Buying a home is the most expensive purchase most people will make. Analysing whether or not you can afford to buy a home is not as simple as just paying the deposit and being able to make mortgage repayments. There are numerous additional fees, costs and expenses that you need to factor in to get a true understanding of what is in store for you. This article will go through a few key components to consider when deciding to buy a home.
What can you afford?
It is vital that you know what your net savings capacity is. If you don’t know this is then you should look at doing a detailed family budget plan or reviewing one you already have. If this proves to be a difficult exercise, see a qualified financial adviser than can help with cash flow analysis and that can discern and educate you on the difference between your necessary and discretionary costs. Remember buying a home is most often a long term exercise.
What type of loan will you take out?
There are numerous types of home loans on offer by various institutions, but we will only touch on the most common loans for first home buyers.
- Variable home loans: Variable home loans are the most common type of loans on offer for potential home buyers. The interest rate varies over the life of the loan according to the economic climate and official interest rates set by the Reserve Bank. Simply put, if the Reserve Bank decides to cut interest rates, so does the rate on your loan; if the Reserve Bank decides to increase interest rates, the rate on your loan also increases.
- Fixed home loans: These loans work by allowing borrowers to lock in an interest rate for a specified period, generally 1-5 years. The benefit of having a fixed rate is that it allows you to plan your finances without having to worry about increases in interest rates. However, you will not be able to benefit from falling rates and there may be early repayment penalties for exiting the loan early.
- Honeymoon loans: This type of loan is specifically targeted to first home buyers, and one which many of us are likely to come across. This type of loan allows for the borrower to lock in a discounted rate for a specified period. This specified honeymoon period is usually limited to 12 months depending on your lender, to which rates will revert to the standard variable rate. Additional fees may apply when exiting the loan early.
Additional costs involved.
In addition to the initial deposit and minimum monthly repayments, there are numerous on-going and one-off costs involved. These costs come in the form of loan establishment fees, legal fees, stamp duty, lender’s mortgage insurance if you are not able to save the full deposit amount, conveyancing fees; not to mention all the other auxiliary costs such as building and pest, home and contents insurance, strata fees, land and utility rates. Accumulation of these fees can well be in excess of $20,000 on an average home.
Remember, buying a home is not an easy decision. Take time to speak with a qualified financial planner on (07) 3040 4840 to ensure you have sufficient information and that you are making the right decision.
The advice on this site may not be suitable to you because it contains general information that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information. Please also refer to our general advice warning under contact us tab on our website. The article is based on information available at the time of writing only and therefore care should be taken as to the accuracy of the content.
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