Six Steps to Buying Your First Home
They say that secure and affordable housing is fundamental to the wellbeing of Australians.. For many of us this manifests in a widely held ambition to become a homeowner. Whilst home ownership in Australia has slipped in recent years, 64% of Australians are homeowners according to the 2016 Census Data.
If you’ve never bought a home before the whole process can feel pretty overwhelming. Like, where do I begin? Who do I need to speak to? Who can I trust? Do I get a loan first or just start looking at properties? What can I afford? So many questions!
So let me break down the process of buying a home into six key steps.
Step 1: Save a deposit
This is the step that typically takes the longest time to complete. In fact, a recent study by domain revealed it takes on average 3 - 5 years to save your first home deposit. New data from the Australian Bureau of Statistics reveals that the average home deposit nationally is $106,743. The home deposit required will vary depending on where you live. Cities like Sydney, Melbourne and Canberra will need a much bigger deposit than if you’re buying in a regional town like Wollongong, Townsville or Shepparton.
To figure out what you need to save, first consider how much will the home you want to buy cost you? Real Estate websites often have fantastic suburb reports that let you know what the average home or unit is selling for. Be mindful that the price of that property is likely to rise whilst you are saving your deposit so adjust your target to accommodate price increases.
Let’s assume you’ve done your research and worked out the 2 bedroom apartment you want to buy in NSW costs around $800,000. To calculate your target deposit you need to:
(Property Value x 20%) + Stamp Duty + Miscellaneous Fees ~$2000 = Target Deposit
Let’s break that down.
Why aim for a deposit of 20% of the purchase price? Well, if you have a deposit of 20% you own a good portion of the property you’re buying (the bank owns the rest until you pay it back) which means if the property market were to go down, you’ll still have equity in the property. Furthermore, you avoid paying Lenders Mortgage Insurance when you have a deposit of 20%. So you can buy a home with less than a 20% deposit but be mindful that Lenders Mortgage Insurance will apply. It’s insurance for the bank, not you. So it buys you the pleasure of getting into the property market with a smaller deposit but it doesn’t protect you personally. It protects the bank from a loss if you default on your loan.
Stamp duty will vary depending on the price of the property you buy and the state you live in. There’s an abundance of stamp duty calculators online so just have a play with one of them to work out what it will cost.
Finally, save a little for those miscellaneous bank fees, stamping fees, conveyancer fees. Aim for $2000 to cover these. You might need more - this is a rough guide!
So let’s put this into practice for our home buyer looking to buy a 2 bedroom apartment in NSW. In their case, they would need to save:
$160,000 + $31,627.80* + $2,000 = $193,627.80
*Another thing to consider at this point is whether you might be eligible for any first home owner grants. Again, these vary from state to state. The grants will often have conditions around the price of the property and possibly if it’s a newly built or established property. Again, do your research!
Now, saving close to $200,000 is no small feat! To accelerate your savings you might want to look for ways to increase your income, decrease your spending, check if you're eligible for a first home owners grant, or chat to a family member about possible co-investment or going guarantor (the bank of Mum or Dad) if you’re lucky enough to have that option.
Step 2: Get pre approved for a home loan
A mortgage broker or a bank’s home loan specialist can help you work out how much you can afford to borrow and give you pre-approval for a loan. It’s called a pre approval because until you secure the home, the loan is not formally approved. Think of it as an approval in theory or in principal. It basically means that on the basis of the information you shared with the broker/bank, they believe you can borrow ‘X’ amount of money.
A good broker or bank lender should ask you lots of questions about yourself, your goal and your lifestyle. More importantly they should take the time to explain the process to you along with explaining the different types of loan structures and why a particular loan structure is beneficial.
There will be application forms to complete that outline how much you want to borrow, details about yourself including where you live, where you work, if you have dependents as well as details about your personal finances like what you earn, what you spend and what loans you have currently.
When applying for a loan, the lender is looking at three things - character, capacity and collateral. When looking at your character, they want to know will you pay back the loan. They’ll look to things like your credit score, employment history and loan repayment history to assess this. When looking at capacity, they want to know if you can afford to pay back the loan? So after you pay all your bills and lifestyle expenses can you afford to pay the loan and still have a little left over? Finally, when looking at collateral they want to know what you’re contributing to the purchase and to make sure that the property you buy is a good quality.
Step 3: Go home hunting!
