Six questions to ask yourself before you buy that property
Thanks to our friends at Finder.com.au for helping us to deliver this article.
Getting into the property market is one of the top ambitions of many Australians. But wanting to buy property and actually being ready to buy property are two different things. Before you commit to the biggest financial decision of your life, you should ensure that you’re both financially and emotionally prepared.So how can you be sure you’re ready to commit to buying a property?
It starts with asking yourself a few key questions about your lifestyle and your finances.
Buying a home is a huge commitment, and in all likelihood is going to mean some pretty significant lifestyle adjustments. With that in mind, you should take an honest look at your current lifestyle to see if you’re in the right headspace to buy.
First, think about your current work situation. How long have you been at your current job? If it’s less than a year, lenders could be pretty sceptical about your home loan application. If it’s less than six months you could face some real difficulties finding finance. If you’re still in your probationary period, forget it. The one exception could be if you’ve been in the same industry for a number of years but have just switched employers, but it’s still smart to wait to apply until you’ve at least passed your probationary period.
It’s not just about your past employment history though. You also need to assess where your career is headed. Do you think you have strong job security? Are you likely to look for a career change in the near future? If you’re uncertain what the year might bring for you and your employment, you might want to hold off on buying a home until you’re on firmer footing.
You also need to think about any potential life changes in the years ahead. If you don’t have kids yet, are you thinking about having them in the next few years? Sure, all your friends with kids go on and on about how expensive they are, but, seriously, no kidding, kids are expensive. That doesn’t mean that having kids and buying property are mutually exclusive, but it does mean you need to factor those considerations into your budget. How many children you want may dictate how much space you will need or how many bedrooms you will need, so think about potential renovations here, too.
Another aspect you need to consider is your expectations around your general standard of living. In other words: how much of your current lifestyle are you willing to sacrifice in order to afford a home loan? Smashed avo on toast has become a lazy punchline for stuffy baby boomers to wag their fingers at millennials over their breakfast habits, but there is some truth to the notion that homeownership requires sacrifice. There’s no shame in wanting to hold onto your current standard of living. You just have to be honest with yourself that homeownership may not be the path for you right now.
Being emotionally ready is an important first step, but you’ve still got to have the money to back up all those good intentions. The next step to assessing your readiness is to have a good look at your finances.
First, you’ll need to see how much money you have saved and how much you think you can realistically save on an ongoing basis. You’ll need a deposit to get yourself into the property market, and most lenders are going to require at least 5% of the purchase price of your home. If you can, it’s smart to save at least a 20% deposit in order to avoid paying for lenders mortgage insurance, or LMI. A quick look at an LMI calculator can show you just how much paying for LMI can add to the cost of a home.
If you can’t save a deposit, or can’t save enough to avoid LMI, you may want to think about asking your parents to go guarantor for you. This means they put their own house up as security, allowing you to buy with little or no deposit. Be aware, though, that this is a big financial commitment. If you default on your home loan repayments, you could put your parents’ house at risk. That's going to make for very awkward family barbeques.
Along with saving a deposit, you’ll need to figure out how big a repayment you can handle. You can use a borrowing calculator to determine your monthly repayments for different loan sizes at different interest rates. When you’re doing these calculations, it’s a good idea to add at least 1% on top of current home loan rates to make sure you’ll still be able to afford your home loan if rates rise.
Finally, you need to make sure you’ve budgeted for some of the hidden costs of homeownership. For instance, when you buy your home you’re likely to be hit with stamp duty costs, building and pest inspection fees and costs for removalists. Once you’ve moved in, you’ll have to pay for utilities, council rates, maintenance and upkeep and potentially strata or body corporate fees. These expenses add up, and you need to factor them into the ongoing costs of being a homeowner.
Property ownership is an admirable goal, and can definitely be an attainable one. If you ask yourself the above questions before you embark on your journey, you’ll be much better prepared to make your home buying dream a reality.
Adam Smith is the Home Loans Editor at finder.com.au, Australia's most visited comparison site, and has more than five years of experiencing writing about the Australian home loan and property market.