An Accountants' Guide To Buying Your First House In Australia
Buying a house is a massive endeavor, it's scary, exciting, and oftentimes confusing. Hopefully reading this can give you a little insight into buying your first house and the steps you need to take before, during, and after your buy. Here's an accountant's guide to buying your first house in Australia:
Mental Preparation
The first step is determining if you want to buy a house, we often push in society that owning your own home is the next step in life, but that's not always the case, and owning your own home might not be right for you. Owning a house is not necessarily the "next step" in your life, it is not an easy money maker that will double in value in a few years. When you are looking to buy a house you'll be hit with loads of commentary from people who will say things like "The property market only ever goes up" or "property is the best investment you'll ever make." Make sure that when you are looking at buying a house, you aren't just doing it because you've heard these quotes a million times growing up.
Buying a house is about choosing a place to live, buy a house because you want to live in it not just because you feel you should or it's the best market in your town. Buy the house because you want to own a home, not just because people say you should. If you want to own a house for investment, buy an investment property, not a primary residence.
Our psychology has a huge impact on what we do with our money, make sure you're not operating on all the quotes we hear in Australia, and make sure you're buying for the right reasons. Getting your psychology right about buying a house is important, I own my home but I don't think of it as an investment. The truth is there are better investment vehicles than your primary residence. Think about your first home in the context of what you want to live in and what you can afford, not what might have the best returns.
Financial Preparation
Buying your first house is not a quick, impulsive decision. It requires long-term thinking and planning well before you sign the contract. The first step is setting a target, and knowing what you want to save for a deposit. Generally, I would say to put down at least 20% of the purchase price as a deposit so that you don't have to pay lenders' mortgage insurance but when we're talking about buying your first house, we're going to have to have a little flexibility with what we put down. I'm assuming if you're young and thinking about buying your first house you don't just have $200k lying around.
The first step is setting realistic goals. Setting your goals for what you want to buy has to be realistic. Whilst it's fun to look at $3 million homes on AllHomes, it's not always realistic. Think about where you want to live and what you want to live in but be realistic and don't overextend yourself.
Now that we have an idea of what we want, we need to set our savings goal for the deposit. The money you pay for a house consists of 2 elements, the first is the deposit. The deposit is what you actually pay to the sellers, this is money that comes out of your bank and goes into theirs. The second element is the mortgage, this amount is what the bank pays to the seller and you pay back to the bank every week for 20 to 30 years.
For the first element, we need to save up a bit of money for the deposit. This is a simple but long-term step, if you want to put down $100k on a property all we need to do is take $100,000 and divide it by the number of months between now and when we want to buy and that's how much we need to save. If the number you get is too high, you may need to extend your time horizon. I would also recommend that you save an extra 20-30% on top of your deposit for additional costs. In the example of $100,000 that you want to put down as a deposit, I would say to save $120,000 to $130,000 to cover settlement fees, legal fees, and to not take away all your savings for the house.
Now if you already have the deposit you want and you know what you want out of your house (i.e. you actually want to live there, not that you're just buying because you feel it's the thing you have to do), we can start putting the pieces together.
- Know what you can afford
If you've managed to save a good deposit, you're probably already okay at budgeting and saving but once you buy the house you need to be even better. Owning a house is much more expensive than just the mortgage, there are loads of hidden costs everywhere. It might be a new faucet or the rates were higher than you anticipated. I would say you can double (maybe even more than double) your mortgage cost to account for everything else like rates, water, and body corp fees (this is probably conservative I know, but I am conservative with my money). To calculate your mortgage costs, I would highly recommend Mortgage Monster which is a super useful tool in calculating repayments based on purchase price, interest rates, and what you have for a deposit.
- Start putting together this information
When you apply for a mortgage, the lender or bank will ask you for a lot of information including bank statements to evidence your deposit as well as what you spend regularly. this will all play a part in how much they offer you.
This brings me to my next point, learning what you can borrow. there are loads of tools out there that let you put in your income, deposit, and some other information and it will give you a rough idea of what you can borrow. For example, if you go onto the Westpac Borrowing Calculator, you can throw in that you have $900 left after all your expenses, can put $100,000 down as a deposit which means that you can borrow roughly $560,000. Once you know what you can borrow, add this to your deposit and that's your max purchase price. In the example I just went through, you can borrow $560,000 and your deposit is $100,000 which means the most expensive property you can buy is $660,000. I don't recommend borrowing to your absolute limit, but again, I'm conservative with my money.
