Financial Health Check

So, you've decided to buy your own home? Before you rush out and make an offer, pause and take note of these few points. It could save you time and money later!

Should you buy?

Unfortunately, the days where you could buy a house for a few dollars a week more than renting are long gone. While buying a property is a larger financial commitment for most people than ever before, home ownership has provided one of the most reliable long-term investments available. As home ownership is a long-term investment, it requires long-term commitment. Although repayments will hopefully reduce in significance compared to your income over time, you must be prepared to survive on much less cash than you've been used to for some years ahead. Having a stable career and income certainly help if you plan to buy property. That said, home ownership has been a gateway to wealth for a large proportion of Australians, and with a growing population, demand for quality real estate will continue to deliver higher property values.

Budgeting for Mortgage Repayments

You should be prepared for the effects a mortgage will have on your standard of living and monthly free-cash flow. It is simply an aspect of human nature that most people will find new sources of spending as soon as their income increases. With a mortgage, you will need to be more financially disciplined than before.

Ever been excited about starting a new job and earning a higher salary - then six months down the track wonder where all your money has gone? You are not alone! You need a budget! By calculating how much you need to spend on the essentials, and allocating a portion directly to savings, you will ensure that you do not fall into the trap of unnecessary lifestyle spending. Write your budget down and track your progress to ensure you stick to it. Transfer your savings target to a separate, high-interest account as soon as you get paid, so you make sure it happens. This will also make it much easier for you to adjust to a regular mortgage payment.

Once you are saving a fixed amount each month, do not assume that you will be able to reach this target at all times. Remember to leave breathing space for interest rate rises. Be aware of the affect of interest rate rises on your repayments, and leave a buffer of at least 2% p.a. in case of increases. In the past, banks used to account for these precautions before they lent money. These days, it is increasingly up to the borrower to 'draw the line' at how much they can comfortably repay. When taking a 'honeymoon rate' be especially sure that you do not fall into a pattern where you cannot afford repayments when you revert to the standard rate. Offers like this contributed significantly to the sub-prime crisis in the US.

While the media blames the banks, who will be the biggest loser if you can't make your repayments and your house is repossessed?

The Credit Check

Ever moved house and forgotten to inform all your billers of a new address? Had a dispute with one of those hopeless phone companies and refused to pay the bill? Unfortunately, the establishment's revenge is your credit rating. Veda Advantage (formerly Baycorp) keeps a register of all these unpaid items, and most financial institutions expect a clean credit rating before they will lend you money, regardless of how minor and insignificant the amounts owed may be.

We suggest that you obtain a copy of your credit rating from Veda before you apply for your finance. A bad report can be damaging to your chances of securing 'the perfect loan' and it is much less stressful to rectify problems when buying your home doesn't immediately depend on it. Veda Advantage will issue your credit report card in a few days for free, or within one working day at a cost of $27.00.

First Home Owners Grant

The Federal Government offers a grant of $7,000 to first home buyers. In addition to this, some state governments offer either additional grants or stamp duty concessions. If you are looking to claim these benefits, make sure you intend to live in your first home for at least twelve months. If you need to move out early, make sure the circumstances appear unforeseen, as there have been cases where the grant has been 'clawed back'. Also be aware that other costs, primarily stamp duty, will exceed the grant in most cases, depending on which state you live in and how much you pay for your property.

Calculate Borrowing Power

A rule of thumb is that you should be able to afford 30% of your gross monthly salary for mortgage repayments. However, this may vary depending on how much your earn, whether you are buying with a single or a double income, or how many dependents you may have. Again, we stress the importance of sticking to a budget to ensure that you are able to service the cost of your loan.

The Deposit

Before you borrow for a property, you will generally need a deposit. The old rule of thumb was always 20% deposit, and borrow the remaining 80%. However, with soaring property prices this situation is becoming less common. With a deposit of less than 20%, you will generally be subject to lender's mortgage insurance costs. This is a situation where the bank takes out insurance to cover them in the event that you cannot meet your repayments. The cost of mortgage insurance varies depending on the requirements of the financial institution. However, premiums escalate significantly if your deposit is under 5% of the property value. For further information, see our guide on buying without a deposit here.

Other Costs

Stamp duty and legals have always been additional costs to the purchase price of a property.

In recent years, the cost of stamp duty has escalated significantly, as State Governments around the country have cashed in on the property boom by failing to increase tiered thresholds at the same rate as rising house prices. As a rule of thumb, allow 5% of your purchase price for stamp duty. Always calculate the approximate cost before you purchase your property. You can access the relevant rates by searching the Revenue Offices in your state.

Legal costs have fortunately not increased at the same rate, making them virtually insignificant in comparison to stamp duty. You can expect to pay either your local solicitor or another service provider approximately $800 to $1,500, depending on the complexity of the transaction. We would recommend that you shop around for the best deal.

Banks may also impose other charges on establishment of a mortgage, the most common being valuation fees and loan establishment fees. Again, we suggest that you shop around, as these can vary from up to $750 each to being included free of charge in some circumstances. Often, there is a trade-off between upfront fees and the interest rate and conditions of the loan

Mortgage Health Check

Rate Detective recently(10 April, 2009) introduced Free Mortgage Health Check. If you want to find out are you getting the best interest rates or want to check what would be the best product for you if you would like to get home loan now, just fill the form on that page and our mortgage broker will evaluate your mortgage and provide free advice.

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Published on March 3-th, 2008 in Home Loans
Damon Rasheed is the CEO of Rate Detective, an Australian financial service comparison sites specialising in Life Insurance, Income Protection Insurance and home loans. Damon holds a Master's Degree in Economics from the University of Melbourne and has been involved in many start-up internet businesses.
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Any information or advice contained on this website is general in nature and has been prepared without taking into account your objectives, financial situation or needs.