If you’re like the average Australian (or Sydney-sider, to be specific), you might be wondering how on earth you’re going to get into this property ownership thing. You’ve seen your friends buying properties, and to be honest, you’re feeling a little bit jealous. Ah, a life without your crazy landlord randomly ‘checking up on things’.
You want my advice? Quit with the resentment and keep reading. Jealously is for the lazy. And laziness never got anyone the house of their dreams.
Truthfully, housing affordability is attracting a lot of media attention right now. If you’re looking to buy your first home, there’s a few ways you can determine what is affordable for you.
What is housing affordability?
To put it simply, lenders need to see if you have money left over after all your expenses, even if interest rates go up. When you see the media rant and rave about housing affordability stress, they’re referring to the rising cost of housing in comparison to Australia’s median income, which isn’t rising fast enough.
Like I mentioned above, it’s important to understand that being able to afford your first home is not just about the purchase price – there’s stamp duty, lender’s mortgage insurance, conveyancing and other costs. When the banks are deciding whether you can afford a home, they’re working out your income minus the expenses of owning a home, plus all the other expenses you have. These include things like your basic living requirements (you know, food, coffee, petrol, Netflix) and your existing debts. Banks will vary on how they treat existing debts, and some won’t even consider your credit card limit if you can show that you pay it off each month.
So, how do you improve your chances of owning a slice of the Australian dream?
Here are my top tips for improving your chances of affording your very first home.
Affordability Tip #1: Buy with someone else for increased affordability
When you have two incomes, affordability is not usually a big deal. The reason is obvious: there’s more income to cover the cost of paying off your home loan. And the more you can show that you can service your loan – a fancy way of saying you can afford to pay off your mortgage – the more likely you’ll be holding the keys to your kingdom soon enough.
Scared about buying with someone else? Read up on how you can buy property with friends using a Property Share Loans. It’s all in this post on how to save for your first home.
Affordability Tip #2: Know what ‘acceptable income’ is
You have a job, and a reasonably steady income…the banks will love you, right? Here’s the catch: not all incomes are equal. The banks will only use your income if it meets certain criteria and this definition varies from lender to lender. For example, most banks require at least 12 months of casual employment before they consider your income “acceptable” enough to finance a loan. However, there are a few that will deem it legitimate income after three months.
If you’re self-employed, things can get a little trickier. You’ll generally need two year’s tax returns for mainstream lenders, although some will look at your recent earnings if you’ve had some relatively good income months. In these instances, you might end up paying higher interest rates or more in lender’s insurance, which is how banks will cover themselves for what they see as a higher risk.
The trick is to know which lenders have stricter lending policies. And that’s where having a mortgage broker on your side pays off – we have a thorough understanding of Australian mortgages and can take the painful guesswork out of the mortgage process.
Affordability Tip #3: Save more than 5% for your deposit
You know how when you walk into a store – Myer, Apple or a luxury boutique – and you get treated differently depending on what you’re wearing? It’s the same with the banks, but they’re not looking at your clothing (although, it’s probably a good idea to wear something nice if you meet with your lenders. First impressions count, and trackies outside of the house say an awful lot about your couch time). Banks are looking at your bank account; specifically, how much you’ve saved over a period of time. You need to demonstrate that you can afford your home loan by demonstrating some serious financial discipline. If you can show that you’ve saved at least 5% of the deposit for a minimum of three months, you’re in with a chance. Every dollar more than that will make you look even stronger financially.
Affordability Tip #4: Pay off your debts
The amount of household debt per Australian has doubled in the past 25 years, according to the Australian Bureau of Statistics. If you’re like the average Australian, you likely have multiple credit cards, an overdraft, a personal loan and HECS debt to pay off. No matter how much debt you have, the hardest part seems to be making a head start. Don’t put your head in the sand and pretend it’s a problem for future you! Attack your debt like you would an avo on toast after a big workout using the Snowball Method.
List your debts smallest to largest by amount owing, then start by making the minimum payments on everything, bar the smallest debt.
For example:
- $300 overdraft ($50 payment)
- $1000 loan from parents ($100 payment)
- $2,500 credit card debt ($63 payment)
- $7,000 car loan ($135 payment)
Let’s say you take on a second job, just to give you an extra $400 a month to pay off your debt. While you’re meeting minimum repayments for everything, take your extra wages and hammer that car loan debt into the ground. Once you’ve paid off the car loan – which could take over a year and a half – tackle that credit card debt with your extra wages. Then turn your debt-destroying attention to the next item on the list and show the parents just who’s financially responsible now.
Thanks to your hard work and conservative spending, you’ll be able to pay off your debt with clarity and purpose. It will take you a few years, but every cent you pay off is one step closer to buying your dream home.
Affordability Tip #5: Be realistic
If you ask me –and I’m assuming you are, because you’re reading this blog – the concept of ‘lifestyle’ today is crazy. We’re taught by thought leaders to vision board our dream houses and DREAM BIG! Aim for that 10-bedroom beachside house with a pool and palm trees!
Truthfully, you might just get that house one day. But right now? Unless you’ve landed the jackpot – and my sincere congratulations, if so – you’re likely looking at someone more modest.
So it doesn’t have a panoramic view of Elizabeth Bay, and the bathrooms are marble with matte black tap ware. It’s not the norm to buy a mansion for your first home. No matter what your first home looks like, this is an excellent milestone in itself. It’s your kingdom – don’t let all those glossy magazine make you feel like it’s any less wonderful than you think it is. You want a house you can live in and enjoy. Aim outside of your budget, and you’ll live with resentment and mortgage stress. Be optimistic, but it keep it real.
If there’s one piece of advice you should walk away from this post with, it’s that education is the best form of empowerment. Why not learn more today? Get in touch for more affordability tips. The best part? It’s completely free, and I’m only an email away.