This article I wrote for the Your Best Interests online magazine which can be found here. I am a guest contributor and this current edition is all about property! Glen
1. Borrow what you can afford
There is often a difference on what the banks tell you how much you can borrow verses how much you can afford. To put basically, their internal “responsible lending calculations” for some banks are not very “real world”. The banks factor in what the basic cost of living is for people. This amount can be very low and vary between banks, which means you can borrow more based on your salary than what you can actually afford – in the real world.
That being said, ensure when you’re looking to buy your first home, try to keep your monthly mortgage repayments at less than 30% of your take home after tax household income. Do this on a 25-year term. 25% is ideal, if possible. It may mean you need a higher deposit to keep your repayments less. This will tell you if you can afford to buy your home now or need to wait a little longer.
2. Clear your debt first
A deposit is often required to buy a home. That or a parental guarantee. Or for the unicorns out there – they get a house given to them! Yes, they exist. Consumer debt cripples a high percentage of the population, particularly millennials. The thing that people may not realise is that for approximately every $10,000 of consumer debt one has, it can reduce the borrowing power by $40,000. So, do you have a car loan and credit cards to the value of $30,000? That can be around $120,000 of borrowings at risk. That coupled with the repayments impacting ones’ cash flow. You really want your first home to be a blessing not a curse – so ensure your cash flow is lean and clean before you purchase!
3. Don’t forget government incentives
This can be free money. There are not many times other than uncle Kevin 07 (former prime minister) giving every tax payer (and weirdly some deceased people) $1,000 that the government throws us money. Federally, there is the “First Home Super Saver Scheme” which allows first home buyers to save for their deposit in a tax effective environment. You can save a deposit of up to $30,000 at a reduced superannuation tax rate. You should speak to a financial adviser about this one. At a state-based level, different governments at different times have incentives for first home buyers. As an example, at the time of print in NSW the government will give people who buy a new home as a first home buyer, $10,000. Further, they will waive stamp duty for new home buyers for purchases of up to $650,000 and concessions to $800,000. This could save you around $25,000. You can buy a new home in NSW, as your first home, and save around $35,000. Wow. Check your state-based stamp duty office for details.
4. Have an exit strategy – if buying with friends... have "the chat"
It’s so exciting buying your first home. You have a flat mate, discussions happen over a wine and the next minute you’re buying a home together! What could go wrong? “The chat” isn’t necessarily who is buying dish soap, rather, what is agreed upon if there needs to be an exit from the property? An example could be that if ones’ circumstances change and they need to exit the property, if the other party can’t buy the exiting person out the property is to be sold or both people exit and it’s a joint investment property (this would then need another “chat”). This of course after a notice period of, say 3 months. The conditions which are agreed to can be whatever you like – just make sure it’s agreed upon, documented and signed by both.
5. Avoid snap purchases, once you’re in your home
You have a nice new place that you want to call home. Great. Amazing. Awesome. Just do not allow this event to cripple your finances and tie up your cash flow with new “stuff”. There is only one time when you should use interest free schemes and that time is never. The reason why this is a mistake is firstly you will always pay too much when you buy on interest free. There is generally no chance to negotiate on the purchase price (yes, it’s interest free but all parties involved need to make money somehow, right!). The second reason why you shouldn’t do this is because your cash flow is tied up and if there is a change in your circumstances you may not have the money to pay out the loan and the nice lounge you purchased is now worth $500. Take your time when making your house a home. Live in it for a while and slowly upgrade your stuff. Gumtree is your friend (search in affluent suburbs!). You may also be able to get some smaller items to make your older lounge look nice!
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