Investing in property is a huge decision and can be very costly if you get it wrong. Here's four top tips to help with your strategy if you've decided to buy a home to live in.
Taylors Strategic Partner, Michael Sik - Financial Adviser and Owner of FinPeak Advisers - shares his tips for buying your own home to live in.
Tips For Buying Your Own Home
Unless you plan on flipping properties as a hobby (which some do very well from), most of us will only ever own one or two properties in our lifetime as the costs associated with buying and selling property are quite high and will erode all your savings if you’re not careful.
Tip #1: Save For A Deposit
It would be nice if we could just turn up at a real estate agent with a cheque and pay for your home outright from your savings but for most of us, we’ll need to come up with a deposit and then borrow the remainder from a bank or financial institution. A good starting point for a deposit is to aim for at least 20% deposit plus costs. Generally, to avoid paying lenders mortgage insurance (LMI)*, it is best to have a deposit of 20% or more. Some lenders may only require a deposit of 5% but a smaller deposit also means a higher cost for LMI and a larger loan to be paid back to the bank with interest over the term of the loan which could be up to 30 years!
Other costs involved will be things such as stamp duty, legal costs, inspection reports, agent fees (if engaging a buyer’s agent) and loan fees. Then there are the other costs they don’t tell you about like moving costs, fit-out costs, renovations and landscaping.
According to moneysmart.gov.au it takes around 4.6 years to save for a 20% deposit. Saving for a deposit starts with a budget. To manage your spending, try setting up a regular savings plan to help with growing your deposit. At FinPeak, we use a wealth platform called MyProsperity which allows you to track all your expenses across all your bank accounts and receive a monthly report so you can stay on target with your goal. MyProsperty allows you to track your spending habits and automatically categorises your expenses and gives you the ability to set a budget so you can see if you are going over or under on those ‘nice to have’ expenses. You can even set a goal that tracks your progress so you can own your home sooner.
Other ways to help you save for a deposit could include:
- If you’re a first home buyer then, using your superfund to tax effectively save, see our article on the First Home Super Saver Scheme (FHSSS) here;
- Or you may be eligible for the First Home Owners Grant (FHOG), to help boost your deposit and even reduce your stamp duty costs. Different rules apply in each state and territory;
- Or you may be eligible to buy your house with as little as 5% deposit and save around $10,000 in LMI through the First Home Loan Deposit Scheme;
- If you have existing investment properties you may be able to use the equity from those assets (note the interest expense associated with the funds drawn for your own home deposit will not be tax-deductible);
- More recently, given high entry prices, many buyers are turning to the Bank of Mum & Dad (BoMD) however this may cause further problems in the future such as a shortfall in their retirement objectives;
- If you have a longer time horizon (and the right tolerance and understanding of risk) you may explore other strategies such as investing in growth assets to help you boost the returns on your savings;
This is where speaking to a financial adviser is key, they can assist by putting together a game plan and helping you understand your options but also keep you on track with regular check-ups along the way. They will understand which strategy is right for you and also the structure to use to get the best outcome. Laws and incentives change all the time and this means your plan may need to change and having that professional third party can add value and save you from disappointment.
Tip #2: Work Out What You Can Afford To Borrow And Find The Best Loan
How much you can borrow will depend on factors such as:
- your income and expenses;
- the size of your deposit;
- how you earn a living (self-employed, contractor, full-time employee);
- and your credit score.
Just because an online borrowing capacity calculator says that you can borrow a certain amount, it doesn’t always mean that you should. You may have other goals and need to weigh up the tradeoffs as buying your own home will be a long term commitment.
Speaking to a mortgage broker/specialist will take the guesswork out of shopping around and the good ones will help choose the right product to save you money and give you options in the long run.
Tip #3: Find The Right Property
Buying a property is expensive and will likely be the largest single purchase you will ever make in your life. Not only are the purchase and transaction costs (stamp duty, legal fees and agent fees) significant but many don’t factor in the time costs in finding the right property over and over again.
If you have or are planning to have a family, will this property suit your needs now and into the future? Is it close enough to transport to get to work and close to good schools so your kids aren’t travelling hours each day to get back and forth? Make a list of what the ‘must-haves’ are and what the ‘nice-to-haves’ are so that it keeps you focused as you’ll spend most of your weekends inspecting properties. It’s not uncommon to be overly excited at the first property you inspect or fatigued after spending months looking at properties. Using a buyers agent can sometimes help. Once they get a good feel for what you’re after they can then shortlist properties that fit your brief and even help you with the negotiations on price.
As house prices keep climbing, most homeowners now are putting off buying your own home until later in life and depending on your life circumstances it may mean working longer and adjusting what your ‘living your best life’ in retirement looks like.
Tip #4: Negotiating And Signing On The Dotted Line
When you find the right house it is easy to let the emotions get ahead of you. Your property might be sold via an auction so it might help to observe a few before you bid on the property that you have chosen. You might bring someone who is experienced, this is where your buyer’s agent can help. Expect to have a cheque ready on the day eg 10% of the purchase price. If purchasing via a private treaty then the contract of sale will stipulate a deposit amount.
The seller will issue a contract of sale which you should give to your conveyance or lawyer to review before signing. You may also want to get a building inspection (to ensure the property is structurally sound) and pest inspections (to make sure there aren’t any nasties hiding under the surface).
Once you’ve ticked all the boxes it’s time to make an offer which could be unconditional (binding offer if you have your finance sorted) or conditional (pending things like bank valuation or finance etc). If everything goes through smoothly and you complete your settlement, congratulations you’re now a homeowner and it’s time to move in!
Like To Learn More?
Buying property at the end of the day is just a means to an end, it can be exciting and rewarding but at the same time can be costly and frustrating. This is where seeking advice can help take the headache out of the journey. For more information, please contact Michael Sik on 0404 446 766.