One of the most fulfilling parts of being a financial coach is journeying with and helping people achieve financial goals that are important to them. One of the biggest, if not the biggest financial goal you and I will face in our lifetime, is to save for and purchase our first house.
It is the great Australian dream to own our own house and from the day we start working. There is this unspoken expectation that we should be striving to buy our first house.
But with the average Australian house price topping $560,000 in December 2014 and the average first home owner mortgage closing in on $350,000, the risks associated with buying your first house and taking on a mortgage are significantly higher than they once were.
I had originally planned to make this just one blog but as I sat down and wrote out the key issues I wanted to share, I quickly realised there was way too much for just one blog post on how to buy a house. So to keep it simple, I have split this topic of “Mortgage Advice for Young Couples” into the following three blogs:
So on with today’s blog — “How much do I need to save before buying a house?”
When it comes to buying your first house there are three groups of expenses you need to plan carefully for:
The Purchase Costs
This first group of costs are made up of the deposit, stamp duty, legal fees, and depending on where you live in Australia, the pest and building reports.
I know saving for your first house is difficult at the best of times, however I strongly recommend that your goal should be to have at least a 20% deposit. Just because the banks will lend you up to 95% of the loan value does not mean you should borrow 95%.
Saving a 20% deposit will mean:
- You do not have to depend on anyone else as guarantor, ie. you are not putting anyone else’s finances at risk.
- You will not have to take on as big of a mortgage; remember it all has to be paid back.
- You have demonstrated both to the bank and yourselves that you have the capacity to save and manage your personal finances well.
- You do not need to pay mortgage lenders insurance, which by the way protects the banks against default, not you. If you want to calculate how much mortgage lenders insurance you might be up for, here is a good calculator.
- You are far less likely to find yourself in a position where the value of your house is worth less than your loan, should house prices suddenly drop as they did in the US, UK and Europe in 2008/09. Australians are so blinded by home ownership that we think big falls in property values can’t happen here. We are wrong — they can, and one day they will.
- The range of mortgage products and interest rates available are typically far greater for those who have a 20% deposit or greater.
Your second biggest expense is typically the stamp duty which is basically a tax paid to your state government on the purchase of your house. Realestate.com.au has an excellent little calculator which will help you work out what you will be up for.
Your legal fees are typically around $1,000-$2,000 for the average residential property purchase.
Finally, depending on which state you are in you may also be up for the costs of the pest inspections and building reports, which can add up to another $2,000.
The purchase costs are the costs we all know about and with the exception of how much we have put down as a deposit, these costs are non-negotiable expenses that must be paid either prior to or at the point of purchase.
Moving and Settling In Costs
The second group of expenses you need to consider are the moving and settling in costs.
Professional removalists can be very expensive, especially if you are moving interstate. You are typically looking at anything from a few hundred to several thousand dollars for professionals. If you have a lot of heavy stuff, a lot of stairs or a dodgy back, my experience is you are better off getting someone who knows what they are doing.
However, if like my recent moving experience you instead opt to get a group of muscle-bound mates to move you across the suburb, you will still need a couple of hundred dollars up your sleeve to keep them well fed and ‘hydrated’.
The costs we tend to forget about are the settling in costs and they can come as a real shock if you aren’t prepared. The connection fees for your phone, internet, gas and electricity can easily add up to a $1,000 – $2,000.
Then there is the cost of restocking your pantry, replacing all your cleaning fluids and redirecting the mail; there goes another few hundred dollars.
Depending on the removalist costs, I recommend that all my clients have at least $3,000-$5,000 set aside to cover these costs because they do add up and it can be very stressful to deal with if you are unprepared.
Just In Case Costs
The final category of expenses is the ‘just in case expenses’. Well, they are actually not specific expenses, but rather a contingency fund for those expenses we can’t anticipate. I can’t recommend this strongly enough to anyone buying their first house and taking on a mortgage — you must have a cash reserve of at least $5,000 – $10,000 because stuff happens.
I have seen on so many occasions that people buy their first house and use up every last dollar in doing so and then find that the roof leaks, the heating doesn’t work, or as recently happened to us, the downstairs bedrooms flood every time we get heavy rain — the repair bill was $9,000!
Even if you do get the perfect house without roof leaks, possum infestations, or blocked drains, you will want to add your own touch to the place, and adding your own touch will cost you money.
I know no one likes to hear it but having a cash reserve is a smart move. The last thing you want is to have to turn to credit card debt or personal loans to cover an emergency because your bank accounts are running on empty.
Buying your first house and taking on a mortgage is probably the biggest financial decision you will ever make and it shouldn’t be taken lightly. Most people seriously underestimate just how much taking ownership of their first house will really cost them.
Don’t let well-meaning parents, the Joneses, or your own desires for owning a house override objective, common sense. I know having a 20% deposit and a $5,000 – $10,000 cash reserve will delay your ability to buy your first house but no house is worth the financial stress that comes from stretching yourself too far.
Continuing this blog series is, Mortgage Advice for Young Couples Part 2: How much can we afford to spend on our house?