Shopping For a Mortgage
There are lots of options for your mortgage, you can go through a bank directly, go through a broker, you can get the interest fixed, variable, offsets, and re-draws. Frankly, it's confusing. So here's your quick summary of each of the options:
Banks
You may already be set up with a big 4 bank account from your childhood, you might want to start here and check out if the bank you've been set up with for years offers any rewards for that. Going with a bank is pretty easy but it also restricts you to only what they offer.
Mortgage Broker
On the other hand, if you go with a mortgage broker they have access to lots of different offers and can do the shopping around for you. Mortgage brokers are a good option because they can shop around for you and they're paid by the banks so you don't end up forking out thousands for their services. There can be dodgy brokers so make sure you go with one that has good reviews or you know people that have used them before.
Next up on the mortgage hit list are offsets & re-draw accounts
Offset Account
An offset account is a separate account that usually links to a debit card, it acts as an inverse savings account. Rather than paying you interest for keeping your money in there, they reduce the interest you pay on your mortgage. Let's look at an example:
If you have a mortgage of $400,000 at an interest rate of 5% on a 30-year loan, you'll pay roughly $2,147 per month which consists of $481 principal (this is the amount that actually reduces your mortgage) and $1,667 interest which goes to the bank.
Now in the same scenario, if you have $50,000 in an offset account. Your first repayment is still $2,147 but the interest portion of that is reduced to $1,458 and the principal amount is increased to $689. This means you pay $209 less in interest on your repayment because the bank calculates your interest based on your loan less what is in the offset. So in scenario 1, the bank calculates interest on a $400,000 mortgage, and in scenario 2, the bank calculates your interest on a $350,000 mortgage.
Re-Draw Account
A re-draw account is similar to an offset but a little different. A re-draw account lets you make additional payments to your mortgage and lets you access these additional payments at a later stage if you need to. You typically can't operate the re-draw like a bank account and make payments from it as you please.
I personally prefer an offset to a re-draw because of the additional flexibility it offers.
Finally, maybe the most heated, fixed vs variable loans
Fixed Rates A fixed loan will lock your interest rate at the agreed-upon rate for a specific period of time. This means that if you lock your rate at 5% and interest rates go up to 6%, you will still pay 5% interest. On the other hand, if interest rates go down, you could still be paying the higher interest rates. Typically fixed rates are only fixed for a few years and then switch to variable by default.
Variable Rates
Variable rates are interest rates that go up and down with the market. This means you will effectively be paying the same as everybody else if rates go up as well as if rates go down.
Setting a fixed period on your mortgage is a personal choice and is often based on the market conditions at the time. Depending on when you want to buy, have a chat with your broker and see what they think.
Getting Underway
I won't get too into depth on these next few steps as the agents, brokers, and lawyers are all professionals who will tell you what steps are next. The biggest impact you can have is properly preparing, saving, and buying for the right reasons.
Once you've chosen a lender, the first step is to reach out to them and discuss what mortgage options are available. Once chosen, the next steps include getting what's called "Pre-approval." This is approval for the amount that you can borrow for you to decide what you can afford to buy.
At this stage you should also find a settlement agent, this is a solicitor who will sort out the legal side of buying the house. They will review contracts for you and manage the settlement process.
Now that you know what you can afford and you have your trusty legal eagle on your side, it's time to start the fun stuff; house shopping. It's helpful to put together a list of what you are looking for and requirements for the house, this is especially important if you're buying it with a partner or other people so that you're all on the same page. Start scheduling some inspections for houses that you like to visit in person.
Once you've found the right house that you can afford it's time to make an offer. Now remember, don't let your emotions dictate the price you pay. If you love the house, you may feel like you can extend your budget because it's "the one," don't. Make sure you are still within the budget. Alternatively, if the house is going to auction you will need to make an offer at auction, again, know your budget. for the finer details of getting contracts, and scheduling building or pest inspections that are required, this will all be explained by your solicitor.
Once an offer is made, it is largely handled by the solicitor and the lender, and they will guide you on the unique situation you're in and let you know when and what is required from you.
Now that it's all settled, it's time to move in and enjoy your home. Make sure you include all body corporate fees, rates, mortgage repayments, possible repairs, and everything else that may be involved in the owning of the home in your budget. Remember to include the total cost of owning the home not just the mortgage repayments in your budget.
