Buying your first home is an exciting experience. However, in all the excitement, it’s easy to make mistakes. Here we review three of the most common to avoid. The first mistake is not knowing your price range. With dozens of financial factors affecting the ongoing cost of ownership, not to mention your up-front settlement costs, it’s easy to just shrug off the specifics and make a wild guess that is also wildly inaccurate. The second mistake to avoid is buying solely on emotion and impulse, rather than calm, careful consideration. If you make this mistake, the cooling-off period may give you a way out, but you should think of it as a last resort. The third mistake to avoid is going it alone, without the help of a professional guide to save you time, money and worry throughout the home buying process.
1. Not knowing your price range
So many factors go into calculating your price range that it’s easy to give up and just guess. But don’t make this mistake. Rather, with the help of a professional guide, start laying out all the financial factors, which generally divide into two primary categories: the ongoing cost of ownership and your up-front payment.
The ongoing cost of ownership
It’s important to first determine how much you can afford to spend each month on all property-related expenses, based on your monthly income. Your mortgage principal and interest payment is your largest property expense, but there are several others of importance that you need to factor in, such as home insurance. There are also yearly expenses, such as council rates, and it’s a good financial habit to divide these by twelve and think of them as part of your monthly payment. These additional expenses will vary greatly depending on the property type and location, but it’s important to do your research and get to know the numbers that apply to your case.
Assuming you will need a home loan, then your credit score will also be a factor in your interest rate and thus your monthly mortgage payment. Be sure to meet with a trusted lender to work out how all these variables translate into the price of the property you can afford before going out and looking at properties. Otherwise, you’re bound to initially fall in love with a whole category of homes that are out of your price range, only to spend the rest of your time being disappointed by the homes you can afford.
The up-front payment
Knowing how much you can afford to pay up-front involves a lot more than your deposit. For example, one of the largest settlement costs is the stamp duty payment, which is a tax collected by the state for certain paperwork-related transactions. Unfortunately, stamp duty can add much as much as five percent of the property value or more to your up-front costs. However, as a first home buyer, you may qualify for an exemption or a concessional rate. You may also qualify for the First Home Owner Grant (FHOG), which could save you as a much as $20,000 on your home. Although FHOG often applies only to newly built properties with a property value below a certain upper limit, each state handles the FHOG differently and there are a wide variety of programs. So it’s important to work with your property lawyer or home conveyancer to find out exactly where you stand.
2. Making a buying decision based on emotion and impulse
Sellers and their agents know that first impressions are everything, so they often go to great lengths to ensure that your senses are engorged and your emotions are stirred to the maximum during your first viewing. A house that has been beautifully staged with expensive furniture, and has been filled with the aroma of freshly baked gourmet pastries, may inspire you to make an offer on the spot, but for all the wrong reasons.
Emotion, intuition and gut instinct should certainly play an important role in your decision. However, it’s important to not get swept away by them, especially when it’s clear that you’re being cleverly manipulated by savvy sellers and their agents. It’s perfectly legal, and you can’t blame them for trying, but you don’t have to fall for it.
While guarding against an overdose of pleasant endorphins, don’t forget that negative emotions drive impulse buys as well. This is why one-day-only sales work so well. The irrational fear of missing an opportunity can drive us to buy something, even a house, when all the rational indicators point the other way.
Although you should make a genuine effort to exercise restraint to avoid an irrational impulse buy, there is usually a way out if you do. It’s called the cooling-off period, and most states and territories in Australia, save Western Australia and Tasmania, offer it as part of the Contract of Sale. You will have to pay either a flat fee or a percentage of your purchase to get out of the contract. But this will be small compared to your deposit, which you will get back. Keep in mind, however, that the cooling-off period is not applicable to properties purchased at auction.
3. Going at it alone
It’s tempting to think that you can take the money that you would have spent on a professional guide, such as a property lawyer or home conveyancer, and use it to buy a nicer property. However, most seasoned home buyers agree that having a professional guide is likely to save you money in the long run while providing peace of mind along the way. Having a property lawyer or home conveyancer makes all of the following aspects of home conveyancing that much easier:
- Preparing/reviewing a Contract of Sale
- Negotiating a lower sale price
- Scrutinizing the seller’s Vendor Statement
- Arranging home inspections
- Calculating settlement costs, such as stamp duty
- Handling settlement and title lodging
Avoiding these three mistakes
In all the excitement of buying your first home, it’s easy to make mistakes. We’ve singled out three of the most common to avoid. First, don’t make the mistake of guessing, rather than knowing, how much house you can afford. You need to know all of the easily overlooked costs of ownership, such as council rates, and all of the easily overlooked up-front costs, such as stamp duty payment. Second, don’t make the mistake of buying solely on emotion and impulse, rather than calm, careful consideration. Be on guard for savvy selling tactics that may trick you into making an impulse buy despite your better judgment. Third, don’t make the mistake of buying a home without the help of a professional guide to save you time, money and worry throughout the entire process.
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