Buying your first property

4 min read

Buy a home or buy an investment property? That is a question many Australians ask themselves.

Should you buy to invest?

Faced with escalating real estate prices in many of our capital cities, owning an investment property is becoming a more common way for people to take a first step into the bricks and mortar market. 

Starting out as an investor may mean you might be eligible in claiming the ongoing costs of a rental property as part of the tax deduction. Speak to your tax adviser. 

That said, the Australian Prudential Regulation Authority (APRA) has capped the proportion of loans that major lenders can offer to investors.

This has seen some budding landlords pay higher rates of interest for a mortgage compared to owner occupiers. 

If you are keen to get out of home and don’t wish to pay rent, then buying to live in may be the option for you. Meeting the loan repayments on your own may be a harder slog financially, but in the long term and provided you meet every repayment, you are one step closer to fully owning a home.

How to save for a deposit

Saving for a property is an exciting goal. A budget can help manage your spending and a regular savings plan can assist you in growing your deposit. 

The easiest way to see where you can cut back is by drafting a budget.

A budget should show you how much you’re spending and where you might be able to cut back. A thorough budget, for instance, will include your essential costs, such as rent, bills and food. Subtract this amount from your income and the difference can be put towards a deposit. Cut back on the non-essential spending and you’ll be able to fast-track your savings. If you’re not sure where your money is disappearing to, check out ASIC’S Money Smart TrackMySPEND app for a month to see where you are spending your cash.

Something to consider is to not cut all your fun expenses from your budget. Doing this could make it harder to stick with it. Set some smaller savings milestones and reward yourself when you achieve them.

Also don’t forget if you can save a deposit worth more than 20% of the value of your property you can generally avoid paying Lenders Mortgage Insurance (LMI). That’s a good incentive to save a bit extra.

LMI enables lenders such as a bank or a credit union to lend you a larger percentage of the purchase price. The cost of LMI can be included either upfront or in your loan repayments so that it’s spread out over the term of the loan.

What can you afford to buy?

Let’s be realistic. Owning a mansion in Melbourne’s Toorak or a harbour frontage in Sydney’s Watsons Bay might be a bridge too far for most first home buyers.

Use ASIC’s Money Smart mortgage calculator to work out how much you can afford to borrow.

Moving out of home – managing the costs

Plenty of younger Aussies are deciding to stay at home with mum and dad for longer, which could mean not paying rent, or paying nominal board. Moving out of home would mean taking care of ongoing costs such as rent, mortgage payments, grocery bills and utility charges.

There are also one-off costs such as removalist fees or the costs of hiring a truck; a rental bond, which is usually the equivalent of four weeks’ rent or more; connection fees for utilities like the internet, gas and electricity, and cable television. You might also need to buy some furniture, linen and kitchenware. It all starts to stack up, so the best advice before flying the coup is to create a budget to make sure you can afford to live independently.

Understanding the costs of buying/selling a home

The costs of buying a home can include stamp duty for the property transfer and for the registration of your mortgage.

Stamp duty is charged by state and territory governments so the amount you pay depends on the location of the property and its price. To find a stamp duty calculator relevant to your state or territory visit the Federal Government’s Money Smart website.

The cost of buying a property can also include pest and building inspections It’s an extra expense but it could save you from hidden (and potentially costly) surprises after you’ve signed the contract of sale.

There are also legal costs for the transfer of a property from a vendor to a buyer. Most people would need the services of a conveyancer or solicitor to professionally and legally transfer ownership of the property you are buying. Your conveyancer or solicitor will also conduct property and title searches to ensure the seller is legally entitled to sell the property.

There may be a range of fees levied by your lender such as application, valuation and settlement fees. Make sure you ask your lender or mortgage broker about these fees. You might also be required to pay for LMI, as well as building and contents insurance.  There are also removalist fees, council and water rates to consider.

How much can I borrow? How does a mortgage work?

A mortgage is a legal agreement between you and a lender that enables you to purchase a property without paying the entire value of the property upfront. The value of the property is used by the lender to secure the mortgage, and over time you’ll repay the loan, plus interest, until you eventually own the property outright.

To work out how much you can borrow, use the Westpac borrowing power calculator , which can give you an estimate of what you can borrow.

Once you know your home loan borrowing power you'll have a better idea of what your next step will be. You’ll know the type of home you can afford and possible locations.

Guarantors, mortgage insurance and getting onto the property ladder

LMI is generally charged by a lender if your deposit, is less than 20 per cent of the value of the property.

It’s possible to avoid LMI by having a person who is willing to be the guarantor for your mortgage. Of course, the guarantors have to be confident that you’ll be able to meet your mortgage obligations before they provide the guarantee. Otherwise, if you default on your mortgage, they will be become responsible for repaying the loan.

Finding it hard to get into property? Financial advice can help

Financial advice could help you achieve your real estate goals. It can provide the assurance that your financial plans such as buying a first home to live in or buying an investment property are achievable. If you’re not on track, financial advice can help steady the ship and get the right strategies in place to help you achieve your property goals.

Financial advice can help you:

  • Make the most of your money with some sound advice around budgeting and establishing savings plans

  • Understand any government assistance you may be eligible to receive such as the First Home Owner Grant

  • Protect yourself and your assets by matching you to the appropriate insurance cover

Need help understanding your financial options? Contact us to arrange to speak to a BT Adviser
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This information is current as at 15/08/2016.

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs.

The tax position described is a general statement and is for guidance only. It has not been prepared by a registered tax agent. It does not constitute tax advice and is based on current tax laws and our interpretation. Your individual situation may differ and you should seek independent professional tax advice.

This information provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

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