an accountant during this preliminary stage to see how much you can afford to borrow.
Even if you haven’t started looking at suburbs or properties yet, it’s a good idea to get an idea of how much you can afford to borrow as this will help fine-tune your search later on.
Be conservative and realistic when punching in the numbers to ensure that you avoid mortgage stress further down the track.
Your credit file and the amount of existing debt that you have can reflect whether or not you’re ready to purchase a home. Request a copy of your credit file to review your financial health.
If you have several credit cards and personal loans, then you may want to rethink your financial behaviour and take measures to improve your credit file. For instance, if you’re struggling to make payments when they’re due, contact your provider to negotiate a new payment plan so that you can make your payments in full and on time.
Another way to repair your credit rating is to get into a regular savings habit. This may involve making regular deposits into a high-interest savings account to demonstrate that you have a good savings record and financial discipline.
If you have bad credit, you may not be a good candidate for a home loan application, in which case it may not be a good time to purchase property.
Ideally, you want to come up with at least a 20% deposit so you can avoid paying lenders mortgage insurance (LMI) for a full documentation home loan.
If you don’t have at least 10-20% deposit saved, there are low-deposit loans available, however you may want to think about whether you are financially prepared to buy a home, and whether you can afford to pay for mortgage insurance.
Look below to see the mortgage insurance costs for different deposit sizes.
When estimating the costs of buying a home, you need to break down government charges (such as stamp duty), lender's fees (including the application fee) as well as other associated costs (such as conveyancing or inspection fees).
Use our calculator to estimate your home-buying costs.
Remember that you’ll also need to factor in a contingency buffer for holding costs such as repairs and maintenance or a rise in interest rates if you take out a variable rate mortgage.
Let’s assume you’re purchasing a property that will be owner-occupied and is worth $650,000. The interest rate is 4.5% and you have a 20% deposit of $130,000. Here’s a roundup of some of the major upfront costs.
- Stamp duty. The amount of stamp duty payable depends on the state in which you’re purchasing the property. For this example, you would expect to pay around $24,740 if you were a first home buyer in NSW.
- Legal charges. This will depend on the complexity of the property ownership structure, but a ballpark figure would be around $1,000-$2,500.
- Building and pest inspection. It’s important to get a building and pest inspection completed to ensure that the property is structurally sound and to avoid any hiccups down the track. You can expect to pay around $500 for an inspection.
- Mortgage application fee. Also known as an establishment fee, you’ll pay around $500-$600.
- Lenders mortgage insurance (LMI). Assuming a 20% deposit, you generally wouldn’t need mortgage insurance, although this will depend on the loan type. If the lender did require LMI for this loan, the premium would be $5,205.
- Valuation. Some lenders may charge you to get your property independently valued, which could cost around $400-$500.
There are also several hidden costs of homeownership to consider.
- Maintenance. Minor repairs such as carpet cleaning or replacing bathroom fixtures can quickly add up. You’ll need a contingency of around $5,000-$8,000 per year for unexpected maintenance and repairs.
- Utilities. Factor in an extra $5,000 annually to cover electricity, gas, water, heating and cooling expenses.
- Strata levies. Typically, strata levies should be around 1%-1.2% of the property value for apartments with facilities and 0.5% for apartments with minimal facilities. Assuming the above details for an apartment with facilities, you would pay $7,800 in annual strata costs.
- Security. If you live in a unit or apartment, you may need to pay extra for a security system. This could amount to $500.
- Removalist. It’s important to factor in the cost of moving expenses, especially if you’re moving a long way from your current place of residence. The average removalist cost for moving a three-bedroom home interstate ranges from $3,500 to $4,500. This will depend on the company selected, the distance you are moving and the amount of items (and labour) that you require for the job.
- Council fees. These fees could cost around $300-$700.
- Professional advice. A licensed accountant or financial planner may charge around $200 per hour.
- Petrol. When inspecting properties, you’ll be driving back and forth, which will cost you not only time but also money in petrol. If you inspect three different properties in one day, this may equate to a $50 petrol bill.
- Time. The time taken to inspect different properties is a non-monetary cost to consider. When you start looking at different properties in different locations, you may spend half your weekends reviewing properties.
- Emotion. Don’t underestimate the emotional investment of buying a home. It can be a lengthy and complex process that demands patience and positivity.
Once you’ve reviewed your lifestyle and financial status, it’s time to think about your homeownership goals and strategy to prepare for your suburb and property search.
Your goals will be guided by your motivation for purchasing a home.
For instance, if you’re a first home buyer, you may want to purchase a new property to secure the first home owner grant (FHOG) scheme in your relevant state. The stamp duty concessions and grant will help fund you purchase if you do not have enough savings to complete the required deposit.
On the other hand, a seasoned home buyer or investor may be interested in finding a property with renovation potential for a buy-and-flip strategy. In this case, an investor may be motivated by the amount of value that can be added to the property and the subsequent return that can be expected.
Remember to be realistic when setting your objectives, your home-buying strategy and timeline.
When defining your homeownership strategy, a critical thing to consider is the level of risk that you’d like to exercise. Are you willing to buy near a mining town that could experience a downturn? Or would you prefer to buy a property in a blue-chip suburb that’s likely to deliver long-term capital growth?
Now that you’ve completed your preliminary lifestyle check, you can move on to Section Two of the Home Buying Guide: Suburb Research.
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