- There's more to buying a home than the sale price.
- Before you analyse the market, analyse your budget.
- Time to save, ditch the credit cards and apply for help.
With interest rates on the rise and a lot of talk around property prices at the moment, it is important that you are fully prepared before you take the plunge into buying property.
The first step to buying any property is to get your finances sorted. This means not only understanding your budget but also to being able to identify ways you can increase your savings, and understand what you can actually afford to buy (your serviceability).
How to look at your budget
Before you start to analyse the market and look at buying your dream home or your first investment property in the latest hot spot, above all else you will need to understand your budget. This is because without fully understanding your budget, you might waste countless hours looking at and researching properties that you can’t afford.
It may seem simple, but a budget will help you to understand your cash flow.
This is about learning where you are spending your money, and finding ways you can improve your spending habits. You may be surprised that all the little amounts you save really do add up over time.
Find some non-committed income
Start with your bank statements and credit card statements for the past quarter and categorise your income and expenses into committed and non-committed/discretionary buckets.
Your income is likely to be committed, but if you earn a few extra bucks here and there from selling items on eBay then this would be non-committed income to be included alongside any work bonuses, gifts, dividends or wind fall gains.
In expenses, your committed amounts will be phone, internet, car registration, rent, petrol, average supermarket spend, council rates, water, electricity, etc.
In your discretionary expenses bucket include gym memberships, Netflix, clothes shopping, restaurants, entertainment, your daily café coffee, etc.
The aim of looking at your budget this way, is to see how you can increase the income in the non-committed bucket as well as how you can decrease your expenses in the discretionary expenses bucket.
Boost your savings – cancel your cards
Depending on your lender, they will generally look at the last three months of bank statements but don’t be surprised if they request the last six months of bank statements, especially under tighter lending laws. This is to verify your regular cash flow check for any unusual activity, and ensure you haven’t taken on any recent debts.
Here’s what to look for in your discretionary spending:
- Credit Cards Lenders will look closely at all your debts, including your credit cards. It is best to cancel any credit cards you don’t need and to pay off any credit card debts. Many people don’t understand that banks look closely at the credit card limits you have and not the debt you hold on the cards which will limit your serviceability (your ability to make repayments on a loan). They will look at a credit card with a $10,000 limit and a $300 minimum monthly payment rather than the fact that you only owe $10 on the card.
- Subscriptions Take a close look at your household budget to see whether there are any on-going subscriptions you are able to cancel such as Netflix, Stan, Foxtel, Disney channel – these will all add up and impact your serviceability in the eyes of the lenders.
- Insurance A lot of Australians don’t bother checking whether they can get a better deal on health insurance. It is important that you check the amount you’re paying and what you are covered for and seeing whether you are able to get a better deal. It is likely you are paying for things like maternity cover, or extras hospital that you may not need. You may be able to save a bit each month which will end up being a lot over time.
- Internet Take a look at you home internet, how much you are really using and how much you are paying for. If you are paying for a lot more than you need to use, then go back to your provider and ask for a cheaper monthly plan that covers your needs.
- Memberships If you have gym memberships that you aren’t proactively using, then it might be best to cancel.
Saving for a property
When buying a property, you will need to consider a minimum deposit that is equal to at least 10 per cent of the value of the property, but the deposit is not the only thing you will need to pay for.
A smaller deposit may mean your lender will charge you Lenders’ Mortgage Insurance (LMI) or a low deposit premium, which is an additional cost that only protects the lender if you can’t pay back your loan.
Also, keep in mind that the larger the deposit the smaller the loan and the lower amount of interest you will be paying to the lender.
Understand what you will pay for a property
Buying a property isn’t as simple as making an offer or winning an auction bid, and paying that price. There are a number of extra costs involved upfront, as well as on-going costs that you will need to be able to afford.
It’s also important that you calculate the correct costs – because each State/Territory governments have their own rates for stamp duty and transfer fees alongside local councils who determine their own council rates.
Costs to consider when buying property:
- Stamp duty or Land tax (if applicable),
- Lenders’ Mortgage Insurance (LMI) if borrowing more than 80% of your home’s purchase price,
- Solicitor fees,
- Building and pest inspection,
- Moving costs,
- Mortgage registration fees,
- Loan application fees, including independent loans,
- Building reports’
- Buyer’s Agent fees (if applicable).
Ongoing costs to owning a property:
- Council rates,
- Connecting and paying for utilities (water, gas, electricity),
- Insurance,
- Strata levies (if applicable),
- Maintenance costs,
- For investment properties, you will also have property management fees, depreciation reports, tax agent fees and perhaps land tax
Financial assistance in buying a property
There may be some relief from costs if you are lucky to qualify for a government grant or scheme. Each State/Territory will have their own grants for people looking at buying their first home or to assist in saving up a home deposit.
Recently, the NSW State Government introduced a housing package called the First Home Buyer Choice to make home ownership “more achievable”. The scheme means first home buyers will be able to opt in for an annual $400 property tax plus a percentage of the land’s value instead of a lump sum payment to provide assistance to first home buyers in NSW trying to save up for their home deposit.
With the right amount of preparation and money saved for the right property, you are more likely to buy something much sooner.
For more information, pick up my book Buy Now – the Ultimate Guide to Owning and Investing in Property – it tells you all you need to know. My book Positively Geared – How to Build a Multi-Million Dollar Property Portfolio from a $40K Deposit is not bad either (in fact it’s a bestseller!).
