Steps to buying a home
Buying a home is a major decision that takes planning, research and careful budgeting. Here are some tips to help you get started.
How much do I need to buy a home?
There are a number of costs to consider when you buy a home. The biggest upfront cost is usually a deposit.
How much deposit do I need?
A deposit of 20% of the purchase price plus enough to cover costs is ideal.
The bigger your deposit, the lower your loan to value ratio (LVR). This is the amount of the loan divided by the purchase price (or appraised value) of the property.
If your LVR is higher than 80%, you will usually need to pay lender’s mortgage insurance, and the lender could charge you a higher interest rate. Avoid these extra costs by saving a bigger deposit to lower your LVR.
First home buyers
Make sure you know what you’re entitled to in terms of first home owner grants, as these can boost your deposit significantly.
You should also find out if the first home super saver scheme can help you save for a home. This is a new initiative announced in the Federal Budget in May 2017 that allows first home buyers to save for a home deposit within their super fund.
First home buyers are eligible for stamp duty concessions in some States and Territories. Check with your state’s revenue office for details.
How to build a home deposit
Growing a home deposit can take a long time and might seem like an impossible goal. There’s no secret tip. It’s about establishing a good savings habit and committing to it. Start small and watch your savings grow over time.
If you’re starting from scratch consider creating a savings account specifically to build your deposit and automatically transfer money into it each payday. See saving for a home for more tips on building a home deposit.
Work out how long it will take to reach your savings goal.
Talk to your partner about saving
If you’re saving with a partner, talk about where you can cut back on your spending. Open communication is really important and you can motivate each other along the way.
See relationships and money for tips on managing finances with your partner.
What are the upfront costs of buying a home?
When you’re buying a home you also need to factor in upfront costs such as:
- Stamp duty – this varies depending on your State or Territory
- Legal and conveyancing fees
- Moving costs like removalists and storage
- Costs associated with selling your old home
Stamp duty calculators
Find out how much you’ll need to pay in stamp duty by using the calculators on these websites:
NSW – Revenue NSW: Calculator – for land and property transfers
What mortgage can I afford?
Working out what mortgage you can afford is about striking a balance between the lifestyle you want and the one you can comfortably afford.
Ongoing costs of buying a home
There are a lot of ongoing costs you’ll have to manage on top of your repayments once you move into your new home. These include:
- Insurance to cover your home and contents
- Council rates
- Utilities like water, electricity and gas
- Extra transport costs
You might also need to do some renovations before you move in, so make sure you know all the costs before you agree to a price for a new home. Then you’ll be able to work out what you can realistically afford.
Create a future home budget
Picture yourself in the home you want and create a budget based on that, including all the costs you’re likely to have from rates and utilities to everyday spending at the supermarket and public transport.
Create a ‘future home budget’.
Once you’ve created this budget you’ll be able to see what money is left over each fortnight. This will give you an idea of what mortgage repayments you can afford.
For example, your future home budget shows that your income is $2,500 per fortnight and your living costs are $1,000 per fortnight. From the remaining $1,500 you’ll need to work out how much you can comfortably contribute towards mortgage repayments.
If you’re currently renting, think about how much more you could afford to spend on rent each week – that will give you a good indication of what you could afford in mortgage repayments.
Work out how much your repayments will be with different loans.
Build a savings buffer
Your mortgage repayments will usually go up if interest rates rise so make sure you build a savings buffer so you can cope with higher repayments.
Another thing you can do is choose a loan that allows extra repayments so you can build a buffer and then redraw it later if you need it.
Before you start looking for a home, do a budget to work out how much you can afford in mortgage repayments. Consider additional costs such as stamp duty and legal costs, as well as ongoing costs such as insurance and council rates.
Source: Asic- MoneySmart