Buying a house is the great Australian dream. It will require a lot of work and it isn't easy, but if you follow these steps, you will gain a better understanding, and make the dream a lot easier to achieve. These principles apply to whether it is a house you are going to live in, or whether it is an investment property.
Owning your own house - the great Australian dream
1. Understand why you are buying or investing in a house
First of all, you need to determine why you are investing in property. Perhaps you want to buy your first home (principle place of residence) for yourself and your family. If investing, will it be for the rental income or capital growth? Are you investing to diversify your portfolio? Perhaps you are investing in property purely for tax benefits, or simply as a hedge against inflation.
By knowing why, will help you determine what kind of property you invest in, and where it will be located. For example, will it be a house or unit? Will it be in the rural area of a mining town or close to the city?
The potential benefits for investing in property are numerous, but you must understand the reasons, and do your research accordingly.
2. Save up a deposit
Next you must save up for a deposit. Ideally, you should try to save up 20% of the cost as a deposit. The reason for this is that you will avoid having to pay lenders mortgage insurance (LMI). LMI protects the lender (bank) if you default on your repayments, but doesn't protect the borrower (you). Furthermore, LMI is usually added onto you loan amount which you then end up paying interest on that also.
By saving for a deposit, it also has the benefit of getting you in the habit of putting away money at regular intervals, which is what you will need to do when you pay off your loan.
When saving for your deposit, you may like to consider the First Home Savers Account, where the Australian Government contributes 17% of your own contributions, and earnings are taxed at only 15%. For more information and eligibilty criteria, visit First Home Saver Account.
Why not take the first step and start saving for your deposit today?
3. Approach a lender for a pre-approval loan
Once you have a reasonable deposit, you should approach a lender for a pre-approval loan. Pre-approval loans last between one to six months, and this guarantees that the lender will give you the money to buy your property during that time, provided no major financial circumstances change (e.g. you lose your job).
You can ask your current bank for a pre-approval, but it is recommended you look around for the best deals. Perhaps you can engage the use of a mortgage broker.
The banks and mortgage brokers can also determine what is best for your own scenario, whether you need a low interest rate, an offset account, or redraw facilities. They can also determine whether you should consider a fixed or variable loan.
Keep in mind at this point that you will also need to take into account stamp duty and fees, which could add an extra 5% on top of your purchase price.
It is also wise not to over-borrow or over-extend yourself, because if interest rates rise, you may struggle to make repayments. Have a buffer in place where you can comfortably make repayments even if interest rates rise by 2%.
Suburbs close to major cities and regional centres are more likely to be in demand. Thus they will generally provide the highest opportunity for capital growth.
Look out for suburbs which may have future developments (this can often be found on the website of local councils), and also suburbs close to schools, shopping centres, public transport, and leisure facilities (e.g. cafes, movie theatres).
What you require in your location will be specific for you, but keep these points in mind.
Stay tuned for Part 2, where I outline the final four points in buying your first property.