Guide For First Time Home Buyers:

Part 1 - How to Set a Budget for Buying your First Home

(credits to Domain.Com.Au)


It’s tempting to base your budget on properties available for sale in your favourite suburb but, ultimately, if you’re a first-home buyer, your budget will be based on how much money you can borrow.

It’s wise to speak to a bank, lender or mortgage broker at the very beginning of your home-buying journey. Even if you don’t have a big deposit saved, they will be able to advise on how much you will need for a deposit for the kind of properties you are interested in, which gives you a goal to aim towards.

They may also help you realign your expectations, as your ideal suburb or property type may be more expensive than you can afford as a first-home buyer.

 

How much can I borrow?

To find out how much you can borrow, you will need to speak to a lender such as a bank or building society, or a mortgage broker. The lender calculates a maximum loan amount based on your income, savings, assets, expenses and credit history.

 

Although lenders will tell you the maximum amount you can borrow, this doesn’t necessarily mean you should borrow up to your limit. Ongoing mortgage repayments are higher for bigger loans, and other costs of owning a home, such as council rates, strata fees and insurance can add up.

Compare your after-tax income with your estimated ownership costs, as well as general household expenses such as groceries, bills, transport, schooling and leisure. If you feel there is only a small amount left over for non-essential purchases like dining out or holidays, you might want to consider a smaller loan. Alternatively, consider whether you can cut back on expenses and live more frugally as a home owner until your income rises.

Put yourself through a “pressure test” before determining your financial limits. Can you handle a 2 per cent interest rate rise? Do you have enough money set aside to make your mortgage payments for a few months if you lose your job? No matter how secure your job seems today, something could happen in the future. Being ready for the worst will ensure you land safely on your feet if or when it does happen.

 

How much do you need for a deposit when buying your first home?

The deposit is the amount of money you contribute from your savings towards the purchase. The typical deposit is 20 per cent of the purchase price, although it’s possible to buy a home with a deposit as low as 5 per cent.

 

Buying with a larger deposit allows you to take out a smaller loan with smaller repayments, and you’ll generally get a better interest rate. A bigger deposit also means you’ll start your home-ownership journey with more equity, which is important when it comes time to upgrade further down the track.

If your deposit is less than 20 per cent, you may have to pay Lender’s Mortgage Insurance (LMI). Borrowers with a loan-to-value ratio (LVR) of more than 80 per cent are deemed more risky by lenders, so LMI protects lenders in case you default on your loan. The cost is generally added to your loan as a lump sum, but you’ll also pay interest on that amount over the life of the loan.

In some cases, it can be more economical to pay LMI rather than wait and save the full 20 per cent, as property prices might increase faster than you can save, which might lock you out of the market in your ideal suburb.

 

How to save for a house deposit

Saving a property deposit has never been easy and requires discipline, usually at a time when you’re finally earning a decent salary and have more money to spend.

The first thing you need is a goal. Once you have spoken to a lender to determine how much you need as a deposit, research any government incentives that could give you an added boost.

Transferring money to a high-interest savings account that is separate from your everyday account makes it a little bit harder to access that money easily, meaning you won’t be as tempted to take it back out again.

Having a set portion of your salary paid into this account gives you a clear idea of how much you are saving, and further reduces temptation.

Also think about ways you can increase your income to save faster. That might mean asking for a promotion at work, taking on additional hours or even selling unwanted items.

 

How to cut back your expenses when saving to buy a house

Take the time to write a list of all your small monthly expenses, and you will probably be amazed by how much money you can save. For example, write down how much you spend on:
  • lunch or dinner at restaurants every month
  • takeaway coffees per month
  • drinks at the pub
  • transportation each month
  • entertainment, both at home and outside.

Added together, small expenses like these add up to hundreds of dollars per month. Simply taking lunch to work with you every day instead of eating out can save you around $300 a month. Takeaway coffees can cost up to $200. Take your own in a thermos or make do with instant and you can save $100 or more.

Those drinks you indulge in once or twice a week at the pub can add up to well over another $100 a month. If you have a few beers with your mates every day after work, you could be spending as much as $500 a month on beer alone.

Use the money you save by eliminating the little things to pay off your credit cards, which could be costing you money in interest. As a bonus, not having credit card expenses can boost your borrowing capacity when the time comes to secure your home loan.

If you’re renting, keep an eye on the rental market to make sure you’re getting the best deal.

 

What are the hidden costs of buying a house?

Apart from the purchase price, there are many other costs that come up during the home-buying process that need to be considered. As most of these costs are unavoidable, it’s best to think about them at the start of the buying process so you know exactly what you will be paying.

 

  • Pre-purchase inspections can cost about $500, but it’s worth it to avoid buying the wrong property or to understand what problems you’re up against.
  • Legal fees cost about $1500 to $2000. As a general rule, conveyancers charge a flat fee, while solicitors charge by the hour and may cost more.
  • Stamp duty is unavoidable for many buyers and normally costs tens of thousands of dollars, but first-home buyers may be entitled to exemptions for certain properties.
  • Council rates can cost several hundred dollars per quarter, depending on the value of the property. Ask the vendor for a copy of a recent council rates notice to estimate future payments.
  • Strata fees vary depending on the building but can cost anywhere from several hundred to several thousand dollars per quarter. A strata report will reveal the fees required, as well as the financial health of the sinking fund so you’ll be prepared for any special levies.
  • Home insurance will cost several hundred to several thousand dollars, and in many cases is required by the lender. For apartments, building insurance is usually included in strata fees, but it’s still a good idea to take out contents insurance to protect your property. Landlord insurance is recommended for investors.
  • Renovations may be difficult to for first-home buyers to estimate from the beginning, but experienced renovators always recommend budgeting more than you think is required.

 

What grants and incentives do first-home buyers get?

Eligible first-home buyers can take advantage of state government grants, discounts and schemes to help make buying the first property easier.

 

Most incentives require buyers to live in the property for at least 12 months, and buyers whose partner has previously purchased a home are normally excluded.

There are also maximum price thresholds, and schemes can change from time to time.