If you’re hunting around for your first property, congratulations!
Buying a house is one of the biggest achievements and scariest things you’ll ever do.
And while it can feel exhilarating to finally find the one after months and months of house inspections, there are some important things to think about before speed-dialling the bank.
Here are four things to consider before you take the homeowner plunge.
Buy a house you can actually afford
Unless you win the lottery, very few people can afford to buy a house outright. Luckily, your bank will lend you a stack of cash to cover the shortfall. And with the next three decades up your sleeve to repay your loan, time is on your side.
It sounds simple enough, but first home buyers can end up in a sticky situation if they bite off more than they can chew. Don’t fall into the trap of borrowing just that little bit more to buy your dream home.
While we’re in a historically low-rate market at the moment, you should always factor in a buffer of 2% to 3% on top of your current interest rate to accommodate future rate hikes. It can be easy to overlook this at the time, but having some financial wriggle room is a crucial consideration when taking out a mortgage.
There’s a good chance your current your financial circumstances aren’t going to be the same throughout the life of your loan.
For example, you might decide to branch out and start your own business or you could be made redundant. No one likes to imagine the worst, but it’s important to factor in any possibilities which might affect how much you earn in the future.
So how can you ensure you have enough of a buffer to continue to meet your future repayments?
Purchasing a less expensive property is a really good start.
As a guide your mortgage payments shouldn’t be more than 28% of your total income. This means you’ll have some breathing space if your interest rate goes up unexpectedly or your employment situation changes.
Don’t buy for the life you have today
If you’re just starting out as a couple, you might decide to start a family a bit further down the track. And if there’s one thing I know about having kids, it’s that you accumulate a huge amount of stuff over the years, not to mention the fact they will need somewhere to sleep and when they are teenagers take over your bathroom all day and night.
Beyond children, you might decide to buy a dog, refurbish a sailing boat or start working from home. So while that cute one-bedroom cottage may be perfect in the present, you don’t want to end up bursting at the seams in a few years time.
Remember that you probably won’t pay off any equity on your property for at least five years either. This is because most repayments will cover the interest to begin with. Once this is paid off, your repayments will then begin to cover equity as well.
So if you think you’ll need to move before that, it’s a much better use of time (and money) to keep looking for something that can accommodate the future you and all that might entail.
Remember that the cost of a home goes beyond the sale price
Many first home buyers can get caught up in the overall sale price and forget to take into account all the other costs involved with buying a house. And there are plenty to cross off the list.
Aside from your loan, you might be faced with a stamp duty fee and a loan establishment fee. You might also be up for lenders mortgage insurance (LMI) if you’re borrowing more than 80% of your property’s value. Smaller fees can include things like a valuation fee and solicitor or conveyancer fees.
And then there’s the move itself. The average cost of removalist hire in Australia is around $1618. This is where many first home buyers often find they’ve fallen short.
Have an exit strategy
When you’re buying a house with your partner and you’re madly in love, it can be easy to sweep all the “what ifs” under the welcome mat. No one wants to talk about divorce or the divvying up of assets when you’re buying a home.
It’s much more fun to pop open a bottle of champagne and pick out colours for the new living room. But life doesn’t always go according to plan, and while a separation isn’t necessarily going to be on the cards, it’s a smart idea to have a back-up plan, just in case.
If you’re married, there are laws that will help to determine who gets what in the event of a divorce. But de-facto couples who go their separate ways might find that the division of assets gets a bit murkier where the law is concerned.
To save yourself unnecessary hassle (and heartache), it’s a good idea to draw up some sort of agreement with your partner, which outlines what will happen to the property if things don’t work out.
Some couples are happy for one person to buy the other one out. Others might prefer to sell the house and split the money 50:50.
Whatever you decide to do, make sure to get it all in writing. You should seek out legal advice if you’re unsure about where to start – and maybe treat yourself to a romantic dinner afterwards.
Sometimes when you’re faced with a mountain of to-dos (and haven’t-dones), it’s easy to miss the most obvious things.
And this happens to the best of us in the excitement of buying a home.
But knowing how much you can afford, what your future plans are and what you’ll do if things don’t work out means that when you do eventually find your dream home, you’ll have all your bases covered. And what could be more satisfying than that?