7 Tips When Buying Your First Home
Set a goal
With everything in life, if you have a clear goal on what you want to achieve, you can start making the right plans towards reaching the target. Give yourself a realistic goal and add the fact that there will be unexpected events, good and bad, that will come up along the way. Be clear on how you will achieve this.
A bad example of a goal - I want to buy my first home in the next 2 years
A good example of a goal - I want to buy my first home in the next 2 years by saving a deposit of $30,000. This will be achieved by saving $350 per week (giving yourself a bit of buffer in case of the unexpected).
Put together a realistic budget
Now that you have a goal, it is time to work out how obtainable it is by working out your current spending and putting together a budget plan to achieve your goals. As with your goals, make sure you add a buffer into. Putting the money together is not going to be an easy task so expect to cut out some of the expenses that you are currently use to. In saying that, do not go to the other extreme of cutting everything out as this could have a negative effect where you consistently miss your budget/goal due to unrealistic expectations. Remember life is there to be enjoyed.
Understanding your options
Owning properties can be a good investment strategy that can help set you up for the rest of your life. While there have been a lucky few that may have won lotto, inherited a house from a relative or have a wealthy family to rely on. For the others that have not been so lucky, it is important to understand how the property market works and how it can benefit you. It can start from understanding what LMI (lenders mortgage insurance more on that below) or equity is and lead into learning how serviceability works and the different strategies that other property investors use to build their wealth. The internet has many different resources available now to help you understand this for free but also talk to a mortgage broker, financial planner and/or accountant as they come across this regularly. When investing the large amounts of money required for property, knowledge is key.
With the average house price in Sydney at $1.1 mil as of Jan 2017, saving the $220k deposit required to avoid LMI sounds very daunting. Add to this another 5% which is normally required to cover legal fees, loan setup cost and stamp duty and it sounds pretty much unachievable unless you saved for your whole life. This is where having other strategies and taking small steps helps you achieve your dream goal.
One example of this is buying an investment property first which is within your price range. Find a property that is $300k and that deposit now sits at $60k instead. Rent it out and use the benefits of someone else helping you repay the property while also receiving tax deductions from the depreciation, repayment of interest, council rates and any other cost associated with the investment property. At the same time, you now have capital growth working for you when the property value increases. So if it were to increase by 10% over the year, it would convert to an extra $30k in equity. That extra money could be placed towards buying your next home or investment property while at the same time continuing to save money and having a tenant help to repay your loan. There are definitely other considerations to keep in mind, but it is a high level example of a strategy to help you towards owning your dream home.
Guarantors can help you avoid Lender Mortgage Insurance (LMI)
If you have a 5% deposit and need another 15% to avoid LMI, one option is to use a guarantor. This is where another party (usually parents) offers their property as security in case you are unable to repay your loan. While there is definitely a risk for the guarantor as they would be liable as well, it can be a good option if you are looking to purchase now and have the capacity to repay the loan. Part of the lenders requirements are to have the guarantors seek independent legal and financial advice before becoming a guarantor. Lenders will also normally exhaust all other avenues before going down the path of recouping funds from the guarantor.
Lender Mortgage Insurance (LMI)
LMI is an insurance for the lender in case you default against your loan. The insurance actually doesn't cover yourself if you default so be careful not to confuse this with mortgage insurance. LMI usually applies when you need to borrow more than 80% of the value of the property. The higher the percentage you borrow, the higher the insurance amount will be. While LMI can scare some people off buying a property as they want to avoid paying this fee, it can sometimes be worth it to pay for the cost.
An example of this is buying a median house in Liverpool back in 2014 which would have set you back $580k. If you were only able to save 10% and there were no other options for the other 10%, then the LMI would have been approximately $15k. Now fast forward to 2016 and the median price is now $706k. So instead of needing another year or two to save for that 20% deposit and trying to buy a place at $706k, you were able to buy the place for a total $595k (580k purchase price + 15k LMI) and seen your equity grow by more than $100k.
When buying property, always keep in mind that you need to have funds available for the unexpected. It could be a burst water pipe, hail damage, broken window, tenants not paying, loss of job etc these things can happen so either have the insurances to cover you for these unexpected events and/or continue to put money aside. This will help you when you least expect it.