Buy a home you can afford
First home buyers are back in the property market – that’s good news
AFTER being squeezed out to the home buying wilderness for years, the regulatory and banking measures to dissuade investors (particularly from overseas) are starting to have an impact and the door for first home buyers is opening.
Figures out last week showed the proportion of first home buyers in the property market hit a four-year high in July, while their demand for loans for new houses hit a 38-year high.
That’s great. Now the key is to make sure the home you buy is one you can afford. Here are seven steps to make sure you’re on the right track:
CREDIT SCORE AND LOOK AT YOUR CASH FLOW Knowledge is power and you want to know how good a customer you will be for the financier if you borrow from them. You can find out how you rate, free, at a number of credit score websites.
The higher your score, the better the interest rate on your mortgage you may be able to negotiate. Good credit can mean lower monthly payments, so if your score is not great, consider delaying such a big purchase until you’ve repaired your credit score.
Banks have an advertised home loan interest and then discount that rate according to how good a payer or customer you are. Having other products, like insurance and credit cards, with the bank should also qualify for a discount.
As for monthly payments, experts say a good rule of thumb is to make sure the total monthly repayment doesn’t consume more than 30 per cent of your take-home pay. If it’s higher, then have a plan to reduce it over a short period.
Because trading houses is so expensive (stamp duty, conveyancing fees, moving costs) plan to be in this first home for at least 10 years.
CASH FOR A DEPOSIT Technically you can negotiate any deposit with the vendor. These days it can be as low as 5 per cent and is often contingent on the length of the settlement. A rule of thumb is the shorter the settlement, the smaller the deposit can be negotiated.
But your financier may stipulate a higher deposit so that you have greater equity in the property to protect the value of the home loan from any falls in property values.
Just remember if the deposit is less than 20 per cent the financier will often require you to take out mortgage insurance which will cost 0.5-1 per cent of the value of the loan each year.
So that discount on the interest rate from being a good customer could be eaten up in insurance.
FOR SURPRISE EXPENSES Even if you can afford the monthly payment, be aware of hidden costs. Buying a home means stamp duties, legal fees, insurance and council rates that can add up to hundreds a month. For people who have been renting, these extra costs can be a shock so make sure you have a bit of a slush fund.
And find out whether you qualify for a first homeowners grant or stamp duty concessions in your state.
PRE-APPROVED FOR A MORTGAGE Once you have the budget and have decided to take the plunge, determine how much you can afford to spend and stick to it.
Talk to the bank about a preapproved loan up to a certain limit before house hunting, which demonstrates to you the real estate agent and to vendors how much you can afford.
When you’re in a bidding battle. a vendor will usually take an offer from those with a preapproval letter before those without one.
But you don’t have to spend every cent up to the approved loan. It’s generally good practice to aim for a home that costs less than the maximum approved amount. 5FIND THE RIGHT REAL ESTATE AGENT Always remember real estate agents are working for the vendor. The higher the price they can get out of you, the more they receive in commission from the seller.
Having said that, finding a good real estate agent who understands your needs, can pay dividends in the long run. Ask friends for recommendations, and interview several to determine their level of experience and expertise in the suburbs you’re interested in.
Buyer’s agents are becoming popular. They act for you and do all the legwork of finding the perfect home, and dealing with real estate agents … for a fee. It can be a flat fee or a percentage of the value of the property.
HUNTING WITHIN YOUR PRICE RANGE Start off by determining your general needs – where you want to live, how many bedrooms and bathrooms you need, and certain school zones you’re trying to be in.
Then, become your own expert. Technology has empowered people like never before to do a lot of the searching online.
IN AN OFFER YOU’RE COMFORTABLE WITH Buying a home is a very emotional process. It’s important to remain rational and stick with your price limit while buying. People get caught up in bidding wars, and will go way over what their price limit because they love the house.
Don’t just put in an offer because you’re emotionally drained and desperate to finish the process. Expect to miss out on a few before you find the one.
If you’ve found the right one, make your bid quickly. There may not be much room to negotiate, as you’ll likely be facing competing offers.