Whether you’re buying your very first home, or buying purely for investment, property is a significant purchase and one that requires plenty of preparation.
Renting can give you a lifestyle you can't always have if you've got a huge debt with a mortgage, so an important question to ask yourself is 'why do I want to buy a house? What would I benefit from it?'
Then, as the proverb goes “What is the best way to eat an elephant?….One bite at a time.” Likewise, to achieve the sizeable goal of purchasing property, it's a good idea to set some smaller, obtainable goals.
You need to:
Take Charge
It’s crucial to take control of your own finances if you want to succeed. Take a deep breath and be really honest with yourself. It takes courage to get everything out in the open but it’s the only way to make financial progress.
Budget
It’s important you know what you’re spending, compared with your income, to ensure you don’t have more money going out, than what is coming in! People often underestimate even the simple things like how much their weekly grocery costs are, so keeping a track by writing things out honestly will give you a good idea of what you can realistically aim to save towards a property.
Making an Excel spreadsheet, itemising your spending by category, will show you where most of your money is going – remember to include your annual expenses too.
Look at ways you can spend less, so as to reach your target. This takes discipline and determination, but it’s attainable when your goal is realistic and there‘s a desirable reward at the finish line. Getting in the habit of sticking to a budget will also be helpful when it comes to maintaining a mortgage.
Eliminate Debt
Paying high interest on debt can be crippling, so the first thing you want to do is focus on paying off your debts, thereby freeing your money for saving. Make a written list of all that is owed and set yourself the goal of paying off those debts, starting with whichever is accruing the highest interest.
One tip is to reduce your credit cards and their excess limit. Personally, I’ve found this strategy really successful as it protects me from the temptation of spending beyond my budget and ensures I can pay the balance owing each month, without accruing any interest. For some people it’s wise to have no credit cards at all - it’s so easy to lose sight of where your money is going.
Consolidating your debts by combining your existing credit and other debts into one loan is another good move. This means just one interest rate and one repayment amount leaving your bank account on a regular basis.
Find Help
A good financial planner can be well worth any cost involved in seeking out their professional advice. They will tailor a specialized plan that is unique to you, recommending specific steps to accomplish all your own financial goals and priorities. They are experienced in dealing with a vast range of financial issues, including property investment, and have insights that will protect your interests. We highly recommend FoxPlan for their approach.
Getting the correct insurance cover is also important and something a financial planner can significantly assist you with because they thoroughly check out those critical, finer policy details – don’t get caught out!
Save
For obvious reasons, saving is important to cover you for any unforeseen circumstances. The more money you can save, the stronger your case for a bank loan and the less money you have to pay in interest over the long term. Establishing a saving habit by making some sacrifices to your weekly spending, before taking out a property loan, becomes a realistic measuring tool as to the budget you can sustain on an annual basis.
You may want to consider selling some items to help towards your savings goal - Trade Me is great for this. Taking on an extra job for a season might be another option.
Housing Finance
When a house you like becomes available you want to be able to move quickly, especially in the present low supply, high demand housing market, so getting pre-approved finance is important. This enables you to negotiate strongly and buy well.
A good credit rating counts when applying for loans and these are affected by things like any debt you owe, your payment history and types of credit used etc.
How much you can borrow will depend on a variety of factors from how much deposit you have through to the value of the home you want to buy and your ability to repay the loan.
Consider A Property Lawyer or Mortgage Broker
A property lawyer or mortgage broker will act to protect your interests. They have the knowledge and experience to help you negotiate deals and recognise any potential problems or legal complications. They can help with the buying and selling process so you understand what your financial commitments are.
It can be confusing what to choose in regard to the right loan so they can help you understand exactly what you’re signing up for, e.g. whether you will be paying interest only for a period, or principal and interest together, and so on.
Next month we’ll look at some of the practical steps you can take to make that exciting property purchase a reality!