It’s time to go shopping! Before you hit the pavement take the time to write a list about the ‘must haves’ and ‘nice to haves’. You’ve already got your budget thanks to your deposit and home loan pre approval but what about location, property type, neighbourhood infrastructure like transport, shops and schools, bedrooms, bathrooms, features are all things to consider. By writing a list you can save yourself lots of time looking at places that don’t suit your needs.
If you’re new to an area or struggling to find the right home consider engaging a buyer’s agent. A buyer's agent works for you (for a fee) to help you find the home that you’re looking for. They can do a number of pre inspections for you, help you access property that’s off market and negotiate the sales for you. My husband and I used one when purchasing our house and it was the best decision we made. It helped not only to look in areas that we weren’t familiar with but it also got us early access to properties which is a huge advantage in a hot market and, most importantly, it helped us save a lot of money in the negotiation. We had a much higher limit than what we ended up paying for our place and it’s because of our buyer’s agent’s fabulous negotiation skills that we got the price that we did.
Step 4: Secure the sale!
This is the exciting, nerve wracking, heart stopping, ‘oh my god I’ve never spent so much money in a day’ moment.
In Australia, there’s two main types of property sale methods - private treaty and auction.
Private treaty, often referred to as private sale, is the option that gives both buyers and sellers the most flexibility to negotiate the price and purchase conditions. In this method, prospective buyers can make offers on the property. There’s no deadline for the sale under this arrangement but in popular areas the properties will sell fast. Once the owner has accepted your offer, there’s a cooling off period in which you can complete building & pest inspections as well as finalise your loan approval.
Auctions can be trickier to navigate so you must pre-plan your purchase and conduct your due diligence like building and pest inspections ahead of time. Make sure you’re comfortable with the bidding process, have set yourself a price limit and take your cheque book/bank cheque with you! To participate in an Auction you need to be registered as a bidder. The owner will set a reserve price (the lowest price their willing to accept for the property) and if it’s not met the property will be passed in. That’s an opportunity to negotiate the sale with the owner. In the event the reserve price is met, the property will go to the highest bidder on the day. Unlike private treaty sales, there is no cooling off period. You’ll need to pay your deposit there and then. Some contracts will let you pay a part deposit and the balance later but check this with the agent ahead of time.
Step 5: Settle your property purchase
Between becoming the successful bidder at Auction or negotiating a contract to buy there’s usually a 4-6 week settlement period before the home is officially yours. It sounds like a long time but there’s actually lots to do in this time and it will fly by!
The first thing to do is get your loan formally approved. They bank will probably want to inspect and value the new home. This is the point in time where you negotiate the interest rate on your loan and choose the home loan structure which may include deciding on a variable or fixed interest rate and whether you’ll pay the principal loan back or just the interest. I’ll discuss different loan types in another post in detail.
Also during this time you’ll want to set up general insurance on your home like home and contents insurance. Of course, if you’re living in a strata apartment or townhouse you should only need contents insurance as the strata should cover the building insurance. Some insurance providers will offer you cover ahead of the settlement date. Regardless, ensure you cover starts on the settlement date.
Finally, it’s time to set up your utilities. Something I forgot to do last time I moved until one day the power went out - whoops! It’s also time to redirect your mail and to organise your move. Be sure to clean your previous home thoroughly once you move out too.
Step 6 - Pay off your loan!
Congratulations - you’re a homeowner!!
Now the focus is paying off your loan and getting the bank off your back. Making the contracted repayments will ensure your loan is paid off according to the schedule.
You can, however, pay it off much faster and save yourself money in interest repayments by making extra repayments (assuming your loan structure permits it) whenever you can, utilising an offset account and making sure you review your interest rate every 12-24 months to ensure the rate your paying remains competitive.
So that’s the long and the short of buying a home! I know from personal experience that when you’re starting out on this journey it can feel almost impossible to achieve. Especially if you’re living in a capital city where home prices are higher. When I first moved to Sydney I couldn’t imagine how I would own my first home but I got some advice and developed a plan. Every paycycle I put money away into an investment fund that helped me accelerate my savings above what I could achieve by saving cash alone. A few pay rises along the way certainly helped me get there faster but it still took about 5-6 years of solid saving and investing before I achieved my goal. The personal pride and sense of achievement I felt when I did was awesome. I firmly believe that if I could do it, you can too.
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