The 3 pieces of advice I always give first home buyers
In this exclusive extract from her new book, Nicole Pedersen-McKinnon shares 3 insights that can help you get a leg up on the property ladder.
Right up front, I want to tell you the three things I always counsel my nearest and dearest about that often-scary property step – when they say, "Hey Nicole" and need my help.
Counsel 1. The time to buy is when you're ready, not when you're rushed
Marriage, munchkins and especially the market shouldn't hurry or pressure you into action – you should buy only when you've worked yourself into a secure financial position.
So how best do I get myself into this position? I hear you ask.
First home buyers have two over-arching missions: One, cement your job or income and, two, build a chunky deposit.
The latter is your biggest barrier to property market entry and a lender will love evidence of the ability to save. It will show them you are good for repayments and help persuade them to lend to you. We'll delve far deeper into the precise steps you need to follow to get approved – this is for you too, refinancers! – as the criteria is now tight. But soon you'll be all set.
So what size deposit should I aim for?
20% is preferable for 2 important reasons we'll also shortly explore. But in Sydney and Melbourne 10% is still – even post-price falls – more probable. I'll also go into available concessions, grants and out-of-the-box strategies that could see first home buyers, well, unpacking boxes.
Counsel 2. It's vital you borrow the right way and the right amount
Not only do you need to strictly adhere to the safe borrowing ceiling you're about to be able to calculate, but you also need to sign up for a loan that carries what I call the debt-busting secret weapon (don't worry, I'll reveal all). The right loan, including for refinancing, will give you the ability to get out of a mortgage super-fast. I know that's not your focus when you're desperately trying to get in to one, but it's how you make your home super-cheap.
And, naturally, I am going to show you how to identify the true cheapest products (a heads up: you won't do that by using a mortgage broker…).
Counsel 3. You need to think ahead for your purchase and purpose
Last but by no means least, everyone must project forward: what might become of a property you're buying/you've bought? You never want to have to sell for at least seven years, preferably more.
And I'm going to get personal: are marriage or munchkins on the horizon such that you'll outgrow it quickly?
What you're trying to determine is whether there is any chance you'll rent out your new home in the future. If so, do not pay the loan down beyond the required principal and interest repayments. Yes, you read that right – and you're reading it early in case you were going to do this before getting to the step where I explain why. So hold fire!
When you stash every extra dollar against your mortgage in the special place I'm about to divulge, you retain full access to your overpayments and:
- You can withdraw them down the track for any emergency, in what I call a Holy Sh*t fund of preferably six months' salary. Because sh*t happens, right? You need a protective barrier so it doesn't hit and scatter your finances like skittles.
- You can withdraw them for any big life move, like a decision to go back to study to earn more money. Indeed, you should throw all the lifestyle savings you have in here too.
- You could even use them as a deposit for your next, larger home while keeping this one as a nice, almost-fully-tax-deductible investment property. I will get into this smartest of strategies in no time. But first…
Top borrowing tip: Stamp duty concessions and even cash grants may be available to first home buyers (whether you or your not-yet-owning kids). We will look at just what soon. But if property is sounding too expensive regardless, think outside of the box:
• Will your family go guarantor? If the loan can stay at 80% or below with parent equity, so with their property as security, you could at least save on lenders mortgage insurance. Bear in mind if you're considering this, your family will be liable for you, so no one should go into this arrangement lightly. Some lenders let you limit the size of the guarantee and remove it once the loan's paid down enough/prices have risen enough.
• Will your family or friends go halves? This was a big part of how I was able to buy my first home. I'll confide the whole story before you get to the end of How to Get Mortgage-Free Like Me. It could be an investment opportunity for your "partner" – complete with tax deductions for them – where you pay half the market rent.
This is an exclusive extract from Nicole Pedersen-McKinnon's new book, How to Get Mortgage-Free Like Me, in which real Aussies reveal how they've done it faster, smarter and cheaper. Nicole has offered an exclusive discount when you enter the code FINDER2020 at NicolesSmartMoney.com in the hopes you'll put your saving towards your deposit.
Nicole Pedersen-McKinnon is a long-time TV money commentator and national newspaper columnist, who paid off her mortgage in seven years.
Disclaimer: The views and opinions expressed in this article (which may be subject to change without notice) are solely those of the author and do not necessarily reflect those of Finder and its employees. The information contained in this article is not intended to be and does not constitute financial advice, investment advice, trading advice or any other advice or recommendation of any sort. Neither the author nor Finder have taken into account your personal circumstances. You should seek professional advice before making any further decisions based on this information.
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Image credits: Getty Images, Supplied