Purchasing property is the largest financial commitment many of us will ever make. For some, it can feel overwhelming trying to work out what is the perfect match for your current situation. Let’s explore the main factors to consider before you buy:
Budgeting and Saving
“Budget will dictate the size of what you buy and its location,” advises Don Gallicchio, Managing Director of Galldon Real Estate. That’s why potential purchasers need to work out exactly how much they need to save.
Peter Boehm, property and finance expert and the author of The Great Australian Dream: A guide to buying your first home, weighs in.
“Say you wanted to buy a home worth $400,000 with a 20 per cent deposit and an 80 per cent mortgage in five years, it means you’ll have to contribute $80,000 of your own money (plus cover the other costs of buying). If you’ve already saved $20,000, you’ll need to find another $60,000 over the next 60 months, or $1,000 per month, or around $231 per week. Now you have your target,” he says.
From here, it’s time to list and analyse income and expenditure and work out what your “needs” are versus your “wants”.
“The first step is to cut out all those “want” expenses. For example, if you cut out a daily $5 coffee, that would add up to $5 x 5 (five days in the week) x 52 (weeks in a year) x 5 (your savings time horizon) = $6,500! That’s over 10% of your savings objective! You’d be surprised how much you can save by adopting this method. It will also give you some valuable insights into your spending patterns.”
Peter also suggests exploring ways to boost your income to help speed up the saving process. This could include selling unwanted assets, asking for a raise, working extra hours, finding a better paying job or taking on a second job.
Understand your purchasing power
“It’s important you understand your buying power which for most people requires them to understand their borrowing power, and this is where getting a pre-approval is important,” Peter confirms.
“For instance, say a lender has made an initial assessment of your financial capacity to borrow, and are prepared to lend you $500,000. This means, assuming you wish to borrow up to 80 per cent of a property’s value, you may be able to buy a property worth 500,000/80 per cent = $625,000. Knowing this helps you identify which suburbs to focus your attention on (that is, where you can afford to buy) and sets limits on how much you should offer in relation to a private sale or bid in relation to an auction.”
However, as Peter adds, it’s important to remember that pre-approvals are typically conditional approvals. These might include being able to meet maximum loan-to-value ratios, if the potential property is an acceptable buy and that the lender’s valuation supports the purchase price.
“So, remember not to overcommit and ensure you fully understand the lender’s terms and conditions,” he says.
Associated costs to consider
It’s important to remember that the cost of buying your home does not end with the purchase price. You’ll also need to factor in the following:
●Government costs: State and Territory governments will charge levies for stamp duty plus the registration of mortgage documents and the land transfer. “You may be entitled to certain government grants and concessions (such as stamp duty reductions) which reduces government charges,” Peter adds. “Your legal adviser, solicitor, lender and/or broker should be able to help you determine your eligibility.”
●Lender costs: Expect to also pay for items such as an establishment fee, settlement fee, security-guarantee fee, additional security fee, lender’s mortgage insurance (“LMI”) and/or a rate lock fee. “It’s very important you understand exactly what you’re up for when taking out a loan so make sure these additional costs are explained to you by your lender and that you receive a written schedule of fees,” he advises.
●Miscellaneous costs: this can encompass solicitor or conveyancer fees, title and land search fees, your share of land and water rates, building and pest inspections, insurances, and removalists charges.
It’s all about location
“Location is extremely important when buying a home, but this is very much dependent on why you are buying,” advises Don.
“An investor in the retirement phase may be chasing a higher yielding property and may be less interested in growth. Someone less reliant on the income generated from a property may look at purchasing in a growth corridor or a suburban home with land and development potential, which has better capital gain potential but higher holding costs taxes.”
“An owner-occupier, depending on lifestyle and demographics, would look at it differently,” he adds. “A family with children would want to make sure they are in the right school zone, with access to freeways and public transport and such.”
Remember, it’s not forever.
When it all comes down to it, people now no longer stay put in a home for multiple generations.
“Over the years it’s become more common for people to downgrade or upgrade depending on their financial situation and accommodation requirements, rather than staying in the same home for 30-40 years,” Don states.
If you’re interested in obtaining guidance before purchasing a property, call Don on:
0418 148 580 email email@example.com