Increasing property prices and poor affordability continue to push many buyers out of the property market – which is especially the case for first time buyers.
In my opinion, it is harder to become a home owner today than what it was back when I bought my first home around 30 years ago.
The declining trends in first time buyer activity and the upward pressures on property prices in the major capitals (especially those in the eastern states) suggests that this situation is unlikely to improve for many young aspiring home owners over the next 5 to 10 years.
As a passionate advocate for first home buyers, I have put together 10 key strategies to consider in order to help aspiring buyers achieve the goal of owning their own home.
Below are the first 5 of my top 10 strategies.
Most of us are familiar with the real estate agent’s mantra 'Location, Location, Location' when it comes to buying residential property – but what’s equally important is Education, Education, Education.
Here is a list of things every first home buyer should be considering in order to make the right decisions when buying their first home:
- How the property market works – what drives prices up and down
- How to budget, save and manage one’s personal finances
- How to successfully apply for a home loan
- How to choose the right home loan product
- How to borrow – for instance, directly from a bank, building society, credit union, specialist mortgage lender, or indirectly through a mortgage broker
- How to manage a mortgage
- How to find a property
- How to choose between different property types, sizes and locations
- How to value a property
- How to inspect a property
- How and when to get in the specialists like a valuer, property inspector or pest inspector
- How to successfully bid at auction or negotiate a private treaty sale
- How to deal with all the parties involved in buying and selling residential property, such as: the selling agent; buyer’s agent; seller or vendor; mortgage broker; lender; insurance companies; property lawyer or conveyancer; utility companies and moving companies
- How to prepare and handle the emotional ups and down of searching for, buying and owning a home
This is not an exhaustive list.
There is so much to learn so time and effort is required, along with access to the right information.
Because there is so much to learn, it is a good idea to start the education process as early as practical, which will ideally be well before you are ready to sign on the dotted line.
A great advantage of a good property education is knowing what questions to ask, and to be able to objectively and knowledgeably assess and consider the answer or advice given.
A good residential property education helps avoid being misled or making the wrong choices.
Whilst having the right knowledge and education is an important foundation for first time buyers, so is the ability to use and apply this knowledge wisely and appropriately.
However, without the benefit of experience, it can sometimes be difficult to know how and in what circumstances to apply what you’ve learned.
Situations may also arise where you aren’t prepared or have the life experiences necessary to deal with the challenges, obstacles and opportunities buying a home can present.
This is where seeking the wisdom of others can pay real dividends (and by wisdom I’m referring to the combination of knowledge and experience).
Seeking advice before, during and after buying a home is vitally important, and it should ideally be sought from someone who is reasonably independent to help ensure there is no bias in the advice being given.
If the person giving the advice does, for instance, have a financial interest in what’s being discussed, such as a mortgage broker (advising on a home loan) or selling agent (advising on a property on their books), then it’s important to understand this and take it into account when considering your options.
A good starting point for getting impartial advice is to approach family and friends first, especially those who have gone through the buying process before and understand the opportunities and pitfalls that lie ahead.
The benefit in doing this is that it helps you avoid making the same mistakes your family and friends may have made when they bought their first home.
In saying all this, it is still important to seek out professional and specialist advice.
For instance, talking to mortgage brokers, selling
agents, accountants and tax specialists, and legal advisors is very important as they all have the experience and technical knowledge needed to help ensure you are making informed and considered decisions.
There is a universal truth for first time buyers and that is unless they know how to budget, buying a home will be extremely difficult.
A budget is more than just a way to monitor your spending, it is a prerequisite and powerful tool for planning, managing and controlling almost every aspect of your personal finances.
Think of a budget as a personal financial blueprint – you wouldn’t build a house without a plan so you shouldn’t try and build your financial future without one either.
In simple terms, budgeting helps you achieve financial goals (like saving for a deposit or meeting regular monthly mortgage payments) by comparing income with expenditure and determining whether there’s enough cash left over to put towards these goals.
If there isn’t, it helps identify whether more income is needed, or if spending has to be cut (and where savings may be made), or both.
Budgeting requires an understanding of income and spending patterns, and it takes time, practice and bit of trial and error before it can be done with reasonable accuracy.
This is why it’s important to learn how to budget as soon as possible so when it comes time to buy that big ticket item, like a home, you have the skills, experience and self-awareness of your spending habits to know what can realistically be saved and what you can realistically afford.
