Ahh, the Great Australian Dream! You have made the decision to make it come true, but where do you start? and more importantly How do you start?
Let me start by making a comment regarding the Australian property market in general. In my opinion, the housing market in Australia and particularly in the capital cities is really expensive and practically unaffordable.
I have heard many different arguments about how this is not the case, how if you measure it this way and turn it that way, remove this and add that, Australian housing is actually very affordable… Unfortunately, this type of mental gymnastics detracts from the real conversation we should be having. We’ll likely talk about this issue on another post.
With that out of the way, should we simply give up the dream and dream about something else? No, it means that we have to be smarter about how we operate and how we go about purchasing our first home.
“We have to be smarter about how we operate and how we go about purchasing our first home”
Before we start talking about savings and loans and all those things, it is important that I give you my definition about a Home. For me, a home is somewhere you want to live in and not somewhere you are stuck because you couldn’t afford anything else. By that definition, a home could also be somewhere you are renting (WHAT! Yes, a rented property can also be called a home. Now this article is about purchasing a home so we will leave that one for another day)
I always say that achieving a goal is much easier when you know what the goal actually is. While that may sound straight forward, I have seen many people start saving without a purchase price in mind, and while some people may say that’s ok, I think it isn’t. I think, having a clear goal of what you are saving for, makes it so much easier to put that extra dollar aside. It keeps you focused and instead on buying the nice cup of coffee from the barista, you have instant coffee instead.
With that in mind, the first thing about buying your first home is:
Research the home you want to buy
To do this, you should research properties online, go to open for inspections, drive around the area, talk to real estate agents about the area. While you may feel a bit silly doing all these things without any intention to purchase -or savings for that matter-, it is very important to get the right motivation in your head, the idea of that first home. Remember, real estate agents don’t know anything about you, for all that matters, you are flush with cash and ready to purchase.
Once you get that fire under you, you can start doing one of the hardest and most unsatisfying things out there:
Saving money
A while back someone told me “Saving money is like watching water boil when you are in a hurry to make a cup of tea”. You know it needs to be done, but there are so many better things you could be doing. The only thing I would add to that saying is that the kettle is a very… very… very… slow kettle. We will be posting some tips on saving money in the future.
Ideally you want to save 100% of the purchase price, but we all know that’s not realistic. Therefore, you should settle with the more realistic amount of anywhere between 10% to 20%.
This means, if the house you set your sights on is worth $400,000, you will need to save anywhere between $40,000 and $80,000 simply to get started! Talk about a hard slog.
Once you have enough savings though, you will likely notice that a couple of things will change. The first thing you will likely notice is that banks will be very happy to talk to you. You will also be more confident to talk to other people about your purchase. Hence the next thing is to:
Get a loan approval or pre-approval
While you could talk to the bank directly and ask them for a loan, I believe it is much better if you talk to a professional mortgage broker. These guys will deal with the banks on your behalf and try to get you the best deal possible. Some brokers charge a fee while some don’t, feel free to call us if you would like help finding a mortgage broker.
Once all of that is taken care of, the most exciting part of the process starts:
Shopping around for that first home
Unfortunately, this can also be the heartbreaking part of the process, you will find that many other people will be in the same position as you are, they have savings, a pre-approval and are keen to get into their first home. You will likely put an offer for a home and be outbid by someone else.
One solution is to increase your offer but you don’t really want to be caught up in that mentality, the other option is to be a bit more creative. Try properties that don’t have as much interest, for example cold and rainy days tend to have lower visitors.
Don’t be afraid to make an offer -even if it is below what they ask- the worst thing that could happen is the vendor says no.
Once you have purchased the property and have a loan with the bank, it is important you have a backup strategy in case things don’t go according to plan. Questions to ask yourself are:
- How can you repay the loan if you lose your job?
- What happens if you are injured or sick for a long period of time?
- How will your family be looked after if you are no longer around?
We will revisit this issue some other time.
If you are like most Australians, once you have purchased your home, you will likely have a big mortgage over your home. It is likely that your next goal will be to pay it off as soon as possible. Once you are settled into that new property, have a look at this post to get started with ideas to pay off your home loan sooner.
Useful resources
ASIC’s MoneySmart
Domain’s Home Price Guide
