Tips for buying your first home

One of my laws of money is the need to generate surplus income. You clearly get this concept. It can be seen in your individual and joint savings, plus a very healthy super balance. I find it really interesting that people get very excited about where to invest and what to invest in, but this is a secondary issue to what is a far more critical, but boring, issue.

Spending less than you earn, not what you invest in, is the common factor with people who create their own wealth. Unfortunately, we humans do not have an inbuilt mechanism in our DNA around saving. For the vast majority of us, spending is fun. We like holidays, eating out, cars, bigger TVs, clothes and the vast range of “stuff” a modern world makes available to us.

This is one of the great challenges in the world of financial literacy. It is all about how people resist all the great-looking stuff we can buy and the very effective marketing of both products and credit. We can have lots of stuff and have it now, yet not pay for it until a later date.

What is important to your financial future is that you and your partner have built saving into your DNA. Even better, you have done this at a young age and with a nice pot of assets already. Another of the key rules of money, compound returns, is working in your favour.

You’ve also nailed another of the key rules of

money, in that you are building long-term wealth in growth assets, not cash. Cash is a terrific asset for liquidity. In my age group, where most of us are pre-retirees or retirees, some cash is also good as we start to rely on investment income. In bad investment years, our income from property or shares may fall and we need to hold some cash so we don’t sell growth assets at a time when markets have fallen.

In your case, some cash is handy as an emergency reserve, but as you have both secured new jobs on the east coast, a lot of cash is a pretty useless long-term asset, in particular when interest rates are close to zero. I am sure you will have seen good growth in your super and shares. Obviously these are more volatile, but they provide far higher returns over the longer term. Quite frankly, you are doing a lot right, which is brilliant.

Next, we move to property. As owneroccupiers and first home buyers you will qualify for assistance. Check online in your state to see what is available. As you say, you will also get a great rate – I suspect this will be close to 2%. All the help and cheap money means property is not going to be a bargain buy. That, however, is okay. A well-researched purchase in a growth location is very unlikely to be anything but a decent investment. And you get to live in it! I’d suggest you head off to a couple of lenders

and see what your borrowing capacity is. With the sort of loan rate you are looking at today, I would prefer to see you hold onto as many of your ASX investments as you can. The rule here is pretty simple. If your mortgage is around 2%, you would rather hold investments earning above 2%. Naturally your significant super balance will remain as an investment.

What I would encourage you to do is what you are already doing: spend less than you earn and apply surplus income to your asset base. A large mortgage is not a big issue with interest rates as low as they are now, so my inclination would be to add your savings in excess of your repayments to your investment portfolio. In reality, for many years your investment mix will be out of whack, simply because your home will be a big proportion of your wealth. This is normal in your age group – we’ve all been there. It is only as wealth growths outside your home that a technically better investment mix is achieved.

So, I think you are right on track. Do plenty of research on a home before you buy and remember your first home is very unlikely to be your final home, so buy with your head, not your heart. You need a property that not only appeals to you, but also to a future buyer or renter.

Paul’s verdict: Remember to buy with your head, not your heart With interest rates around 2%, a big mortgage is okay, so try to hold onto your shares