Buying a property is one of the biggest financial decisions you’ll make in your lifetime, so it’s important to think about everything carefully before diving in.
Understand the market.
One of the first things to think about is what’s going on in the area you’ll be buying into. Research prices in the area you would like to purchase, so you have a good idea of values. Consider the time of year when you’re buying - spring is generally considered a good time to sell, so more properties tend to come onto the market then. Look at the economic environment too. If interest rates are rising or there is a negative economic outlook, property prices might fall in the months ahead.
Prepare your finances.
Once you’re in the know about external factors, it’s time to think about preparing your finances.
First, review your income and expenses to see how much you can afford to save. Make sure you include all the costs of buying property in your calculations, such as building inspections, legal fees, stamp duty and insurance.
The remainder of your savings can go towards your deposit. The more you can save for the deposit, the less you’ll need to borrow.
How much can you afford to borrow?
Next, you’ll need to work out the monthly repayments you can afford, which will determine how much you can borrow.
Banks will generally consider the loan to value ratio (LVR) of your purchase, which is the amount of the debt as a percentage of the value of the property. The lower the ratio, the lower the banks perceive the risk of the loan. Banks generally prefer an LVR of lower than 80%.
If your LVR is greater than 80%, you will generally need to take out Lenders Mortgage Insurance (LMI), a one-off cost paid at the time of purchase. LMI protects the lender if the borrower is unable to meet their mortgage repayment commitments.
Can you comfortably service a home loan?
Mortgage rates can fluctuate over the term of the mortgage, which is usually 30 years. When you’re working out the monthly repayments you can afford, it’s a good idea to ‘stress test’ your ability to make repayments at a range of different interest rates. You can work out your monthly repayments by adjusting the interest rate on Beyond Bank’s mortgage repayment calculator.
Prepare for the unexpected.
A lot can happen over the period of a 30-year mortgage.
It’s a good idea to consider life events that might change things for you and how these could make a difference to your cash flow for home loan repayments. For example, what would happen if you had children or lost your job? Owning your home is more than just an investment. It’s a place where you live and need to feel secure, so it’s very important to be confident that you’re ready for home-buying as a long-term financial commitment.
