Federal and state governments aimed to make the process easier by offering first home owner grants. But with stamp duty and legal costs, one often cancels the other out.
Working a second job is a common way to boost the cash reserves – but make sure you don’t buy a house that would need to see you burning the midnight oil for the life of the mortgage. Jobs that work around a traditional full-time schedule are traditionally in hospitality, call centres or weekend retail.
Be wary that any additional income will be taxed without the relief of the tax-free threshold, but according to Kane Taxation director Ben Kane, it may open the door to more income tax deductions.
Other ways to increase personal cash reserves include moving back in with parents or family, renting out any spare bedrooms in your existing home, moving to a share house yourself or temporarily downsizing to a smaller house in a cheaper location.
Paying off a fancy car? It better be worth it, as it’s likely to be costing you a slice of the property market.
Based on 2007 interest rates, if you’re on an income of $50,000, for example, with a $30,000 car loan, then the four major banks will limit your borrowing capacity to about $165,000. Cut the car loan to $10,000 and you’ll increase that capacity to about $220,000 – and be able to invest in something where values aren’t going backward.
If you’re managing one or more of Australia’s 14 million credit cards, an effective way to cut debt is to consolidate to a low or no-interest card that gives you up to 12 months to get your balance down.
But beware of traps.
Mr Kane gives an example whereby a customer transfers $10,000 into a no-interest transfer credit card, with a credit limit of $15,000.
“If that customer spends $2000 on a holiday, then repays that money immediately – that repayment will bed down the $10,000 transferred balance that isn’t accruing interest but leave the recent $2000 spend as fully exposed to interest, often at a high rate of 20%,” Mr Kane says. “It’s basically luring people to transfer and increase debt with a new creditor.”
No-fuss credit cards with low interest rates of about 12% are good alternatives, he says, as are cards that offer “redeemable bonuses”.
Despite charging relatively higher interest rates than its no-frills rivals, plenty of redeemable points can be made paying bills via credit card, then transferring funds from a savings account.
If your credit card debt is more than $15,000, it might be worth consolidating and taking out a personal loan, which you can repay over a long period at a relatively lower interest rate less than most credit cards. Once you have paid off your credit card, reduce the maximum credit limit.
When assessing your application, banks do not look at your credit card balance but your credit card limit and factor this limit as a personal debt.
START A BUDGET AND RE-ASSESS EVERYTHING:
Financial planners say it often becomes glaringly apparent where money is being wasted once people put everything they spend down on paper.
Two coffees a day, lunch and city car parking, for example, will set you back about $150 a week in after-tax dollars. Add up to double that again if you smoke, or have a couple of drinks more than once a week.
Fuel, rent, bills, memberships, presents and entertainment are common expenses that will need to be amended if you’ve had trouble getting into a positive savings pattern, as is your resistance to personal reward items such as homewares, clothes and phones.
Check your internet and mobile-phone plans to ensure you’re on the most efficient plan.
A concerted effort needs to be made to cut down on other individual utilities, including electricity, gas and water.
If you really want to make an impact on the budget, dumping the car should free up about $300 a month, excluding petrol. If you live in the inner-city, calculate whether you’d be financially better off travelling by public transport or taxi in and about town. Hiring an older car for the weekend is a far cheaper alternative than hiring a new car.
Or buy a car with a family member or friend and share it one week off, and one week on.
When budgeting what your monthly home loan repayment will be, add between 3% and 4.5% over and above existing interest rates to allow for any movement over the medium term. Australian interest rates hit 49-year lows in 2009, but most analysts consider this unsustainable and are expecting a continued upward trend.
The property sector has become big business for several real estate-related industries, including lenders, building inspectors, insurers and conveyancers. Familiarise yourself with as many of the industry terms as you can to avoid being trapped at a later date.
As most mortgages now last between 25 and 30 years, it’s important to factor in the benefits of flexibility, which may not seem essential right now.
Banks charge varying fees to transfer between fixed and variable interest rates. If you need to do this several times during the course of a loan, it can be costly.
Costs associated with redrawing any funds can also vary in price and may be necessary longer term. Loan application fees can also vary.
Long-term loans of up to 40 or 50 years have been recently marketed as a new product but Mr Kane discourages first-home buyers from getting into such a long commitment. It’s wise to get quotes for jobs associated with buying a home, such as legal work, and ask providers to give detailed breakdowns of the services they offer. During settlement, for example, a conveyancer might be able to do for $300 what a lawyer may charge $3000 for.
Fees payable once you buy a house include stamp duty, land transfer and mortgage registration.
RESEARCH THE MARKET:
Time spent saving for a deposit can be well spent researching the property market.
It’s not unusual for first-home buyers to consider a range of suburb options.
Property value, not size, is important to consider if you plan to use equity from this home to finance another.
Factors such as new roads and freeways, or major government cash injections, such as those being invested in Docklands, Dandenong or Epping, also positively affect values, as does access to public transport, schools and retail amenity.
When you find a suburb you like, speak to the agents about what properties have sold for in the area and attend some auctions to get a realistic idea of what your money will buy. Selected information about SOME sold properties are posted online, but many are not – so it’s worth keeping old copies of the Sunday and Monday newspapers.
Agents recommend buying a home that will fit your plans over the next five to 10 years to avoid being forced to sell in what could be a lull in the market.
If you intend to keep the property as the first in a budding portfolio, consider its attraction as a rental.
Buying a home to renovate and rent is a good way to build equity, as values often increase by more than the sum of any works.
Also, you will not receive government grants if you do not live in the home within 12 months of buying it.
Co-buying a home has become much more common than at any time in the past – but it comes with plenty of risk, including trusting your partner’s financial security. Changes in the co-buyers’ circumstances, including their employment, or them wanting to buy a home with somebody else, should also be factored in. These relationships can turn sour and costly when bad timing forces a early sale.
BORROWING MORE THAN THE HOUSE IS WORTH:
Be wary of institutions prepared to lend up to 105% of a property’s price. Although it’s pleasurable to think of having someone else paying for the house, stamp duty and legal costs while you choose the blinds, there are mounting examples of people who borrowed using this model suffering huge financial losses. It’s considered good practice to save as much of a deposit as you can, to see what kind of commitment is required for the life of the mortgage and to prove a savings history to the banks