Don't get caught between houses
July 2012
It is very apparent that the local housing market is struggling. House prices have fallen, sales are sluggish and the number of new home builds is certainly down. Whilst this is not great if you are looking to sell or if you are employed in real estate or building, it does provide opportunity for those looking to buy or potentially upgrade their home. However, it is crucially important not to get stuck between two houses.
What I mean by this is that anybody looking to upgrade from their existing home to a new home should ensure that they can either, a) sell their existing home or b) afford to keep both. Signing a contract to purchase a new home, without having sold (or having a clause in the contract giving you time to sell) can lead to disastrous consequences. You could find yourself paying two lots of rates, insurances and mortgage repayments, as well as land tax. Whilst rental income may help with these payments, there is often a big gap between income coming in and expenses going out. Plan ahead and know your capabilities before finding yourself in this position.
As always, a financial planning process should begin with a deep understanding of your lifestyle goals. Housing is often a key part of this so be very clear on what is important to you. How many bedrooms will you need? Do you like to entertain and need space for this? Can you store your caravan? Look into the future to assess your need to be close to schools, healthcare, transport etc.
You should then develop a budget and balance sheet. A budget will help you to determine affordability of repayments (and should allow for some movement in interest rates). Your budget should include all of the things that are important in your lifestyle, for example holidays, gym memberships, dining out etc. If you find you can't afford your dream home, you may have to decide what you are prepared to give up or cut back on. Make sure this is a conscious decision made prior to the purchase of a house, rather than a forced decision when you are scraping to make your repayments.
Your balance sheet (a list of your assets and liabilities) will help you to determine whether you have enough equity to obtain finance for a home. If you can pull together 20% of the total value of the property and can meet repayments, the banks will lend the remaining 80% without charging you lenders mortgage insurance (an insurance policy which protects them not you!). If you don't have enough for this, your budget can help you determine how long it will take to save.
Once you are armed with this information and you know how much you can spend (and whether or not you need to sell your existing home) you are in a much better position to begin negotiating prices and can do so comfortable that you won't find yourself in trouble down the track. A house is a significant purchase so always seek professional advice to assist you in the panning stages...before you sign a contract.
This article is for general information only. Any advice in it has been prepared without taking into account your objectives, financial situation or needs. You should therefore not act on it without first taking those things into account and seeking professional advice. While all reasonable care is taken in the preparation of this article, to the extent allowed by legislation, WHK Financial Planning Pty Ltd ABN 51 060 092 631 AFSL 238244 accepts no liability whatsoever for reliance on it.
