Home Buying Guide Step 1: Preliminary lifestyle check

home buying guide preliminary lifestyle check 1

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.

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? (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

Job security

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.

Parent-to-be borrowers

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.

Find out how you can apply for a home loan while on maternity leave and how you can afford a home as a single parent.

Sticking around?

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.

Wanderlust

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.Home buying campaign 1 travel

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Finance

Affordability

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.

Enter your details into our calculator below 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.

Existing debts

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.

Deposit

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.

LMI costs graph

Costs

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.

Upfront costs

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.
Hidden costs

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.
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Get strategic

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.

Level of risk

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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Rates last updated January 19th, 2018
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Name Product Interest Rate (p.a.) Comp Rate^ (p.a.) Application Fee Ongoing Fees Max LVR Monthly Payment Short Description
3.64%
3.66%
$0
$0 p.a.
80%
A basic home loan with a competitive rate and low fees.
3.69%
3.69%
$0
$0 p.a.
90%
A special limited time offer for owner occupiers. An IMB Transaction Account must be opened with this loan.
3.69%
4.86%
$0
$395 p.a.
90%
A special rate for first home buyers buying residential property and borrowing over $150K. 350K NAB Rewards Points offer available. Terms and conditions apply.
3.49%
4.47%
$0
$375 p.a.
90%
Discount off an already competitive interest rate for loans over $150k. NSW, QLD and ACT residents only.
3.62%
3.62%
$0
$0 p.a.
80%
A discounted, competitive variable rate loan with limited fees.
3.59%
3.62%
$500
$0 p.a.
95%
A loan that combines a competitive rate with a 100% offset account.
3.65%
3.66%
$0
$0 p.a.
90%
A competitive variable rate home loan with no application fee.
3.64%
3.67%
$0
$0 p.a.
80%
A low rate home loan with no ongoing fees.
3.64%
3.67%
$0
$0 p.a.
80%
A home loan with a competitive variable rate, limited fees and plenty of flexibility.
3.74%
3.76%
$0
$0 p.a.
90%
A home loan with a special rate for owner occupiers. Free offset account.
3.74%
3.74%
$0
$0 p.a.
80%
Pay no application fee or ongoing fees with this loan.
3.68%
3.83%
$0
$10 monthly ($120 p.a.)
80%
A low interest rate home loan that allows borrowers to borrow up to 80% of the property value.
3.84%
3.84%
$0
$0 p.a.
110%
Requires a family member to act as guarantor. Discounted rate available with family pledge loans. Family pledge loans
require no LMI and no deposit. NSW, Qld and ACT only.
3.73%
3.73%
$0
$0 p.a.
70%
A special low variable rate for owner occupiers with 100% offset account and no application or ongoing fees.
3.78%
3.78%
$0
$0 p.a.
80%
A basic low-rate home loan that still offers some useful features.
3.79%
4.19%
$0
$395 p.a.
95%
A package loan that offers discounts and a 100% offset account.
4.79%
5.44%
$0
$395 p.a.
90%
Package your 4-year fixed rate investment loan and pay no application fees.
4.09%
4.12%
$0
$0 p.a.
95%
This loan has a high max insured LVR, making it an option for low deposit borrowers.
3.65%
4.19%
$500
$0 p.a.
95%
Get a discounted fixed interest rate for the first 12 months while you settle into your new loan.
3.72%
4.19%
$0
$0 p.a.
80%
Enjoy a variable rate with the Bankwest Equaliser Home Loan.
3.65%
4.84%
$0
$395 p.a.
90%
A 2 years fixed platinum package that has $0 application and a loan redraw facility.
4.09%
4.11%
$0
$0 p.a.
90%
Access a fee-free offset account and a special interest rate for investors.
3.99%
4.02%
$0
$0 p.a.
80%
An investment loan with a competitive interest rate and no ongoing fees.
4.14%
4.14%
$0
$0 p.a.
80%
An investment home loan with competitive rate and 100% offset account.
3.74%
3.74%
$0
$0 p.a.
90%
