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Ready to make the leap from renting to buying a home? Well, before you begin the search for your perfect home there are lots of questions to find answers to. Here are some of the big ones.
Do you need to own your home?
For many Australians, buying a home is still seen as part of the great Australian dream. However, that narrative is shifting. Renting provides greater flexibility and can often be a financially viable alternative to homeownership. Before diving into the housing market, it’s worth taking the time to weigh the pros and cons. Ask yourself if buying a home aligns with your current and future lifestyle needs.
If you determine that buying a home is the right path, then the next step is to evaluate your finances and borrowing capacity carefully.
What repayments can you afford?
Understanding what you can afford starts with creating a detailed budget. This budget should outline:
- How much money you have coming in.
- Your regular expenses.
- The amount left over to cover potential mortgage repayments.
A well-planned budget can also help you identify areas where you can cut back and save more, giving you a stronger financial footing when applying for a mortgage. Don’t forget to factor in future plans, such as starting a family or other significant life changes that might reduce your household income.
How much can you borrow?
Once you’ve determined how much you can afford in monthly repayments, you need to understand the size of the loan you can secure.
Online mortgage calculators, such as the one available at www.moneysmart.gov.au. can be a valuable tool. When using these calculators, it’s a good idea to input an interest rate of at least 7% per annum, even if current rates are much lower. This higher figure reflects the buffer banks apply to ensure borrowers can handle potential rate increases.
Banks and lenders are required by the Australian Prudential Regulation Authority (APRA) to assess your ability to repay a loan at this higher benchmark rate. Some lenders may even use a higher buffer to safeguard against financial strain.
What’s it really going to cost?
Aside from the purchase price, buying a home comes with a whole lot of other costs, some upfront and many ongoing.
Stamp (or transfer) duty is usually the biggest of these. Remember to allow for it when setting your purchase limit. Conveyancing, loan establishment fees and removalists are other upfront costs.
Buying an apartment or unit? Body corporate fees will need to be paid. These, along with other ongoing costs such as council rates and insurance premiums must be included in your budget.
If this purchase will be your first home, check out details on first home buyer grants in your state or territory here www.firsthome.gov.au. Stamp duty concessions may also be available. Combining these initiatives can save you tens of thousands of dollars. Make sure you understand the conditions that apply, such as limits on the value of the property. If eligible for a grant, factor this into your calculations.
What deposit do you need?
When buying a home, the size of the deposit required is a critical consideration. While some lenders may still offer loans covering up to 90% of a property’s value, 80% is generally more realistic and financially prudent. This means you’ll need to save at least 20% of the purchase price, plus additional upfront costs such as stamp duty, legal fees, and insurance.
If you haven’t yet saved the full deposit, revisit your budget to identify opportunities to save more. Set clear savings goals and outline a strategy to reach them. Buying a home requires careful financial planning, and your deposit is a major part of that equation.
What’s your savings record?
Your savings history plays a big role in securing a home loan. When buying a home, lenders will assess your bank account and credit card statements to evaluate your financial habits. Do your statements show a consistent savings history and responsible debt management? Or do they reflect poor spending habits and a lack of financial discipline?
If you’re still in the process of saving for a deposit, use this time to build a strong financial record. Pay down existing debts as quickly as possible, cancel unnecessary credit cards, and reduce the credit limits on others. Keep in mind that when assessing your mortgage application, lenders factor in your credit card limits, not just the outstanding balances.
Do you know how mortgages and interest rates work?
If not, start learning from independent sources.
Before buying a home, it’s essential to understand how mortgages and interest rates work. Start by gathering information from independent sources and directly from potential lenders. Be sure to get details about all associated fees, including any early repayment charges.
When evaluating loans, pay attention to “comparison rates” to get a clearer picture of the total cost, but also be aware of their limitations. Features like introductory interest rates or additional perks may come with hidden costs, so ensure you fully understand the terms.[1]
Fixed or variable?
The interest rate is one of the biggest factors influencing the total cost of buying a home. For example, consider a $400,000 mortgage at 4% per annum over 25 years with monthly repayments. Ignoring fees, the total repayment would be $633,404, including $233,404 in interest. At an interest rate of 7%, the interest portion alone would rise to $448,135, significantly increasing the total cost.
Understanding these figures can help you make informed decisions and prepare financially for the reality of buying a home.
How can you reduce your interest payments?
Your interest is calculated on your outstanding loan balance, so anything you can do to reduce that balance will help reduce your total interest bill. Many loans offer a linked 100% offset account. The balance in your offset account is subtracted from your outstanding loan amount when the interest is being calculated. It therefore makes sense to keep as much of your spare cash as possible in your offset account.
As financial circumstances allow, you could increase your mortgage repayments to pay off the loan sooner. Using the previous example of a $400,000 loan at 4% interest, if you paid it off in 20 years rather than 25, the interest component would be only $181,741, a saving of more than $51,000.
Another option is to make fortnightly or weekly repayments, rather than monthly.
Ready to buy?
When buying a home, it’s important to understand the current lending environment. Securing a loan has become more challenging due to lender and regulator concerns over high levels of household debt. However, there are still plenty of options available, including your current bank, other banks, non-bank lenders, and online platforms. Shopping around for the best deal is essential, whether you do it yourself or work with a licensed mortgage broker.
Getting Loan-Ready
When preparing to apply for a loan to buy a home, be ready to provide your lender with extensive documentation. This includes pay slips, credit card and bank statements, and a detailed account of your assets and liabilities. To streamline the buying process, consider seeking pre-approval from your lender before you start visiting open houses.
Understanding Pre-Approval
Pre-approval can give you confidence when making an offer on a property, but it’s not a guarantee. Some pre-approvals are instant appraisals based on limited information, which may not hold up to a full assessment. Check with your lender to clarify what their pre-approval process entails. If it’s a full assessment, it provides greater certainty; however, even this may not cover situations where the property itself doesn’t meet the lender’s criteria.
Keep in mind that making multiple pre-approval applications can impact your credit rating. Take the time to research and choose your lender carefully to avoid unnecessary credit inquiries.
Buying a home is a significant step, and understanding the loan process can help you make informed decisions and secure the best possible deal for your circumstances.
Do you understand everything, including all the fine print?
If you’re unsure about any aspect of the buying a home or loan process, don’t hesitate to ask questions and seek independent advice. Whether it’s understanding loan terms, comparing interest rates, or evaluating lender offers, being informed is essential when buying a home.
What insurance cover do you need?
You’ll obviously insure the house and contents, but what other insurance cover do you need? With your ability to make mortgage repayments dependent on you earning an income, income protection insurance should be a high priority. Life and disability insurance should also be considered. And yes, these premiums all need to be included in your budget calculations.
Need advice?
Buying a home is one of the biggest financial steps you’ll ever take. It’s also a complex process, and seeking good financial advice at the outset can deliver rewards down the track.
When the ink is dry it’s time to crack open that bottle of bubbly and celebrate getting your foot in the door of home ownership.
[1] Figures obtained from Moneysmart.
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