3 key benefits of starting to save early:
1. You should be able to save a bigger deposit
The savings rule is a simple one: the sooner you start saving, the more you’ll save.
It sounds obvious I know but let’s take a look at a real life example to really drive home the point.
Saver 1 is 20 years old, while Saver 2 is 25.
They are both thinking about buying a home when they turn 30.
Saver 1 has 10 years to save while Save 2 has just 5 years.
Assuming that they can each save $10 a day, or $70 a week, their respective savings at age 30 will be:
Saver 1: $10 x 7 (days) x 52 (weeks) x 10 (years) = $36,400
Saver 2: $10 x 7 (days) x 52 (weeks) x 5 (years) = $18,200
As you can see, Saver 1 saved twice as much as Saver 2 with their 5 year head start.
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However, there is an important aspect that we have not yet considered, and that is the compounding interest effect that was described by Albert Einstein as “the most powerful force in the universe”.
Assuming both of our savers deposit their savings at the start of the month and earn 4% interest per annum, payable monthly in arrears, and this is added to their account each month over the life of their savings, let’s revisit the figures (pre-tax savings by age 30):
Saver 1: $44,815 (including $8,415 of interest)
Saver 2: $20,178 (including $1,978 of interest)
Saver 1 has not only saved more capital, but they have also earned considerably more interest due to the powerful combination of saving more and earning interest on interest.
In fact, Saver 1 has increased their total savings by over 23% due to the compounding effect of interest, compared to Saver 2 who has only increased their savings by 11%.
This is a compelling reason to start saving as early as possible as it pays big dividends in the long run.
2. You can reduce your borrowings
A big advantage of saving more is that, all things being equal, you may be able to borrow less.
And when it comes to home loans, less is good.
Borrowing less can save you a considerable amount of interest expenses over the life of your home loan, as well as reduce (and hopefully eliminate if the deposit is big enough) amounts that may need to be paid for expensive Lenders’ Mortgage Insurance.
Let’s again compare our two young savers at the time they are ready to buy and check out what the relative savings in interest costs could be, based only on what they can put down as a deposit.
Both are buying similar properties at identical prices.
Home loan is for 25 years, at 6%.
Saver 1 has a deposit of around $45,000.
Saver 2 has a deposit of around $20,000 – meaning they need to borrow an additional $25,000 to buy their property.
How much more will Save 2 have to pay back because they had to borrow an additional $25,000?
The answer is an extra $161 per month, or around $48,300 over the life of the loan.
This means Saver 2 will have to pay a whopping $23,300 extra in interest.
I think most of us would agree you can make better use of this extra $23,300 rather than having to hand over this hard earned cash to your lender.
3. Learning financial discipline
Another important benefit of starting to save early is that it helps teach financial discipline.
This discipline arises because the savings target won’t be reached unless enough cash is put aside each week, fortnight or month, and this requires sensible choices as far as saving and spending is concerned.
Establishing good financial habits early on is a great way to prepare for financial commitments down the track, such as having to pay things like ongoing and regular monthly mobile phone bills and (eventually) home loan payments.
There’s an old saying that goes, “No pain, no gain”.
This is exactly the case when it comes to saving up to buy your first home.
The fact is, most first time buyers will need to make spending sacrifices to find the extra cash they need to save a decent deposit in a reasonable period of time.
This is where understanding the difference between needs and wants is very important.
Simply put, a need is something you have to have in order to live, whereas a want is a nice-to-have but you could live without just fine item.
A need might be food, rent, clothing or a car, whereas a want can include designer clothes, expensive overseas holidays, regular meals out or a huge flat screen TV.
A great way to quantify how much is being spent on needs and wants is to go through expenses (actual or budgeted), identify which is which and mark each with a different colour.
Then you can add them up and take a critical look at spending habits with the goal to cut out spending on wants as much as possible.
It’s also important that you don’t forget the little things when looking for cost savings.
For instance, if you are buying a $5 cup of coffee a day, you’re spending $35 a week or $1,820 a year.
Cutting this out would equate to $9,100 in savings over five years, and $18,200 over 10 years!
Of course, any sacrifice should be made over a period that is reasonable and sustainable.
In the case of our coffee example, a compromise might be to cut down rather than cut it out altogether.
Article originally published at onthehouse.com.au.
Keep an eye out for Part 2, coming tomorrow!