Getting into the property market and buying your first home can seem like an impossible task to many. Saving the deposit seems like a big ask, then you need to consider Stamp Duty and other purchase costs that just require even more savings!
Getting the deposit together takes discipline, but the rewards are great if you can manage your money effectively.
So what are the steps a future first home buyers should be doing to achieve their goal?
Step 1 – Establish a Budget
It might not be exciting, but the first thing you need to do is set up a Budget! Yes that “B” word, Budget!
As we have already said saving a deposit takes discipline, and budgeting gives you a means to track your spending and put your finance priorities in order. A well prepared budget allows you to analyse your spending and assess whether you can cut down some of your discretionary spending to get you towards home ownership faster.
ASIC has a great budget planner on their Money Smart website (https://www.moneysmart.gov.au/tools-and-resources/calculators-and-apps/budget-planner)
Step 2 – Start Saving
Once you have worked out what surplus funds you should have from each salary / wage deposit, make sure you set up a separate account, preferably a high interest account, to deposit those funds into each pay day. You need to make sure you don’t touch these funds, no matter what, until you are purchasing a house.
The other benefits of having regular savings deposits as part of a budget is that when you are ready to apply for a loan you can demonstrate to the lender your regular savings pattern. This will be a real positive as part of their loan assessment processes.
Step 3 – Understand the local property Market?
Now that you have a savings plan established you need to research the property market and understand the cost of housing in the areas you are interested in. Remember, you may have to consider a cheaper suburb for your first home so make sure you are building your knowledge on what your money buys over a number of suburbs.
You can do this research by attending open inspections in your preferred areas or even spending an afternoon on the internet researching property sites such as www.realestate.com.au or www.domain.com.au
Step 4 – Meet with a local Mortgage Broker?
This is the step that for many, where reality begins to step in. Your Mortgage Broker will be able to guide you as to what your borrowing capacity is (i.e. how much a lender is likely to lend you), what other costs are involved (stamp duty etc) and what the repayments are likely to be.
From here you will get a much clearer picture about the savings you need to contribute.
Make sure you ask your Broker to tell you what the repayments will be should interest rates increase by say 2 – 2.5% p.a., so that you can make sure you understand the financial impact of any potential interest rate increase. Your Mortgage Broker will also be a wealth of knowledge in letting you know any Grants or First Home Buyer benefits you may be eligible for! Or even other options (i.e. Family Guarantees http://brentonparsons.com.au/home-finance/what-is-a-family-guarantee-loan/ ) that may be available to help you get into the market sooner.
Step 5 – Review your Budget & Savings!
That “B” word again! Now that you have an understanding on what you can afford, the price of property and what savings are required, you need to review your budget.
Are your current regular savings adequate? How long will it take you to save the money you need? Can you make lifestyle adjustments to save even more? Do you need to reconsider the price of the property you can afford?
As a rule, now you have an idea of your potential loan repayments when you have purchased a house, your minimum regular savings should be:
Minimum Savings = The amount of your forecast loan repayment Plus forecast utility expenses (i.e. water, council rates etc) Less any rent you currently pay.
Preferably your forecast loan repayment should assume a higher interest rate than what is current. If you maintain savings at this level over the longer term, you are proving to a potential lender that you have the ability to service your loan repayments and are a good credit risk.
Good Luck and happy saving!