If you’ve set your sights on buying property, one of the bigger questions you’ll be thinking about is ‘can I really afford this?’ Buying property is a big commitment and potentially one of the biggest financial decisions you might make in your life. We asked our go-to property and mortgage expert, Susan Mitchell, CEO of Mortgage Choice to answer our burning questions.
How can you estimate your budget for owning an owner-occupier property?
There are a few things you’ll need to consider when calculating the ongoing cost of homeownership.
The most common ongoing costs are:
- Monthly home loan repayments.
- Bills and utilities such as internet, gas, electricity and water.
- Home and contents insurance.
- Council fees.
- Strata fees.
- General maintenance costs, especially if you’ve purchased an established home that might have more wear and tear.
These costs should be taken into consideration before you decide which property to buy. I would encourage anyone looking to buy a home, especially those doing it for the first time, to get an understanding of the above costs for the type of property you’re going to buy. Factor these into your monthly budget so you can plan your cash flow accordingly.
What are some hidden costs that might occur?
If you’ve purchased an established home, it’s important you set some funds aside for repairs or small renovations. The strata fees you pay in a unit can also increase over time.
What if the interest rate of my mortgage goes up?
If you settle on a variable rate home loan, consider how much your monthly repayments would cost you if your home loan interest rate were to go up by 1%. Remember, a home loan is a long-term commitment (typically 30 years) and while borrowers currently have access to the lowest interest rates on record, they’re unlikely to remain this low for the remainder of your term.
That being said, you can choose to fix part or all of your home loan interest rate so that you are certain about your home loan repayments over a period of time.
What kind of buffer should you create around your mortgage/property costs?
Ideally, borrowers should aim to have at least 3 months’ worth of mortgage repayments saved. That being said, I would encourage all Australians, whether they have a home loan or not, to save money for a rainy day.
If this year has taught us anything, it’s that life can throw curve balls at you. According to the Australian Banking Association, at the peak of the COVID-19 pandemic, more than 900,000 loans were deferred by Australian banks. Most of these borrowers have now resumed their repayments but there is an important lesson to learn here: we must prioritise our financial security and prepare for the unexpected. I urge anyone hoping to create healthier money habits in the New Year to live within their means, save for a rainy day and create a long-term financial plan to protect your livelihood if you are suddenly unable to work.
How can you ensure that you can really afford a property (any ‘affordability’ or ‘lifestyle’ tests)?
Speak to a qualified mortgage broker before applying for a home loan. An experienced broker will consider your financial situation, goals and needs to help you understand what property and loan size you can afford with your lifestyle in mind. If you’re applying for your first home loan, ask your broker to help you determine your borrowing power and the size of home loan repayments you could expect to pay each month and compare this to your current rent and living expenses so you can understand if you’ll be stretched financially or can afford the loan comfortably.
If you want to stretch yourself financially to buy a property, what are some of the risks?
Stretching yourself financially leaves you vulnerable against life’s ups and downs. If you were suddenly unable to work, you would be at greater risk of not being able to repay your loan if you were stretched financially. Putting yourself in this position, doesn’t leave much room for the unknowns. Sadly, we often assume we’re invincible but health problems can sometimes pull the rug out from under you and this can also impact your ability to repay your home loan.
Stretching yourself financially can have a detrimental impact on your financial wellbeing. It’s important you understand what your home loan repayments would look like if your interest rate did go up. Ask yourself these questions:
- Would you be able to make ends meet?
- Would this cause a considerable amount of stress?
- Ask yourself why you want to stretch yourself financially. Is it to keep up with the joneses? Consider the short and long-term implications of stretching yourself.
Speak to your broker and financial adviser to understand how this will impact your financial wellbeing.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.