It can be exciting to find your ‘dream home’, but is it really a home you can afford?
Many first home buyers quickly discover that their dream home has turned into a nightmare. That’s because they max their borrowing power to the hilt and then struggle to pay back their home loan.
You don’t want to be one of those buyers. Instead, you want to be the kind of person who buys a home you can afford right now. The kind of person who knows that sometimes your first home is really just a stepping stone to your next home. And maybe that next home is the dream home you can afford – really, actually, comfortably afford.
Take these seven steps to take to make sure you’re on the right track.
1. Check your credit score and look at your cash flow
Knowledge is power and you want to know how good a customer you will be for the financier if you borrow from them. You can find out your credit score for free at a number of credit score websites.
The higher your score, the better interest rate on your mortgage you may be able to negotiate. Good credit can mean significantly lower monthly payments, so if your score is not great, consider delaying such a big purchase until you’ve repaired your credit score.
Banks have an advertised home loan interest and then discount that rate according to how good a payer or customer you are. Having multiple other products, like insurance and credit cards, with the bank should also qualify for a discount.
As for monthly payments, experts say a good rule of thumb is to make sure the total monthly repayment doesn’t consume more than 30 per cent of your take-home pay. If it’s higher than that, you need a plan to reduce it over a short period.
Because trading houses is so expensive (stamp duty, real estate commissions, conveyancing fees, moving costs), plan on being in this first home for at least 10 years.
2. Have cash for a deposit
Technically you can negotiate any deposit with the vendor. These days it can be as low as 5 per cent and is often contingent on the length of the settlement. A general rule of thumb is the shorter the settlement the smaller the deposit can be negotiated.
But your financier may stipulate a higher deposit so that you have greater equity in the property to protect the value of the home loan from any falls in property values.
Just remember if the deposit is less than 20 per cent, the financier will often require you to take out mortgage lender’s insurance which will cost about 0.5-1 per cent of the value of the loan. Keep in mind that this insurance is purely for the lender – it doesn’t protect you at all.
3. Plan for surprise expenses
Even if you can afford the monthly payment, be aware of hidden costs. Buying a home means stamp duties, legal fees, insurance and council rates that can add up to hundreds of dollars per month.
For people who have come from renting, these extra costs can be a shock. So make sure you’re well prepared and have a bit of a slush fund in the household budget.
Don’t forget to inquire whether you qualify for a first homeowners grant and for stamp duty concessions in your state.
4. Get your mortgage pre-approved
Once you have the financial budget in order and decided to take the plunge into a first home, you need to determine how much you can afford to spend and stick to that limit.
Talk to the bank about a pre-approved loan up to a certain limit before house hunting. A conditionally-approved loan demonstrates to you, the real estate agent, and to vendors how much you can afford. When you’re in a bidding battle with other potential buyers a vendor will usually take an offer from those with a pre-approval letter before those without one.
Remember though, you don’t have to spend every cent up to the pre-approved loan. A home you can afford is generally one that costs less than the maximum approved amount. That way you cover yourself for interest rate rises and any unexpected home expenses.
5. Find the right real estate agent
Always remember real estate agents are working for the vendor. The higher the price they can get out of you, the more they receive in commission from the seller.
Having said that, finding a good real estate agent who understands your needs, can pay in the long run. Reach out to friends for recommendations, and interview several options to determine their level of experience and expertise in the suburbs you’re interested in.
Buyer’s agents are becoming popular. They act for you and do all the legwork of finding the perfect home, and dealing with real estate agents … for a fee. It can be a flat fee or a percentage of the value of the property.
Your can also hire a buyer’s agent to simply bid at an auction on your behalf.
6. Start hunting within your price range
Start off by determining your general needs — where you want to live, how many bedrooms and bathrooms you need, and certain school zones you’re trying to be in. Listing your ‘must haves’ will really give you the best idea of whether a property in this area will be home you can afford.
Become your own expert. Technology has empowered people like never before to do a lot of the searching online, and to really understand the market before actually going out in person.
Pore over real estate websites, talk to people who live in the area you want to buy in, spend as much time as you can in the area yourself. Visit as many open homes as you can – both within your price range and a little outside it. It’s worth knowing what paying a little less or a little more will buy for you.
7. Put in an offer you’re comfortable with
Buying a home is a very emotional process. It’s important to remain rational and stick with your price limit while buying. Many times people get caught up in bidding wars, and will go way over what their price limit because they love the house so much.
Don’t just put in an offer because you’re emotionally drained and desperate to finish the process. Expect to miss out on a few homes before you find ‘the one’.
If you’ve found the right one, make your bid quickly. There may not be much room to negotiate or drive the price down, as you’ll likely be facing competing offers.
Good luck and feel confident that you’re putting a bid on a home you can afford. Really, actually, comfortably afford.