You've saved up what you think will be enough to secure a loan to purchase your first home, you're on the right track. The next step is to talk to a lender who can inform you of the costs and give you a better indication of what your buying figures are. Having a deposit doesn’t necessarily guarantee you a loan. Your loan qualification will be determined by your credit history (if you have a track record of paying back loans in the past, like credit cards and store credit) your monthly income, (which will be a combined income if there are two or more names proposed on the title), as well as your daily living expenses and payment obligations. Once you have your loan approved you are ready to go house hunting. Before you do though it’s important to draw up a budget that takes the expenses of buying a property into account.
Interest Rates
Of course, the big factor that everyone is focused on is interest rates. Interest rates, even small ones, make up a big part of your home buying cost over time. It's important to understand how rising interest rates will affect your repayments and overall purchase price. Lenders have a duty of care to explain the impact of rising interest rates to you, it’s important to take these seriously and find a repayment option and maximum price cap that allows you to make your payments easily.
There are other costs to consider aside from the interest rate.
Bank fees
Bank fees are part of your loan applications as well as ongoing charges. These will differ from lender to lender so it’s important to read the terms and conditions carefully to find the right fit, if you want to pay off your home loan faster for example or if you had special conditions that might be free for some lenders and cost hundreds of dollars for another.
Insurance
Lenders Mortgage Insurance (LMI). If you are paying less than a 20% deposit this insurance cost is usually mandatory. Check to see if you qualify for an exception. Just keep in mind this insurance covers the lender if anything goes wrong with your loan, it doesn’t give anything back to you.
Conveyancing
Conveyancing is a one-time fee that is usually paid after the settlement is completed. Your conveyancer will help with the settlement process and lodgment of title paperwork. The most effective way to do this is through the online application, known as e-conveyancing.
Now that you have the preliminary costs covered, it’s time to move into the other costs that are not typically considered but are important to cover when buying your first home.
Four Things To Consider When Buying Your First Home
- It’s not the same as renting
One reason many people step up to own their own home is that the mortgage repayments are actually cheaper than renting. It might feel like a comfortable step to say, well I can pay my rent, I can absolutely afford a mortgage, but there’s more to it than that. As renters, your landlord is covering a number of costs. Uncovering these and adding them to your monthly budget is important to get a view of what you will really be paying as a homeowner.
- Council Rates
- Water Rates (including sewage treatment, water usage and in some cases stormwater fees)
- Maintenance costs
- Home Insurance
If you are in an apartment or townhouse then you will need to factor in Strata Management fees that can be high if you have building lifts, a gym or swimming pool, community spaces and security staff/reception.
- The cost of living
If you are buying a bigger home than your rental you also need to consider that the cost of living might increase. If for example, you had a 2 bedroom apartment as tenants, then heating and cooling costs might have been manageable, or you might have had to struggle though if the landlord didn’t supply suitable heating and air-con.
If you move into a three-bedroom house, there is more space. This might result in an increase in energy use and the associated costs, especially if the home you buy is a little older with low energy ratings, or if the climate control systems might be a little outdated. Of course, you can have these things adjusted and even look at solar panels on your roof to help negate the costs, however, this will come at a price.
Consider the extra cost you might have to pay for
- Electricity
- Gas
- Water
- Car Insurance
- Transport costs
- Contents Insurance
As well as paying for essentials like
- Groceries
- Health Insurance
- Internet
As well as a bigger home, you’ll also need to consider your location. Are you living close to your usual neighbourhood for work and social activities? Will the move result in higher transport fees, including your car running costs? If the parking facilities are not the same as your previous address, will you need to pay more in insurance due to parking on the street or being in a high theft area?
Once you have these factored into your budget, look to have a way to put some money aside for unexpected costs like an emergency hot water service replacement, dental work or being off work for an extended period of time.
- Renovations
Buying your first home in the current market might mean you have to look for something a little rough around the edges. Even though this puts a home in your price range, there are some big money factors still to consider after you buy.
Fixing up a home can add amazing value to a property for a fraction of the price of buying a home that’s already renovated. Plenty of people make a living (and a tidy one at that) from flipping homes. However, the difference is they already have the connections to builders and labourers and are usually skilled to do some, if not all of the refit themselves.
Professional flippers also have a solid understanding of what gives a home good foundations and what is too far gone to repair. They can tell the potential of a property and how to bring it to its best to make the profit worthwhile.
Follow their lead and be picky in your choices. Pay to have a building check done so you know what you are up against and get quotes from builders, know the price of kitchen appliances and understand the full cost of your commitment.
Keep in mind that a new kitchen alone could cost as much as $30-$34K.
- Holding for the Long Term
There is a lot of talk about the value of your home, however, it’s important to understand that even if home prices increase, you won’t be able to tap into your property gains easily. Property is not a liquid asset. In order to get your hands on any additional value, you would need to sell your property, which comes with a lot of costs, including exit fees if you signed onto a long term home loan.
The cost of buying your next property will also increase, as the market is in the favour of sellers, so think about where you would be moving to and what you would be buying in order to keep the money in your pockets.
In reality, you need to consider property value as a long-term gain. In ten years or more you will see a better rise in value and will have paid off enough of your loan to look at leveraging your equity.
If you are thinking of moving or there is a possibility of needing a different type of home in five years time, crunch the numbers and see what the costs would be for selling the property so soon into your investment.
Buying your first property is an exciting step. As long as you have the savings you need and the income to make it affordable, you're well on your way to securing your financial future.
