Buying a house has become somewhat of a dilemma for our Gen Y's and even potentially some Gen X's due to the increased price of housing, particularly in our Eastern capital cities. When you start thinking about buying a house it is important to be clear on what you can afford and then work backwards from there.
When deciding on your "first house budget," begin with the facts and look at how much you can afford in terms of mortgage repayments, particularly if the house is going to be your primary place of residence. This will then help you work out how much you can borrow and what your deposit will need to be. There are some great calculators available on bank websites that can help you work this out.
Once you do this you will have a good idea of a purchase price that is affordable for you. The other option here is to go into your bank or give them a call and tell them you want to work out how much you could borrow to purchase a house and what deposit you may need.
– With interest rates at an all-time low be careful not to over-borrow. It is important to think forward and be realistic in terms of what sort of impact an interest rate rise would have on your cash flow if you had a mortgage. Would a 1% rate rise put you under financial stress, could you handle the increase in repayments and still live comfortably?
The next big step is the deposit. Where is it going to come from? Are you going to have to save it or maybe your parents would be willing to gift you the deposit (or loan it to you) or they might offer to go as a guarantor to help you out. If you need to save then the first place to start is creating a budget. You would have received our budget planner last week and we have included it again this week in case you missed it. Using this template you will be able to work out how long it will take you to save your deposit based on your current surplus cash flow. From here it will be best to open a high interest earning account to save your deposit, it may be an idea to shop around and find an account that makes it harder for you to withdraw from whilst encouraging you to save – accounts like ING seem to have good parameters around this. Then it is all about getting into the habit of saving regularly for your deposit which will help you over the long-term as this is the exact same discipline you will need to apply when you're eventually paying down your mortgage. In the May 2017 Budget the Government announced a plan to save for a first home deposit through Superannuation called the 'First Home Super Saver Scheme' which has not been legislated as at January 2018 but it may be worthwhile to keep an eye on this as an option to give your deposit a boost.
For some of the people reading this item, it may not be the first house you are buying and you may be considering purchasing property as an investment… Our tips here are to look at the rate of return that you would receive from the property. At the moment we are generally seeing around a 2% to 3% income return on residential investment property so unless there is a significant lift in the underlying value of the property, you may want to look at diversifying your investable funds into other asset classes such as shares. Diversification is a word you will hear us talk about regularly. Basically it is spreading your investible funds across different asset classes like shares, property, fixed interest or cash. The allocation that you put toward each of these asset classes comes down to the returns you are seeking and your level of comfort with risk. It is also important to look at the liquidity of your investible assets (how easily you can sell them) and the time frame you want to invest them for.
– If you are looking at property as an investment option and are going to be looking at a buy/sell strategy, make sure you speak to your financial adviser or accountant about taxation issues such as capital gains tax and always take into consideration the fees associated with buying and selling property as this will affect your rate of return.
We hope you have enjoyed this week's "Money in Life" series and remember we are only an email or phone call away if you would like to seek advice on how to help grow your wealth now and into the future.