16 Tips I Wish I Had Been Given When Buying My First Home
Times are tough for new home buyers. It’s well documented that it has never been more difficult to purchase your first property in Australia than it is right now. House prices are getting to the point where the old Gold Lotto jingle, “Wouldn’t it be nice to win a million” doesn’t have quite the same impact as it did a few decades ago!
Even so, buying my first home was still no mean feat. For those of you out there struggling to get your head around how to buy your first home, I’ve listed a few really handy tips that I wish I had known back then.
I truly hope some of these tidbits that I’ve picked up along the way will help you on your own home buying quest. Good luck!
1. Clear your debts first!
Any debts you have when applying for finance can make things a bit trickier. Look at trying to clear or minimise as many of these debts as possible to help pave the way for stress free finance!
This might include things like car loans, credit card debts, personal loans and HECS fees. Start with your highest interest debts first!
2. Stick to the 30% Rule
Not sure on how much you should spend on your first property?
The best tip I can give here is to stick to the 30% rule; that is, your monthly mortgage repayments should not be more than 30% of your household income.
Once you start going even a smidgen over the 30% mark, your lifestyle might start to suffer and your financial stress will inevitably rise.
Figure out the size of loan this will afford you and use this as your absolute maximum budget for your new property.
And be careful, the loan amounts that lenders will offer will often be much greater than this self-determined 30% cap!
Also, if interest rates are low like they are at the time of writing this post, remember that a home loan is a long term investment. This means you really need to account for interest rate rises in the future too.
The safest way to do this is to set your monthly repayment budgets on a home loan at around 7% – 8% interest (the long term average interest rate for home loans in Australia).
To do this easily, just aim for repayments to equally say 26-27% of your gross income and then pay the extra 3 – 4% each month on top of your loan.
The added benefit here is that you will save thousands in interest costs in the long run as you will be paying down your loan principle faster while interest rates are low!
Just one last point to consider on this one. If you’re thinking of getting married or having kids (or both), it might be best to calculate your loan repayments on 1 – 1.5 salaries as opposed to 2. This will give you the wiggle room to save for a wedding or take extended maternity/paternity leave if desired.
3. Save, save, save!
Many lenders still require a deposit before they give you a loan, and ones that do not still prefer working with somebody who can put cash down upfront.
You want to aim for a 20% deposit to increase the lenders and loan deals you can choose from and avoid Lender’s Mortgage Insurance (and insurance for the banks in case you default. If your deposit is not large enough, your LMI could cost you tens of thousands of dollars that goes straight into the banks’ pockets!).
Ok I get it. A 20% deposit is a huge amount when looking at today’s property prices.
The concern for many new home buyers is that, no matter how much they save, house prices continue to rise which reduces the buying impact of their home deposit savings goal.
If you do not have enough money for a deposit, then consider asking your parents, grandparents or other relatives to go guarantor.
However, the pitfalls of ‘going guarantor’ are that, if you default, your parents or relatives will be stuck with your repayments. It also ties them up in terms of their own investment opportunities or retirement plans.
However, as I am in no way a financial advisor, I’d recommend you talk to a mortgage broker or your bank about guarantors to find out more.
5. Monetary Gifts
Another way to do it is to see if your folks will get an equity loan in their home and ‘gift’ this money to you.
This means that you get the cash for your deposit but your parents are not tied up in your assets. You can set up your own, separate repayment plan to have this ‘gift’ paid back within 5 years and just treat it as an additional loan.
This way, you are essentially saving for your deposit while living in your new home and paying off equity in your new home at a rapid rate. All this while limiting your parent’s liabilities at the same time. It’s a win-win-win!
Again, I am not a financial advisor so talk to a qualified mortgage broker or your bank about these options to find more.
6. Get Preapproval on Your Finance
Contact a mortgage broker, or your bank or credit union, before you start house hunting and get preapproved!
Having financing lined up shows sellers you are serious and ready to buy (and will be able to buy relatively quickly too).
You can get usually preapproved for a few months which will take quite a bit of the pressure off when house hunting.
Preapproved finance also gives you a bit of leverage during your negotiations as a huge amount of home contracts fall through on finance – which you will already have organised. This is tantalising to desperate sellers.
Further to this, the seller may also be inclined to take a lower offer from you over another, less financially secure party’s higher offer. You never know!
7. Proof of Income and Savings
Banks and mortgage brokers need to see a steady stream of reliable income within your bank accounts. If you can achieve a steady income, this will go a long way in your financing efforts.
Better yet, if you have cash savings on hand (like a deposit), this will also help your cause.
8. Introduce Yourself to Local Real Estate Agents
One frustration a lot of new home buyers have is getting outbid at auctions or watching properties go under contract before they even get a chance to put an offer on.
One trick a friend of mine filled me in on is to go and have a meetings with as many local real estate agents (in the area/s you’re looking in) as possible. Often, the listings you see online have already been farmed out to prospective buyers before the listing even goes up.
