Updated: February 22, 2012
Owning a house is everybody’s dream and today, one of my readers shares his story on how he was able to finally afford it.
So let’s now read the story of Alban and his wife, and learn about the things they had to do when they first bought a house.
It took me and my wife over two years from the time we decided to buy a home to actually packing up our last box and moving out of the rental trap. A lot of the time over those two years was spent going over our budget, our options, our weekend newspaper and working out how we could afford a home.
One of the first things we did was to save money. Good thing we both already have savings which we can start with. But to seriously save more towards our goal of a house, we both set up an automatic debit from our salary accounts on pay day (that’s paying yourself first).
Next, we started looking at properties in the area where we wanted to live. Through newspaper and online listings, we were able to get an idea how much our house would be, which is around $600,000. Also, we made a list of things we definitely needed and the things we wanted in our house to narrow down our search criteria.
After finding several properties, we ordered a standard building inspection and a property valuation. This is for us to learn if the house is structurally sound and what work it needs.
Unfortunately the building inspections showed there was more work needed than a dishwasher installation and a coat of paint could fix. These were just a few of the issues, but we quickly got the message that we couldn’t afford a house in good condition in the area we wanted.
A year has already passed when we decided to re-evaluate our savings and crunch the numbers more closely to see how much we would have to pay for fees and taxes, and how much deposit we could afford. A year of “paying ourselves first” plus our previous savings summed up to around $14,800 already.
Moreover, our research showed us that most home loan providers would require at least a 10% deposit on a property and that meant we were a long way from a $60,000 deposit for our original budget. However, making further comparisons we found that there were still some lenders who would allow a 5% deposit which meant we only had to get to $30,000 and we were not even half way there.
This is when we started getting really worried because I had read that when buying a home, you should allow around 10% of the purchase price for all other expenses, such as stamp duty (which can be tens of thousands of dollars depending on the property value), loan application fees, lender’s mortgage insurance, legal and conveyancing fees, and more building and pest inspections.
That meant that we would still need $45,000 even if we supplied just a 5% deposit and since we wouldn’t get the full grant, we’d have to work doubly or triply hard at our savings goal.
At that point we looked beyond our current budget and considered the lifestyle we wanted to live in our home. We wanted kids, we wanted to travel and we wanted to be able to enjoy life – and not always be worried about a mortgage repayment which would constitute almost a whole month’s wage for us.
Therefore we adjusted our property value search down to $450,000. We figured we’d need around $5,000 for the remaining costs of purchasing a home and obtaining a loan. A $450,000 home would require a $22,500 deposit, so a total of at least $28,000 to safely cover our costs.
We realized we couldn’t move into our dream home right away, but if we bought smart, we could build equity through capital growth and our own improvements and use that equity to leverage into a bigger house, closer to the city or the hills.
Capital growth comes from a rise in demand and the issue with buying in an area of new land releases where we had looked was that there would always be a newer and better house just around the corner, or the opportunity to build one, so building a house in a new area would not show the same growth as buying one in a built up and desirable area.
We set out in earnest and two months later finally found a property which passed building and pest inspections, and suited our needs. We negotiated a final price of $430,000 for a short settlement.
After another month of settlement paperwork which our lawyer and conveyancer handled, our savings stood at $24,000 and a $21,500 deposit would settle our loan. After we paid our application and legal fees we were still left with $20,000. So we decided to provide a round $24,000 deposit and keep $3,000 in our savings account for emergencies, or new furniture, or both.
While we took what seems like a long time to get into our first home, we learned important lessons about property values and demand, as well as compromising on our immediate goals to make sure we weren’t over extended – we couldn’t see the point of spending all of our money on a mortgage, when we’d both have to be at work all the time just to cover the payments.
Instead we opted for security, a larger deposit and we invested in research to ensure capital growth for our future.
Alban is a personal finance writer at Home Loan Finder, where he helps people to choose the best first home buyer loan
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Photo credit: jeweledlion