We discussed the pros, cons and Beyonce lyrics relevant to home ownership in Part I.
So, you want to go ahead and buy your own little patch of paradise? (If by paradise you mean a modestly priced abode in an affordable suburb).
Great, let’s do this!
How much do you need?
Shit’s gettin’ real now. You’re going to need a large amount of cash as a deposit. Ideally, 20% of the purchase price and the stamp duty (there are some stamp duty exemptions depending on the state you live in, but overall, it’s a tax you pay for buying a house. I know, WTF, as if it isn’t already crazy expensive).
So let’s assume, conservatively, you are buying a $500K property. You will need to save $100,000.
This would give you a 20% Loan-to-Value Ratio, or LVR. This a big deal to banks – and they get all antsy if it’s much lower than this.
However, maybe you find a deal where you only need a 10% deposit. That’s fine, but they will charge you Lender’s Mortgage Insurance, which is a total scam in my view, but it protects the bank if you default on the loan. I know, poor banks, needing ALL the protection cos they’re doing it tough.
The price of LMI depends on how short of the 20% deposit you end up. They tend to whack it on top of the mortgage amount, which is good because you don’t need to save the money for it, but bad because you end up paying interest on that amount too. In our example, LMI would cost almost $9000.
How will you save this much?
By not spending it on other things. Sounds obvious, but there is a long way between saying ‘I plan to save a cool $100,000’, and actually getting there. And on this long road is a lot of saying ‘no’ to things.
No to $20 cocktails. No to taxis home after said cocktails. No to overseas holidays. No to expensive phones you upgrade every two years. Look, the list goes on.
Saving money is kinda hard and boring. So is paying a mortgage actually. In this example where we borrow $400,000 (after saving 20%), the repayments will be over $2000 per month (on a 4% interest rate). Totally doable, but not exactly conducive to a lifestyle of luxurious ease.
And this is what the bank wants to see: that you have been practising the saving game for a while now. You need to demonstrate a savings history – which is why, even if you have awesome folks who gift you a deposit, you still need to show you aren’t blowing your paycheque on cocaine and hookers every week. Or even every second week.
Savings and wise investment
Homer hilariously disparages the concept of ‘savings and wise investment’ in this scene.
Sadly, there are no fortunes to be made with bacon grease these days. And even saving is pretty tough on its own. If you have a sensible time frame to save a deposit, you might consider investing it first.
The era of low interest rates is great for borrowers but shit for savers. Even the best high-interest accounts are only paying around 3% interest, and inflation is around 2%. So every year the value of your money actually only grows by 1%.
One option is to invest in a managed fund or ETF that delivers a higher return. Now this comes with its own set of risk and reward, so don’t just take my word for it (you could even see a financial adviser). But the idea here is that you have an interim investment strategy to boost your returns, if this is whole property idea is a long-term goal.
Playing the long game
My friend Gigi is in her early 30s and lives in New York (thanks E3 visa!). She wants to buy an apartment there one day. (That sounds pretty way out, but in fact it’s the same price as Sydney, maybe even less.) So here is what she does:
- She has been saving part of every pay since she was a graduate – i.e. it goes straight into an account that she doesn’t dip into for new clothes or nights out.
- She still has holidays and does fun things, but that is a separate budget. She pays herself (to her savings) first.
- She puts it into a share portfolio that bubbles away while she plays the long game. This means instead of getting 2-3% she has been getting 5-8% returns (depending on the shares and the time period).
So it’s probably a few years yet until Gigi bags that apartment. But guess what, she started early, so even if she waits five years, she will be well under 40 when that happens. Considering we live a bloody long time these days, Gigi will have a good 50 years of owning property ahead of her.
So how do you get started? Break it into small steps.
- Open a dedicated online savings account, for that one purpose. Set up direct debits to it on payday. Don’t touch it.
- Use the savings and mortgage calculators on MoneySmart to work out how much you need to save, and over what timeframe. It will give you a goal to aim for.
- Do a budget. For realz. Give it a go at least. Look, here is an easy one! Just get a handle on what goes in and out, so you can see where to trim.
- Start practising saying the magical phrase ‘Sorry, I can’t afford that’.