Dress well and present yourself/yourselves as a fantastic prospect. Don’t give away your budget but let them know what you’re looking for and give them a very broad price range.
You can be sure the good agents will get in touch with you as new properties are about to go on the market for first dibs!
9. Go Farther Out
In today’s market, prices are lower the farther you get from the city centre in capital cities. The good news is that these outer suburbs (and beyond) are fast becoming mini-centres of their own and will likely continue to increase in value as the city becomes less and less affordable.
Stick to your budgets and go farther out if you need to. You’ll get a nicer property and will have likely made a solid long term investment as well.
10. Go Regional
Housing prices rose by 45% in Sydney between 2012 and 2015. The UBS Global Real Estate Bubble Index listed Sydney as the fourth riskiest housing market in the world. This means that metro property is overpriced and the market could potentially even crash. Similar bubbles have been reported in Brisbane, Canberra and Melbourne.
If your profession allows it and you’re not tied to city living, there are some absolute bargains to be had in regional Australia.
11. Housing Alternatives
Perhaps your first property doesn’t need to be a house. Have you looked into buying a duplex, townhouse or apartment instead?
Opening your mind to these options can really help you get your foot in the door of the Australian property market.
12. Research the Market
There is so much more information available to first home buyers today than when I was purchasing my first home.
Websites like realestate.com.au, domain.com.au, homesales.com.au and onthehouse.com.au provide huge amounts of information on cities, suburbs and even specific properties.
A few key things to look at when researching would be:
Time on the Market: Find out the length of time the property has been sitting empty on the market. If the property has been on the market for an unusually long time, something might be wrong.
Also look at the average time on the market for the suburb/s you are looking in to get an idea of how quickly you need to put an offer on if you find a suitable property.
Average Discount: Look for the average amount below asking price houses in your target area are selling for. Once you have this percentage figure, you can set yourself a good meeting point when negotiating on the price of your property.
Similar Properties: Look at how much similar properties have recently sold for in your target area. Are they above or below the asking price of the property you are looking at? Use this to your advantage if you can.
Auctions: If you have finance ready and preapproved, consider buying through an auction. Buyers who enjoy the thrill of bidding can sometimes get a better deal.
13. DON’T GET EMOTIONALLY ATTACHED!
This is by far one of the most common mistakes that buyers make (and is definitely one that I made too!)
When you find a place that is ‘perfect’ and ticks all of your boxes, there is an urge to secure the house at all costs. Don’t do it! Stick to your budget and do not budge.
You need to be strong here.
The ABS found that there are approximately 9 million dwellings in Australia. Trust me, there will be another ‘perfect’ property. I guarantee it.
Don’t get caught up in the emotion and speed of a property offer. You can put everything at risk if you over extend yourself beyond your budget.
In fact, when you do purchase your new property, I’d even recommend deleting your property apps and alerts so that you don’t suffer any post purchase dissonance when a new ‘perfect’ place pops up the week after your contract settles!
14. Make a Lower Offer and Negotiate Hard!
Housing prices are not set in stone, so always offer a lower price first. Agents and vendors will try to anchor the sale with a high price to begin with in order to keep you within a high bracket.
Remember, agents work for the seller. You’re on your own here.
Stick to your budget and be brutal. You are likely never going to have to deal with the agent or the vendor again during this period so don’t worry about hurting anyone’s feelings with a low offer. They aren’t going to be saddled with the home loan, you are!
As a barometer, use your research on the area to make your initial offer but 15-20% below asking price is not an unreasonable starting point in many cases.
15. Buy with Friends
Consider buying with a group of friends. Many lenders will give mortgages to groups of friends or siblings who are able to come up with a deposit. You may want to seek legal advice here first though to set up terms of purchase amongst your group.
People’s financial and life situations can change in a blink of an eye. A property is definitely not a liquid asset so if anyone in the agreement finds themselves in financial hardship or wants to sell, clear rules will need to be drawn up beforehand.
I personally would not recommend this option but, nonetheless, it is an option some young property buyers are taking these days so it is still worth a mention.
16. Don’t buy…
And then there is the final option – don’t buy at all. There is a growing population of savvy, lifetime renters that do not plan on purchasing a property for themselves until retirement (or maybe never).
The catch is that these renters invest the extra amount of money that they WOULD have been putting into a mortgage on a monthly basis.
Doing this from an early age can create a hell of a share portfolio over 20-30 years and can set them up for financial freedom down the line.
Instead of paying interest, they earn interest and dividends. They also negate many of the costs of maintaining a property and pass these on to their landlords.
Again, this might be one to talk about with a qualified financial planner if this is something that interests you.
Buying your first home is a big deal. I hope that some of the tips that I’ve accrued over the years from friends, family and financial advisors will help you on your path to home ownership.
If you found this article useful in any way, please feel free to share it on your preferred social network or email it to a friend!
Written by Lisa Gerding
PODS Customer Service Supervisor