Buying your own home has always been considered “the great Australian dream”. It stands to reason that saving for a house deposit is one of the most common goals our clients have.
There is no doubt that it’s getting harder to buy a house with the average deposit needed being well over $200,000 in Sydney and Melbourne. The amount required also very high in most other capital cities.
If you’re going to chase your property dream it’s important to do your homework up-front and be mentally prepared for the road ahead. Here are a few questions I found myself asking when deciding whether to buy.
Do I really want to buy or am I just keeping up with the Joneses?
Like many Australians, the idea that we need to buy a home is something that’s been drummed into me by my parents and relatives since I was young. We’re told that home ownership provides financial stability and security to help set us up for the rest of our lives.
However, the Australia we now live in today is a very different one from 30 years ago in terms of both lifestyle and costs. The median house price in Sydney back in 1985 was $73,000 or 3.5 times the average annual income. By comparison, this measure has grown to 11 times the average annual income in 2018.
That is a huge financial commitment and will mean you’ll have to change your priorities, lifestyle and goals in order to save almost every dollar. This is why it’s good to have a reality check by asking yourself if being a first home buyer is actually something you want or feel you should do.
Can I *really* afford it? How much do I need and how much should I borrow?
Be realistic with what you can afford. I’ve personally witnessed friends struggle to repay their mortgages because they’ve overcommitted themselves by buying a place they can afford to rent, but was not really within their budget to buy.
Being conservative when considering your future earning potential and expenses is important. Having enough money for a 20% deposit will save you from paying mortgage insurance but you should have additional funds saved up for emergencies (e.g. you lose your job) or unexpected expenses (e.g. urgent repairs, special strata levies). ASIC’s MoneySmart mortgage calculator can help you work out how much you can borrow and should budget for repayments.
One other thing to consider is your age when you think you’ve saved up enough money to purchase your home. High property prices has resulted in more people buying their first home later in life. This can impact your loan term as banks typically want the loan to end before retirement age, which can put the standard 30-year mortgage out of reach.
What are the costs involved in buying a home?
The costs of purchasing a property vary by state/territory and the type of property you’re purchasing. Typical costs include:
- Stamp duty
- Lenders mortgage insurance (if you do not have 20% deposit)
- Legal and conveyancing fees
- Loan application fees
- Pest and building inspection reports or a Strata search (for apartments)
- Utility connections
Some of these costs like stamp duty can be substantial, for example, the stamp duty on a $800,000 property is $31,490 in NSW and $43,070 in Victoria. These are additional costs that you’ll need to save up on top of your house deposit.
Where do I want to live?
Is the area you want to live affordable or are you happy to live further out in return for something that fits within your budget? With house prices starting to ease, buying somewhere less desirable and further from the city as a stepping stone may no longer be a sensible investment strategy. Fringe suburbs have a history of not holding their value well in downturns.
If your ideal suburb is too pricey and you can’t bear that long daily commute or that $70+ Uber ride after a night out in town, it might actually be better to continue renting in your favourite area.
There’s no right or wrong…
The decision to buy or rent is ultimately a personal preference.
For me, coming up with honest answers to these questions has helped me work out my motives and priorities, assess my financial situation and develop a more realistic long-term plan.
Being able to strike a balance between maintaining the lifestyle that I enjoy and being financially sensible was ultimately what’s important to me. I set aside money each month as if I have mortgage which goes into my investment portfolio.
The rest is divided up into rent, essentials and “happy money”, which I track using the TrackMySpend app (It’s amazing how much more money you can save by using a budgeting app!).
Whichever option you decide to choose, being disciplined with saving is key and investing can help speed up the process of reaching your goal sooner. Returns from an investment portfolio aren’t guaranteed but give you a better chance than a savings account of keeping up with house prices as you save.
Find out how Stockspot makes it easy to grow your wealth and invest in your future.