Know your numbers and think affordability
This week, I had a good chat with a number of first home buyers who had a bunch of questions they wanted answers for and so I thought I would answer one of them here with an example. One of the things I get asked a lot is, e.g. What can I afford with say $550,000 which is what my mortgage broker and or bank has calculate that I can borrow comfortably? This seems to be a common occurrence and I am glad to see that first home buyers are now starting to think about getting into the market and are getting their borrowing capacity worked out. Knowing what you can afford allows you to shop smartly and not go overboard with buying something that you may not be able to get and sustain in the long term. It’s about being disciplined by knowing your budget before shopping and not biting off more than you can chew.
‘The best thing you can do for yourself is to think about the overall cost of the property you are investing in and know your numbers. It’s about knowing how much rent you will be getting as an income, known as ingoings and outgoings which is the cost of holding the property’
The best thing you can do for yourself is to think about the overall cost of the property you are investing in and know your numbers. It’s about knowing how much rent you will be getting as an income, known as ingoings and outgoings which is the cost of holding the property. The outgoings which includes strata/ body corporate fees, council rates and water, agency fees. So let’s say you are looking at a 2 bedroom unit as an investment. For example, Rent is $500 per week x 52 weeks = $26,000 p/a gross rent. Outgoings is Strata $3,000 p/a + Council $1,200 p/a + Water $500 p/a + Agency fees $1,500 p/a = $6200 p/a. Subtract the outgoings from the ingoings to get a net return. $26,000 – $6,200 gives you a $19,800 return.
This way, you will know what the shortfall is by knowing how much interest or interest and principal you are paying on the total loan amount. So say you borrowed $440,000 from the bank which is 80 per cent LVR (Loan to Value Ratio) for a $550,000 property and your interest is 5 per cent, your interest payment will be $22,000 per annum in repayments. This means you have a shortfall of about $2,200 per annum ($22,000 repayments – $19,800 net return) which is $42 per week. So then ask yourself if that is something you can invest in consistently and sacrifice to hold this property. Know your numbers and think what you can afford.
If this is a place you are buying as your first home, you only need to look at the outgoings and the interest or interest and principal as your cost for holding the property. In this example, your outgoings would be strata, water, council, electricity, internet, let’s say it’s $8000 per year and the holding cost for the loan, let’s say you are paying interest only repayments being $22,000 per annum. Therefore, your yearly holding cost will be $30,000 per year to own your first home.
This of course assumes you can borrow that amount from the banks which will consider the amount of deposit you have saved up and your serviceability of the loan which is largely based on your income. You will also want to consider the tax benefits in this and also depreciation on your unit which is a great benefit to your taxes.
‘Realise that you are getting yourself into a long term investment so you don’t get emotional over the short rise and fall of the value of your investment. It sure beats paying somebody else’s mortgage’
Calculate grants and stamp duty exemptions
One of the things you need to look at is as first home buyers now is to start to add up all first home owners grants and stamp duty exemptions which will be a significant saving for you when purchasing your first home. With the current changes in the grants and stamp duty exemptions, it is worth capitalising on the opportunity to get into something sooner rather than later. The market is ripe for the picking for first home buyers who are thinking of getting into the market. You can read more about this in the article on ‘First Home Buyers, this is your time and why!’ (page 48) to read more about the very current changes in the rebates and duties for first home buyers across NSW, VIC and QLD.
Strike while the iron is hot and get into the market
Australian capital city housing markets are robust and reliable over the longer term with significant financial advantages for home ownership, particularly through first home owner grants, stamp duty exemptions and taxation benefits
Quite often I see first home buyers over analyse the situation so much that they get overwhelmed and not seize opportunities to get something on their own. Realise that you are getting yourself into a long term investment so you don’t get emotional over the short rise and fall of the value of your investment. It sure beats paying somebodies rent.
Sometimes, to get into the market expeditiously, be prepared to not be too concerned over lifestyle choices, convenience, property type but get into something reasonable that you can afford. It is so important to put your first step on the ladder, then as your journey continues you can look at other options and revaluate your situation over time. Remember to seize the opportunity and strike while the iron is hot with the recent announcement of advantages for first home buyers and get into the market.
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