5 Key initial steps to buying your first home
It’s a New Year and no doubt you’ll have some resolutions one of which may be buying your first home.
If you’ve made this important decision, the first thing you’ll do is go online and research a question like – “how to buy my first home?”
Try it and you will find the response is a list of advice including information about interest rates and terms, finding a real estate agent, using a mortgage broker and the meaning of things like pre-approval, conditional offers and how to buy at auction.
Let’s face it – if you’ve only just started to think about buying a home you won’t be interested in all of this, just yet. In fact, it may put you off. The only thing on your mind will be how do I start?
First things first – here we look at 5 key steps that you need to consider to get you started on the exciting but roller coaster ride towards buying your first home.
By following these you will be in a far better position to be successful and have your own place in the near future.
1. Review your finances is the first step to buying your first home
Whether you are planning on buying a home by yourself or with someone else the first step will be to look at how your finances stack up including income, expenses, debt and savings.
Balancing income with expenses and debt will show how good you are at managing your money and your potential to save in the future.
Savings could include deposit accounts, investments, KiwiSaver and shares, and cash in the bank. Add this up and you will have an idea about your deposit however, remember its value will be reduced by any debt.
Part of this review could also be considering other potential sources of funds from family. While not strictly your own savings, if you are lucky enough to have this option these can be considered when accumulating a deposit, as long as strict rules are followed. And if a 20% deposit seems unreachable you can consider applying for a Welcome Home Loan as part of your plan to save for a deposit.
2. Getting out of debt helps you buy your first home
When a lender looks at your potential to secure a mortgage they will consider your savings and your debt. This means reducing debt as much as possible helps enormously.
Your debt includes everything from credit cards, loans on items such as cars, technology even furniture. For most first time buyers there is also the often heavy burden of a student loan.
The trouble is we are encouraged to take on debt all the time – credit cards, interest free loans that end up hanging around for ages, hire purchase, it’s very tempting but all these are a block to taking control of finances and ultimately buying a home.
The best way to manage debt is to understand what it is, how much needs to be paid off regularly and set up a plan to do this. Starting as early as possible is important.
It may need some sacrifices along the way but it’s worth it. It will also save you money in the long run because it will reduce interest payments.
You can also help reduce debt by selling things you don’t need any more, using sites like TradeMe or Neighbourly. Also, consider what you could do to earn a little bit more money through a second job.
Consolidating multiple debts into one loan, interest rate and repayment schedule, can also make repaying debt easier.
3. Budgeting to buy your first home
Now you’ve reviewed both sides of your finances, savings and debt, you need to work out a budget. While it sounds boring this is totally focused on achieving your home ownership goal and your first real step towards buying a home.
The main focus of this is analysing your income versus your expenses so as to decide how much you can save each month. Use your online banking and receipts to do this over at least one month. Once you’ve worked this out, transfer it automatically each month to a high interest savings account and after a while you’ll be able to set-up a higher interest rate investment fund, like a term deposit.
Most importantly of all, don’t touch it.
Budgeting sounds restrictive but it’s essential as it balances what you can achieve within your timeframe. If you need help try using a budgeting tool to save for a house.
Let’s say you and your partner have just decided to buy a house. You have $40,000 of combined savings, including KiwiSaver, and no student debt. You are both 30 years old.
Based on your combined income of $110,000 you think you could save $1,800 a month and are looking to buy a two-bedroom property in Christchurch for around $350k with a 20% deposit of $70k – so you need $30k more and it would take just under 1.5 years to achieve this goal, as long as you can stick to it.
4. A few tricks to saving for a deposit on your first home
Once you’ve set your goal you will become very focused on saving. Look carefully at what you can do without, where you can trim expenses and keep to the plan for at least a year, but be realistic so you can actually achieve your goals.
A good way to manage saving is to use your bank’s mobile app to transfer amounts saved each day. For instance, if you decide to make your own coffee instead of going to a café, transfer the money saved there and then. Taking a sandwich to work as opposed to buying one is another way. These little amounts soon add up.
Use auction sites to buy second hand instead of new. Shop at PAKnSave and not New World. Eat in or have people round for drinks BYO as opposed to going out; a glass of wine at home is about $2 compared to $10 in a bar.
Once you’ve been doing this for a couple of months you will work out how much you are saving. To help try using a savings calculator.
You can also make saving fun by turning it into a game. Try having weeks when you attempt to spend as little as possible. If you are saving with someone else, be competitive and celebrate whoever wins by saving the most. If you are on your own you can try and beat your savings record month by month. With apps and banking technology you can track your spending and saving very easily.
5. Setting goals to buy your first home
If you don’t know your goal you won’t know when you’ve reached your destination, and more importantly when you can celebrate.
Life is full of changes so the goals you set now may be exceeded in the future because you get a better paid job and you reach your target quicker, or otherwise.
As a result, try looking at three options covering your dream home, ideal home or acceptable.
In our example, the dream home may be a three bedroom standalone house, the ideal a two bedroom unit or townhouse, and acceptable as a way to get on the housing ladder a one-bedroom unit.
Buying your first home is an exciting adventure and a time when you will learn important lessons about finance, budgeting and saving. You need to be dedicated and persistent in taking steps, however small, towards achieving a deposit.
It can also be very hard work so it’s a good idea to get advice, support and help whenever needed, whatever stage you are on the home buying journey.
The journey you are on involves the biggest financial decision of most people’s lives so it needs to be taken seriously. However, the rewards of being a home owner are the key to achieving all your future financial goals and prosperity.
To find out more about buying your first home call Paul Townsend, Senior Mortgage Advisor – 027 352 6262
Posted 30 Jan 2017