JUNE 27, 2016

5 questions to ask yourself before taking the leap of buying a home

Michael Yardney

Owning your own home is often referred to as the Great Australian Dream, but with any major purchase, comes a laundry list of responsibilities. If you’re not buying to invest but buying to live in, the stability of staying in one place often means a loss of flexibility and with the opportunity to build equity comes more financial responsibilities.

So let’s look at five questions to ask yourself before you make the leap into ownership These should help you decide if it’s the right time to buy your dream home.

1. Do you plan to stay put?

Before any serious commitment, you need to think ahead to the not so distance future and know you will still want the same things in 5 years’ time. There’s an old rule of thumb suggesting that buying make sense if you plan to stay in the one place for at least three to five years. Mainly because of the transaction costs involved in of buying a home.

When you factor in costs like stamp duty (around 5% of the purchase price of your property), loan costs and the expense of moving, not to mention all of the miscellaneous items like fresh paint and new curtains, these easily add up to many thousands of dollars. And when it’s time to sell, there’s once again another set of costs.

With all these hits to your bank account, it may well take staying put a few years to break even when all is said and done. And are you ready to tie yourself down to a particular home in a particular city? Depending on your future plans, what you do for a living and the job market in your area, you may be better off with the flexibility of renting.

2. Do your finances stack up?

If you’re already dreading the mailman’s arrival with your overflow of bills, buying a home may only compound your money woes. Ideally, you’ve saved at least 10 per cent for a deposit but keep in mind you’ll have to pay lenders mortgage insurance if your deposit is less than 20 per cent of the purchase price.

If you’ve struggled to save a deposit, then you probably aren’t in the position to buy your own home just yet. Instead try to improve your financial situation, before buying your first property.

3. What does it really cost?

If you’re on solid financial ground and ready to make a longer-term commitment, the next step is to get a realistic estimate of what you can expect to spend and how that number breaks down every month.

You can get a basic estimate by plugging in the details into a mortgage calculator. While this is a good starting point, it doesn’t tell you the whole picture.

For your own home, when you start repaying your mortgage, a small (initially tiny) portion of your mortgage will go towards paying down the principal. Over time, of course, the total amount borrowed reduces and you begin to make inroads in the reduction of the loan.

4. What are the extra expenses?

Don’t forget that there are many additional costs of home ownership that unseasoned buyers tend to overlook. As a renter, you may not see the expenses you never have to pay as tenants, and it’s not only rates and insurances.

If you buy an apartment or townhouse, for example, you will need to pay body corporate or owner’s corporation fees – usually every quarter. This additional levy, which pays for costs of shared infrastructure and amenities, can add hundreds of dollars to your monthly expense, and it’s not uncommon for owners to be hit with once-off levies for projects not covered in the budget.

When it comes to houses, most single income homeowners will need to budget money and time for routine maintenances costs, as well as big-ticket projects, such as paint jobs and new roofs. You have to be ready to take on all the things that come with ownership, because it’s not for everyone.

5. What’s happening in your market?

When considering buying your first home, it’s important to understand what is happening in your local property market. The market varies greatly from one city to the next – for example the strength of Sydney versus the weakness of Perth over recent times – so it pays to understand where in the cycle your market is sitting. Auction results are a great way to compare other like for like properties in the market.

While some will suggest you don’t want to buy at the peak of the market, if you’re intending to hold for the long-term then you should aim to buy whenever you can, regardless of the property cycle, because it’s better to do something than nothing!

The upside

Buying your own home is one of the best financial decisions you could make. Most Australians who bought a home and slowly paid it off over the years have found it is the biggest store of their wealth due to the long-term ongoing capital appreciation of well-located residential real estate in Australia.

For many buyers, that’s a good enough reason to get off the fence and into the housing market sooner rather later. However, it is important to go into this financial commitment of a new home with your eyes wide open.

Author: Michael Yardney is a director of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia’s leading experts in wealth creation through property and writes the Property Update blog.

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Michael Yardney


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