Purchasing the family home has always been most people's dream. However, with house prices on the rise, owning a home is becoming just a dream for many people.
The main advantages of owning a home include:
- The home provides people with stability (not having to move when your lease is up etc);
- Paying off a mortgage is a form of disciplined saving;
- There is no Capital Gains Tax (CGT) applicable when you come to sell your home;
- The home can be used to fund retirement if you decide to downsize your home and use the excess funds to purchase an income stream;
- Any improvements to the house will not be subject to CGT; and
- You can change your house to suit your personal style.
Disadvantages to home ownership include:
- The costs associated with purchasing a home can be quite significant;
- Home ownership may provide significant capital growth, but in retirement the investment will not provide income;
- If the home is your main asset there is a lack of diversification in your portfolio; and
- Property tends to be an illiquid asset.
Step 1. Decide on whether to buy or rent
You need to decide on whether being a homeowner makes more sense to you than renting. Home ownership can stretch your finances significantly. If this is the case you may be better off renting until you have a larger deposit.
Step 2. How much can you borrow?
The general rule when you are considering a mortgage is that your repayments should not be more than 35% of your gross income.
Some institutions allow you to borrow up to 95% of a property. But in these cases the institutions will most probably make you take out mortgage protection insurance. This insurance protects the lender against you defaulting on the repayments, it does not protect you!
If your home loan is variable then you need to make sure that you can afford any increases in interest rates as your repayments will increase as the interest rates increase.
You also need to factor in the associated costs when considering the purchasing of a home as you may need to borrow more than you thought. Solicitor's fees, application fees, property valuation fees, stamp duty, building and pest inspections etc. all add up and must be taken into consideration when looking at how much you can borrow.
Step 3. Getting the finance
There are currently over 3000 different home loans available so choosing the home loan that is suitable to you can be quite a daunting task. The choices you have are:
- Choosing a lender. To do this you should always compare the real rate of interest that is being offered by the different providers. You also need to check the flexibility that the lenders give you – how often can you make repayments,
- Variable or Fixed? Your decision to have a fixed or variable rate depends on whether you think the rates are going to increase or not, or, whether you want some certainty about your repayments over the term of the loan. If this is the case then you might be better off with a fixed rate loan. If you want to have more flexibility in your repayments then you are better off with a variable loan as you can usually make extra repayments on a variable home loan.
Step 4. Finding the right home
Consider what type of home you would like (unit, townhouse, semi-detached or freestanding home), where you want to live, check recent sales in that area, work out what you can afford, attend open inspections and auctions and talk to local real estate agents.
Step 5. Making an offer on the right home
Step 6. Paying off your mortgage
Obviously, the more repayments you make the quicker the loan will be paid off. If you switch to fortnightly repayments you are now making 26 repayments, which means you are effectively making an extra month's payment each year.
During the early years of loan repayments, only interest is repaid so any extra payments will reduce the principal.
Many lenders are now advertising offset accounts as an effective way to pay off your loan earlier. An offset account is one where you deposit all your salary into your mortgage and then make all your everyday purchases with your credit card. The theory is that you are reducing the interest on the loan while the money is in the account.
Contact Us for more information and to discuss the most suitable solution for your unique situation.
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