20 August, 2014 / Category: Blog
When it comes to buying property, weighing in on the ol’ monetary situation needn’t be a deflating exercise. Talk to your buyer’s agents as with a little planning and the right information, you’re already on your way to making a decision that works for you now, and in future:
What’s on the cards for today? And tomorrow?
First thing’s first: are you confident you can afford the repayments on your chosen property now? What if interest rates happened to rise by 2%? And, could you cope with any potential spanners in the works by way of changes to your employment or family circumstances? All of these things need to be considered before taking the plunge.
So, ask yourself what you can afford today and then have a professional help you draw up a budget and cash flow management system that reflects your circumstances, goals and objectives both now and into the future.
How much can you really borrow?
While securing a loan may seem like half the battle, it doesn’t necessarily mean you can ‘afford’ to purchase the property you’ve had your eye on.
When determining your borrowing capacity, banks use set criteria often derived from The Henderson Poverty Index, to assess your annual spending. This amount varies slightly from lender to lender, but as an indication would likely approximate monthly spending of $1,167 for a single applicant, $2,194pcm for a couple and an additional $330pcm per child.
Many households spend in excess of these amounts, so having a detailed understanding of your family’s annual expenditure and a clear head about what you can actually afford to borrow is crucial to ensuring your quality of life isn’t impacted by nasty home loan repayments.
Before you take the property plunge, get clear on the amount you’ll have to part with both upfront and down the track. Ideally, you’ll want to have a 20% deposit handy in addition to a few extra pennies for additional costs associated with legal fees, stamp duty and financing.
When it comes to financing your purchase, be aware that borrowing in excess of 80% of the property’s value will result in you being liable to pay lenders mortgage insurance (LMI), which kicks in to protect your bank in the event you default on the loan repayments. LMI is charged as a percentage of your overall borrowings, with the cost capitalised to the mortgage and repaid over the life of the loan.
As you can imagine, the higher the percentage, the more you’re up for in your monthly repayments. LMI is certainly one of those underestimated costs to look out for when assessing what you can/can’t afford.
A taxing affair
When purchasing an investment property, you’ll also need to consider the after tax rent received and interest paid. This will provide you with a true indication of what your likely out-of-pocket costs might be at the end of each year.
In addition, consider whether you can fund the repayments in the event of vacancy. You should ensure you can fund at least 3 months’ worth of repayments without receipt of rental income.
Protecting what’s important
You’re scrimping, saving and sacrificing to turn your real estate dream into a reality, so ensure it’s yours to enjoy in sickness, and in health.
We all understand the importance of insuring our homes and cars, but in reality, our income is our most valuable asset. If you’re borrowing for the purchase of your home, it’s absolutely vital you hold appropriate levels of personal insurance cover, in particular income protection cover. Income Protection (or salary continuance) will provide you with up to 75% of your annual income should injury or illness stop you from working.
The right loan with the right repayments:
The out of control feeling that getting into a mortgage can bring, coupled with what can appear to be inherently confusing and unmanageable repayments might have new home owners rethinking their decision to buy in the first place!
While doubts and dysphoria may seem to come part and parcel with financing, at Kearney Group we know that when debt is well placed and structured, it should be easy to negotiate, effective from a tax perspective, and will reflect your needs, goals and overarching financial strategy.
At the Kearney Group, we rarely see people whose debt is structured correctly, and incorrect structure costs people thousands (sometimes tens of thousands!) of dollars each year. A word of warning… Be wary of loans from banks. So often we meet with people who have gone to their bank and have had their mortgage set up by someone who:
To combat this, we’d always recommend working with a good Mortgage Broker (better yet – a Broker who works closely with your financial adviser so they understand you and your financial situation). Rather than being beholden to one specific bank, good Brokers have the ability to scan the finance market and find the BEST product/solution from a range of institutions. They should have no allegiance to one particular institution over another, and will help select the best package for you.
Mortgage Brokers should make sure your facilities are set up in the name and in the way that makes most sense for you and your circumstances. They’ll also prep all your paperwork and liaise with the institution on your behalf – meaning much less stress for you.
Many brokers (Kearney Group’s in-house Broker included) will provide their service at no charge – meaning it costs you nothing to get objective advice that ensures your loan works harder for you, than you do for it.
Where to from here?
If you’re looking to buy, but aren’t sure what you can really afford, look no further for the right advice on a host of financial solutions to get your real estate dream underway. Get in touch with us at Kearney Group and put your best foot forward today.
Andrew Mackenzie, Senior Financial Advisor, Kearney Group