With the government offering further incentives, prospective first home buyers are faced with a dilemma. Interest rates are rising, but rents are also going up. Would it be better* to borrow and pay interest on your own home, or keep renting longer while you save a larger deposit?
Rent and save?
Despite rising costs, there are definite benefits to renting, like no need to worry about maintenance, rates or ongoing mortgage payments. Few renters spend weekends combing the hardware store for matching paint or that new lawnmower and edger, and if you decide to move to another city or state for a few years you can just hand in your notice and leave.
On the other hand, it might be difficult to save as quickly as you’d like. And if prices in your dream suburb are rising at the same pace as your savings, you’re not really getting ahead. On top of that you can’t hang things on walls or change the carpets; it’s your home, but only so long as that’s okay with the owner.
Buy less, own now?
One way to get into home ownership is to buy a property you can afford now, even if it’s not your dream home.
Do you need a big house? Apartments are considerably less expensive, so ask yourself if you really want the garden, extra bathrooms and spare room. Although, one possible downside is that space will get tight if you plan to start a family soon.
Another way to afford your own home, if your dream suburb is way over budget, is to consider looking for a place in surrounding suburbs, which might not be so pricey.
Choosing to buy a cheaper property now makes it easier to find the deposit and cover your monthly repayments. And the money’s going into your own nest egg.
Say you find a place for $700,000. With the minimum 10% deposit, you’ll need to borrow $630,000; calculating 5% interest over 30 years, the monthly repayments will be $3382.
Buy a different unit borrowing $500,000 and the monthly repayments are $2684. If you’re currently paying $620 rent each week, you’re effectively paying the same monthly amount anyway.
A fairly major, long-term, benefit of owning your home is that when it comes time to move, you can either sell the property or keep it as an investment and use the equity on a new home.
Work out how much you have already saved for a deposit and what you can afford to pay each month, as well as your eligibility for any first-home buyer grants.
The deposit is usually around 15-20% of the value of the property. Some lenders will allow a smaller deposit so long as the loan is covered by Lenders’ Mortgage Insurance (LMI), but that can be an expensive way to do it.
As a general guide, your monthly mortgage repayments should be less than or equal to around 25-30% of your gross monthly income. When calculating what you can afford, take into account existing expenses such as credit card debts, student loans or car payments as well as additional homebuyer costs.
If you find that the only properties you can afford right now are in areas that don’t appeal to you, consider buying one as an investment and take advantage of the tax benefits while you save for your dream home.
*Please note that the points we make in this article are academic, weighing up the various benefits of available options. Make sure you do your own research and consult a financial advisor, before any big decision.