A competitive variable rate with a redraw facility. NSW, QLD and ACT residents only.
3.64%
4.03%
$0
$395 p.a.
80%
Apply for a new owner occupier loan or refinance from another lender and receive this discounted rate.
3.88%
4.89%
$0
$395 p.a.
95%
A fixed rate package with flexible repayment options. 350K NAB Rewards Points offer available. Terms and conditions apply.
3.74%
4.15%
$0
$395 p.a.
80%
Enjoy a discount of a competitive interest rate and 100% offset account.
4.39%
4.42%
$0
$0 p.a.
80%
An interest-only loan for investors. Access equity to further your investment opportunities.
4.19%
4.59%
$0
$395 p.a.
90%
Enjoy all the benefits of a full-featured package investment loan, including a 100% offset account.
3.95%
4.99%
$300
$10 monthly ($120 p.a.)
80%
A flexible, competitive fixed rate loan that allows for extra repayments.
3.94%
4.88%
$0
$0 p.a.
90%
Enjoy a low interest rate and borrow up to 90% (with LMI) of your property's value.
3.85%
4.18%
$500
$0 p.a.
95%
Apply for Easy Street fixed rate home loans and get a competitive loan with a fixed interest rate.
3.97%
4.02%
$445
$0 p.a.
90%
Get a competitive rate without features you may not use.
3.99%
3.99%
$395
$0 p.a.
80%
A flexible low-rate variable home loan that lets you combine your loan with other financial products.
3.97%
3.97%
$0
$0 p.a.
90%
A competitive variable rate home loan with no ongoing fees.
4.09%
4.25%
$300
$10 monthly ($120 p.a.)
80%
Get a competitive investment home loan rate without expensive features you may not need.
4.09%
4.11%
$0
$0 p.a.
80%
A low variable rate loan with no application or ongoing fees.
3.74%
3.74%
$0
$0 p.a.
95%
A low rate home loan with no application or ongoing fees. Loan comes with 1 year of free home and contents insurance. Note that to be eligible for this loan you must be QLD resident.
3.84%
4.83%
$0
$0 p.a.
80%
Get a competitive 2-year fixed rate with no application or ongoing fees.
3.69%
4.45%
$0
$375 p.a.
90%
Discount off an already competitive 2 year fixed rate for loans over $150k. NSW,QLD and ACT residents only.
3.99%
4.77%
$0
$0 p.a.
80%
A competitive 3 year fixed rate with a redraw facility and split loan options, plus no application fee.
3.68%
3.69%
$0
$0 p.a.
95%
A no frills loan with a competitive rate and a maximum LVR of 95%.
3.64%
3.78%
$0
$10 monthly ($120 p.a.)
80%
A competitive variable rate home loan with flexible features. You can earn 30,000 Velocity Points for every $100k you borrow (for a limited time, subject to eligibility requirements).
3.69%
3.71%
$0
$0 p.a.
90%
A discounted interest rate home loan with no monthly fees.
3.87%
3.87%
$0
$10 monthly ($120 p.a.)
90%
Get a competitive interest rate for 3 years and a discounted variable rate when the fixed period ends.
3.79%
3.80%
$0
$0 p.a.
80%
A competitive rate with no ongoing monthly fees or application fees.
3.69%
3.69%
$0
$0 p.a.
70%
Enjoy a low variable rate with no application and ongoing fees.
3.88%
4.88%
$0
$395 p.a.
95%
Lock in a discounted fixed rate with a low service fee.
3.99%
4.03%
$0
$0 p.a.
95%
Enjoy a basic home loan with a high LVR and no application or ongoing fees.
3.85%
4.95%
$0
$395 p.a.
95%
A discounted package rate for owner occupiers with the ability to package a Qantas rewards earning Amplify credit card. $1,500 cashback available for refinancers. Conditions apply.
3.99%
4.99%
$0
$395 p.a.
95%
A package home loan with fee free extra repayments available during the fixed term.
4.39%
5.42%
$300
$10 monthly ($120 p.a.)
95%
Borrow up to and fix in a 3 year home loan rate. Access your account via internet and phone banking.
3.69%
4.03%
$0
$299 p.a.
80%
Enjoy a low variable rate with no application fee.
5.29%
5.64%
$995
$15 monthly ($180 p.a.)
65%
Available for former bad credit borrowers who have had a clean credit file for the last 24 months. Loan can be used to purchase a property or refinance.
3.59%
4.42%
$0
$0 p.a.
95%
This competitive introductory rate is a limited time offer for new owner-occupiers
3.68%
3.69%
$600
$0 p.a.
90%
Get a low variable rate along with some important basic features.
5.59%
5.94%
$995
$15 monthly ($180 p.a.)
55%
Available for borrowers with bad credit history. Can be used for purchase or refinance even with negative listings on your credit file.

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Belinda Punshon

Belinda is a journalist here at finder.com.au. Specialising in the home loans and property sections, she is passionate about helping Australians improve their financial wellbeing.

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