Five questions to consider before buying a home

There are many good reasons to own the roof over your head, but there are some tradeoffs as well; with the added control comes a laundry list of responsibilities.

The stability of staying put often means a loss of flexibility and with the opportunity to build equity comes some financial responsibilities.

So let’s look at five questions to ask yourself before you make the leap into ownership. These should help you decide if it’s the right time to buy.

1. Staying put

There’s an old rule of thumb suggesting that buying made sense if you planned to stay in the one place for at least three to five years because the transaction costs involved in buying a home.

When you factor in costs like stamp duty (around 5% of the purchase price of your property), loan costs and the expense of moving, not to mention all of the miscellaneous items (fresh paint and new curtains, etc.) these easily add up to many thousands of dollars.

And when it’s time to sell, there’s once again another set of costs.

So, given the historical rate of home price appreciation, it may well take staying put a few years to break even when all is said and done.

And just as important as the numbers is whether you’re ready to tie yourself down to a particular home in a particular city.

Depending on what you do for a living and the job market in your area, you may be better off with the flexibility of rent.

2. Do your finances stack up?

If you’re already struggling to pay your bills, buying a home may only compound your money woes.

Ideally, you’ve saved at least 10% of the price for a deposit but keep in mind you’ll have to pay lenders mortgage insurance if your deposit is less than 20% of the purchase price.

If you’ve struggled to save a deposit, then you probably aren’t in the position to buy your own home just yet.

Instead try to improve your financial situation by spending less than you earn and saving the rest, before considering buying your first property.

3. What does it really cost?

If you’re on solid financial ground and ready to make a longer-term commitment, the next step is to get a realistic estimate of what you can expect to spend and how that number breaks down every month.

You can get a basic estimate by plugging the home price, minus your deposit, into a mortgage calculator.

Most calculators also allow for property taxes such as stamp duty, which is a significant extra cost involved in buying property.

While this is a good starting point, it doesn’t tell you the whole picture.

For your own home, when you start repaying your mortgage, a small (initially tiny) portion of your mortgage will go towards paying down the principal.

Over time, of course, the total amount borrowed reduces and you begin to make inroads in the reduction of the loan.

Of course, with investment properties, you generally don’t try to pay these off quickly as the interest component of the loan is tax-deductible. In fact, most investors only have interest-only mortgages.

4. What are the extra expenses?

Don’t forget that there are many additional costs of home ownership that unseasoned buyers tend to overlook.

They’re the expenses they don’t have to pay as tenants, and it’s not only rates and insurances.

If you buy a apartment or townhouse, for example, you will need to pay body corporate or owners corporation fees – usually every quarter.

This additional levy, which pays for costs of shared infrastructure and amenities, can add hundreds of dollars to your monthly expense, and it’s not uncommon for owners to be hit with one-off levies for projects not covered in the budget.

When it comes to houses, most single income homeowners will need to budget – money and time – for routine maintenances costs, as well as big-ticket projects, such as paint jobs and new roofs.

You have to be ready to take on all the things that come with ownership, because it’s not for everyone.

5. What’s happening in your market?

When considering buying your first home, it’s important to understand what is happening in your local property market.

The market varies greatly from one city to the next – for example the strength of Sydney versus the weakness of Perth over recent times – so it pays to understand where in the cycle your market is sitting.

While some will suggest you don’t want to buy at the peak of the market, if you’re intending to hold for the long-term then you should aim to buy whenever you can, regardless of the property cycle, because it’s better to do something than nothing!

Now don’t get me wrong …

I think buying your own home is one of the best financial decisions you could make.

Most Australians who bought a home and slowly paid it off over the years have found it is the biggest store of their wealth due to the long-term ongoing capital appreciation of well-located residential real estate in Australia.

Who wouldn’t have liked to buy the home their parents bought at the price their parents paid 20 or 30 years ago?

For many buyers, that’s a good enough reason to get off the fence and into the housing market sooner rather later.

However, I’m suggesting that you go into the financial commitment of a new home with your eyes wide open.

Michael Yardney is a director of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia’s leading experts in wealth creation through property and writes the Property Update blog.