Buying your first home is a damn big deal. Not only from a financial perspective but from an emotional point of view as well. Kudos to you for embarking on this journey!
When buying with a partner, spouse or friend, the purchase of a first home represents a huge leap of faith in your relationship. On the other hand, if you are achieving the incredibly admirable feat of securing your first home on your lonesome then it represents an anxious-laden jump towards independence. Again a very big deal.
Such a big decision shouldn’t be made lightly. While a property can always be put on the market and hopefully sold quickly if your circumstances change, selling a home isn’t easy. The collateral damage administered to the relationships involved can be irreparable.
I believe there are 5 key questions you need to ask yourself (and each other) before you jump in. These questions can provide a decision-making framework for your purchase. If there are disagreements between those involved on where and what to buy, the resulting discussions could help you find common ground.
5 Questions to answer before buying your first home…
1. How much can you realistically afford?
Buyers are often surprised by how much the bank will lend them when they go through the pre-approval process. You have to remember, banks are keen to lend you as much money as possible. Charging interest is their core business. You want to use as little of this as you need. The quicker you pay off your own home, the quicker you can reach financial independence, retire early and ride off into the sunset…
Your pre-approval amount is a limit, not a target.
If you have the ability to borrow $500k on a 30-year mortgage, then try to restrict yourself to a cheaper home. Instead, borrow $400k on a 20-year mortgage. The fortnightly payment would be the same ($1,167) but this change alone will save you $205k in interest and 10 years of paying off a mortgage!*
*Calculations assume an interest rate of 4.5%
Don’t believe me? Try it out for yourself on the sorted mortgage calculator.
Read: Should you be using a mortgage adviser?
2. How much space do you actually need?
Many of our parent’s generation, ie. baby boomers, aspired to own big homes. It seems it was a status symbol to own a large property. Or maybe they just wanted to get away from us, the kids?
Either way, these large 4-5 bedroom homes become a burden once they are filled with clutter. Deferred maintenance mounts up and energy levels reduce as the years go by, compounding the problem.
Can you think of a family member or someone you know who will be stuck in their large home forever, just because the thought of moving is buried way down at the bottom of the too-hard basket?
Bigger homes take more effort to clean, fill up hours of your weekend with chores and require constant ongoing maintenance. The bigger the house, the more everything costs too.
Keep this in mind and buy the smallest home you can get away with. My personal preference is to live in a home which I can vacuum, in its entirety, without moving the plug once. It’s the simple pleasures in life that really matter! This rule essentially limits us to a home with a livable floor area of approx 90 – 120 sqm.
As an aside, I grew up in a family of 7 in a 3 bedroom house in Newlands (the garage eventually became a 4th and 5th bedroom). Looking back, it never felt cramped. I loved being close to my siblings. You were never lonely and we became accustomed to sharing our space with each other.
3. How important are future returns?
Are you looking to secure your financial future? Or the best possible lifestyle money can buy?
If your focus is the former, then you need to own a property with some sort of land component. This could mean you end up out in the ‘burbs‘. With any property asset, it’s the land that goes up in value, not the building as such. Generally, apartments don’t go up in value at the same rate as standalone homes.
If you are after the inner-city lifestyle and want to buy an apartment as your first home that’s absolutely fine, but just keep in mind that your friends out in the suburbs may benefit from more capital growth than you do.
4. Could this be a rental property?
Speaking of future returns… Every first home should be chosen with the following question in mind:
Could you easily rent this property out if you had to?
Better still… Would the potential rental come anywhere near covering the basic costs of ownership? eg. Mortgage + rates + insurance.
Let’s say you get sick of your jobs and decide to go travelling for 6-12 months. Maybe you want to satisfy your wanderlust before you settle down and have kids. Wouldn’t it be handy to be able to keep your home, have tenants pay the mortgage while you are gone and still own a major asset when you get back? One that has hopefully gone up in value in the meantime?
Read: Should you buy an investment property
5. How much freedom are you prepared to sacrifice?
Buying a property usually involves a little ‘delayed gratification’. Which, let’s be honest, is not something Gen Y’s and millennials are known for embracing. While property debt is generally considered ‘good debt‘, it can still cause anxiety and stress and feel like a big weight on your shoulders. This is especially true when interest rates rise, which they inevitably will. Consider what your lives would be like if instead of paying 4.5% interest, you were suddenly paying 7.5%?
Take that same $400k, 20-year mortgage mentioned above. If, after 3 years, your interest rate suddenly went up to 7.5%, the fortnightly payments would go from $1,167 to approx $1,444 (if you still wanted to pay it off in 20 years). That’s an extra $138 per week.
All the more reason to go with the smallest mortgage you can in the first place!
In my experience, people do well out of owning a property when they hold it for 5+ years (or better still, keep it forever). Otherwise the costs of selling generally wipe out any capital gains that have been made during your time owning the property.
Please note: I discussed this article with a very good friend of mine and they told me their story of buying the cheapest possible first home. Turns out it was cheap for a reason! High maintenance costs and dramas did his head in. So there is definitely a sound argument that cheapest is not always best. Sometimes it is better to stretch yourself a little to get a quality property (not necessarily bigger but quality) that you will be happier to live in. The flipside is that capital gain is generally much better on these homes, resale is better and sometimes maintenance costs are less.
Moral of the story? Don’t go straight out and buy a lemon, but make sure you take on a level of debt which you can realistically afford and preferably payback in a lot less than 30 years.
Resources
During the making of this article, I found the following mortgage calculators useful…
Easy to use:
//sorted.org.nz/tools/mortgage-calculator
Calculate any variable (slightly more advanced):
//www.interest.co.nz/calculators/mortgage-calculator
Calculate the difference in payments for interest rate changes during loan-term:
//www.mortgagechoice.com.au/home-loan-calculators/remaining-balance-calculator/
