How to ‘health-check’ your budget to buy a home in the New Year
News Corp Australia
20 Dec 2021, 12:00am
News Corp Australia Network
Deciding to buy your own home is one of the biggest decisions you will ever make, and while it can be daunting, Australians really love real estate and want to achieve the ‘Great Australian Dream’.
Whether you are a first homebuyer or an investor looking to add a property to your portfolio in the New Year, property analyst Alex Fitzgerald said it was important to do your homework well in advance and to ensure you had your finances in order with a workable budget you can stick to.
“The hardest part is saving for the deposit, but once you’ve done that, you’re in,” the Custodian national acquisitions manager said.
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Alex Fitzgerald, the Acquisitions Manager for property investment company Custodian.
Here, Ms Fitzgerald shares her tips for getting your budget to buy a home in the new year in order.
Health-check your finances: It’s a good idea to have an honest conversation with a strategic mortgage broker to determine where you stand financially. This will help you work up an achievable budget to get you the home you want in the area you want it in.
Buy what you need not what you want: If your expenses exceed your income, it’s time to get rid of some of your unnecessary wants. If you are struggling, cancel all your credit cards and automatic payments immediately as this will help kick start the process. Sometimes just cutting down on your monthly subscriptions will be an eye-opener.
You may want it, but do you need it?
Understand the difference between good debt and bad debt: Bad debt is debt that gives you absolutely no return, but is of cost to you such as credit card debt. Good debt, as an example, is debt such as an investment property, it gives you a rental return, tax deductions and also capital growth. If you have credit card debt you keep coming face to face with, it’s time to clear it and get rid of that card. Plain and simple.
Research the cost of buying a home: When speaking with your mortgage broker get a full scope of costs associated with purchasing your own home. These include, the deposit, stamp duty, legal and conveyancing fees, finance, and insurance costs, building and pest inspection fees and maintenance costs, not to mention ongoing repayments such as rates, and perhaps even strata or body corporate fees.
Save as hard as you can: The bigger the deposit the better. Lenders often require a cash deposit of between 10 and 20 per cent of the purchase price. If your deposit is 20 per cent or more you will avoid having to pay Lender’s Mortgage Insurance (LMI).
Grant eligibility: If you/and or your partner haven’t bought a property before, there’s a chance you may be eligible to receive the First Home Owner Grant (FHOG). It’s a national scheme but each state funds its own and the amount varies state-to-state. It can be more or less depending on what you buy (new or existing property) and how much it is.
Run a dummy budget based on your estimated repayment amount: Set up an automatic transfer of what you expect to have to repay on the loan amount you’re considering and put it into a separate savings account for a set period. This way you can work out if your expected mortgage repayments are going to be achievable or not long-term. During this process it’s also worth considering whether you can afford a rate rise in the future, try upping your pretend repayments to factor in a 1 per cent increase and see if it’s a struggle or not.
Run a dummy budget to see if you can afford a house and your lifestyle
Streamline your bank accounts: Have an everyday account for all your needs and wants, a future account with a different bank without internet or card access for future investment and a one-off account for big yearly bills like car registration – this should normally be about 10 to 20 per cent of your take home pay.
Have a structured savings system: Commit to saving 10% of your pay every time you are paid. Put it away before you can even contemplate spending it on things you don’t need! Once you master this, you can up it to 15% and then maybe even go as high as 30% if you breakdown your budget hard enough.
Have a safeguard strategy: I see a lot of young people scared to buy based on their ongoing commitment to make repayments. Its always a great idea to have one or two of your friends live with you for a few years and pay you per week for rent. In turn, you will have less stress with your repayments, and they may be paying cheaper rent with less of a long-term commitment.