Australia has one of the highest levels of home ownership in the world. On the flip side, Australia has the highest levels of household debt in the world. Furthermore, Australia has the lowest interest rates in history, so repaying that debt is (kind of) manageable today.
I still passionately believe that owning your own home is one of the best financial decisions you’ll make. Why? Well, owning your own home is like a 30-year forced savings plan and any gains you make over that period are tax free.
You’ve often heard the term “Rent money is dead money”. As a Finance Broker, i don’t see it that way at present, well, at least not in the short term while you get your life and finances in order. You see, if you plan to buy a home with little deposit and you cannot prove you have genuine savings, then proving to a bank that you’ve made consistent rental payments on time for the previous six months is as good as showing genuine savings.
I’ve been doing this for over 14 years and i often see when young people make the biggest purchase of their life, a property, I see them make the same mistakes over and over again.
Mistake 1: They’re waiting for a crash
I’ve heard this since the global financial crisis back in late 2008.
You can’t plan your life around something you have no control over; the only thing you can control is yourself and your savings. The time to start preparing to seize opportunity is right now.
Mistake 2: They buy a home they can’t afford
A young couple can earn good money when they’re both working full time. A few years later comes babies and obviously down to one income for a period of time. This then can become a nightmare in having to meet the minimum repayments.
Is it any wonder the median duration from wedding bells to divorce bills is 12 years? In my 14-year tenure in the finance broking industry, I am now seeing a lot of my original first home buyers come back to me with this sad news.
The truth is that buying a home creates financial stress and insecurity until you get ahead of your mortgage.
Mistake 3: They rent but forget to save
Renting is generally cheaper than owning because you don’t have to pay interest or upkeep. It makes sense on paper to rent and invest the difference. The only problem with this idea is that hardly anyone ever saves the difference.
Mistake 4: They don’t consider the other options
You can move to the outer suburbs or to the country. Less than an hour’s commute from Melbourne you can purchase a home on a large block for roughly half what it would cost in a run-of-the-mill suburb of Melbourne. It’s a lifestyle choice you’ll have less of a mortgage, more involvement with your community and more time to spend with your kids.
OK, so we’ve looked at the biggest mistakes first-home buyers make. Now let’s look at some FAQs
How much of a deposit do i need?
You need to save at least 5% of the purchase price or even as much as up to 20% to help avoid the cost of ‘lender’s mortgage insurance’ which can be in the thousands of dollars.
How much can i afford?
Always borrow less than the bank will lend you. Your overall debt repayments should be less than 33% of your gross income. If you’re planning on having kids in the next five years, factor in the drop in income and the increase in costs.
Should i buy with friends or family?
Friends? No. How many decade-long share-house relationship do you see? Family? Possibly. As long as you’re planning on living in it for the next ten years.
What about government grants?
If you’re buying a home, you may be eligible for the first-home buyer grant and stamp duty concessions. Your Conveyancer and Broker can help you with this. To find out more visit www.firsthome.gov.au