Buying a home is not for the faint hearted and it is a huge financial and emotional commitment. That’s why it’s essential to do good preparation and make sure you have everything well researched and prepared before you start house hunting. Of course, you do have knowledgeable experts, such as your real estate agent, to guide and advise you, but there is some important and valuable groundwork for you to do beforehand.
In our nine-point plan below, we cover off some financial essentials and give some hints on how to start reading the property market before you dive in!
1. Strengthen your credit score
A good credit score is essential if you need financing to buy a home (which applies to most people!). It is a number between 0 and 1,000 that indicates to lenders how credit-worthy you are, and how likely you are to pay your financial commitments – like mortgage repayments – on time. Most scores are between 300 and 850. The higher your score, the better your credit rating, and the more attractive you will be to lenders.
You can end up with a bad score for a number of reasons, including failing to pay bills, applying for credit too often, if you’re a bad tenant and even if your partner defaults on a debt that also has your name on it. Your score is calculated by how you pay your bills; if you have a good track record of paying your bills on time, you will have a higher score than those who pay late, or not at all.
2. Start saving for a deposit and purchase costs
‘Saving more money’ is at the top of many people’s to-do list, particularly if they’re trying to gather enough for a deposit on a home. However, most are too vague about how much they want to save, so they end up with nothing. Others may have a plan to ‘spend less’ and decide they will save what is left over at the end of each pay cycle. This also seldom works, as even with a good budget, if you have money left in your bank account, it is far too easy to spend it.
The best way to save for a deposit is to work out at each payday how much you can afford to save and transfer this money to a savings account immediately. Don’t touch it, or sit on it or think about treating yourself ‘just this month’. Transfer it straight away – or, even better – set up an automatic payment for the same day your pay comes into your account.
Savings should be in an account that you can’t easily access. A good idea is to open a savings account at a different bank, so you’re not tempted to dip into it when you log in to do everyday banking. Give yourself regular rewards for sticking to your savings plan, to keep you on track.
If you have any expensive debt, such as credit cards or hire purchases, pay this off first.
3. Start researching
As soon as you can, start searching websites, newspapers and magazines that have real estate listings. A great local resource is realestate.com.au. Follow particular homes you are interested in, see how long they stay on the market and compare this with the average. Also, note any changes in asking prices. This will give you a sense of the housing trends in the areas you’re interested in and show you homes where the vendors may be open to negotiation.
Also, to maximise capital growth, you should research the surrounding area. Schools, shops and public transport nearby will make the property more attractive to future buyers and should ensure you experience good capital growth with your property. When researching, it’s also important to look for any obvious problems – including checking plans for development or roading in the area that may affect property values – as well as anything negative in the media, such as a history of flooding.
4. Work out what you can afford to repay
Lenders in Australia generally recommend that people buy homes that cost no more than three to five times their annual household income if the home buyers plan to make a 20 percent deposit and have a manageable level of other debt. Begin with a little introspection. You need to take a long, hard look at yourself and your finances and determine what you’re planning in the years ahead and how much you can afford to repay. There are a number of online calculators that can help, including this one at yourmortgage.com.au.
Begin with your total monthly income. Add the after-tax income of you and your spouse or partner (if applicable), regular income from assets that you will own after you buy a home, and any other income. This is your total monthly income.
The next step is to determine your monthly expenditure. Don’t include your current rent if you are purchasing a home to live in. Subtract your total monthly expenses from your total monthly income and the number that you have is roughly what you can afford to repay each month on a loan.
You should consider where your career is headed and whether any salary increases are likely. There are also family considerations. Are you or your spouse likely to need time off work to raise a child, which could eat deeply into your income?
5. Work out how much you can borrow
Now that you know the total amount you can devote to mortgage repayments, you should determine how much you could borrow. This amount will vary from lender to lender – many offer online calculators that allow you to determine your borrowing limit. You can also ask a mortgage broker to assist, who will have a good idea of how much the lenders on their panel will lend to you based on your income, debts, assets, number of dependents and whether you are buying the property alone or with somebody else.
You can also use a home loan calculator to get an estimate of your mortgage repayments. The calculations take into account the financed amount requested, the length of the loan term and the interest rate. Remember to set enough money aside for the deposit.
This is usually a minimum of five percent for owner-occupiers and 10 percent for investors. However, recent announcements by the Australian Prudential Regulation Authority (APRA) mean that banks have toughened up on the loan-to-value ratios for customers taking out interest-only loans.
You will also need to budget for stamp duty, conveyancing and legal costs (click here for more detail about this). Total costs will vary slightly, depending on which state you live in.
6. Get conditional mortgage pre-approval
Before you start looking for a home, you will need to know how much you can spend on a property purchase. The best way to do this is to obtain pre-approval for a mortgage. To do this, you’ll need to provide some financial information to your lender, or mortgage broker, including your income, any savings and investments you have and your regular expenses.
After reviewing this information, your bank will let you how much you are pre-approved for. This will tell you the price range of the homes you should be looking at, plus your deposit. This is just an in-principle approval, and once you make an offer and formally apply for finance, your bank will require more details and supporting information. Click here for more detail on the financial aspects of buying and selling property.
7. Find the best real estate agent
Real estate agents are important partners when you’re buying or selling a home, as they can provide you with helpful information on homes and suburbs that isn’t always available to the public. Their knowledge of the home buying process, negotiating skills and familiarity with the area you want to live in can be extremely valuable.
Good agents are very hard to find. A good agent is an asset and more than pays for themselves. Yes such agents do exist.