So, you’ve got bad credit at the moment, but you’re still hopeful that you can turn your finances around and buy property in Australia. Saving for a 20% deposit takes more or less 5 years for the average Aussie, so as mentioned in our article “How to Get a Mortgage with Bad Credit”, consider this as an opportunity to upgrade your credit rating by paying your bills consistently whilst you save money towards your bigger goal to buy a house!
This guide should provide a good starting point to start your journey in the property market. Whilst owning property does represent a form of risk (getting into debt), at the end of the day if you are renting, it’s “dead money” that goes toward paying someone else’s mortgage – whereas at least if you own your home, you can save money, build equity for your future and grow your net worth.
Pre-Purchase Financing Considerations:
- Property Price – The first and biggest consideration for buying property is the property price – and how much you pay depends on where you want to live, the type of property you are looking at, and whether you can afford to service the ongoing mortgage repayment plan. Research the property market and suburb profiles on sites like Realestate.com.au or Domain.com.au, where you can compare the price of recently sold residential properties in suburbs you would consider living in.
Consider the type of housing that is going to suit your needs – and whether you want to build or buy a house (buying is generally cheaper, but you may be able to build for less if you do your homework (and by building you may also be eligible for the First Home-owner Grant in some Australian states)).
Bear in mind the many hidden costs of buying the property also depend on the value of your property and where it is located (the higher the value of the property, the higher the costs), and although the property is generally considered to have stable asset prices, inflation can cause price fluctuations over time which may or may not work in your favour if you are 5-10 years out from saving a deposit.
Once you have a figure in mind for the type of property, you would like, plus that amount into a mortgage calculator to check the cost of mortgage repayments. If this is out of your budget, keep researching until you find a suburb and property time that matches your financial capacity and lifestyle requirements.
- Deposit – With a ballpark figure in mind, you must also figure out how much you would need to save for a minimum 5%, or ideally, a 20% deposit. Once you know the deposit figure, you can start thinking about how to save money for a house.
- Guarantors – If you are unable to secure the full loan amount on your own, some lenders will grant the loan provided a guarantor (such as a family member) undertakes to help you secure the loan by offering their own property as collateral. Note that this is a major legal commitment for the guarantor, and it is recommended that all parties seek independent financial and legal advice before making this commitment.
- Lender’s Mortgage Insurance (LMI) and Low Deposit Premiums (LDP) – These fees charged by the lender effectively insure the lender against any loss incurred should you be unable to repay your loan. If you are unable to save a 20% property deposit in Australia, you will be liable to pay for LMI or LDP when you purchase a property (you only pay one or the other). This fee is a once-off, non-refundable cost based on your property deposit size and the amount you borrow. You also won’t need to rely on a guarantor as security if you have LMI or LDP.
- Consult your Accountant and Financial Planner – As there are important tax implications in purchasing a property, including on settlement day and at the end of the financial year, it is important to find a good tax accountant if you have not already done so. See if you can get a recommendation from friends and family and conduct online research to ensure that you are comfortable with the person you select to manage your financial affairs. Your accountant may also refer you to a financial advisor, who will be able to help you decide the best strategy for financing your property purchase, given your current financial situation. For more information about Financial Advisors, see our article “Is it worth paying for a Financial Advisor”.
- Australian Government Assistance for First Home Owners
- First Home Owner Grant (FHOG) – Under this national Australian Government scheme, a one-off grant is payable to first home owners that satisfy the eligibility criteria. In addition to the FHOG, state governments may also offer first homeowner concessions or exemptions on stamp duty. Conditions and the amounts granted vary from state to state – visit firsthome.gov.au and select your state for more information.
- First Home Super Saver Scheme (FHSS) – Allows you to save money for your first home faster by making voluntary concessional (before-tax) and voluntary non-concessional (after-tax) contributions to your super fund (max of $15K in any one financial year, up to a total of $30K which may be saved toward your property), and then apply to release those funds when you are ready to purchase your first home. Note there are strict eligibility criteria and important tax implications with this scheme. Refer to the First Home Saver Scheme section on the ATO’s (Australian Tax Office) website for more details.
- Still not sure whether to rent or buy? See our article “Getting a home – should I rent or buy a house?” for some more considerations to help you decide whether this decision is right for you.
Even if you are only at the beginning of your wealth-building journey, hopefully, these considerations can help you buy property in Australia and understand that not all debt is bad – there are solutions available to help you get into the property market.
Even if you aren’t sure about the best way to save for a house and can only afford a small deposit, depending on your circumstances, buying may be better for your net worth in the long run than paying rent on someone else’s mortgage! If you are reading this guide, and you would really love to own a property but aren’t sure how to save for a downpayment on a house because at the moment you are struggling to overcome your current debts, we may be able to help get you on the right track!
Contact us on 1300 003 328 for an obligation free consultation with one of our knowledgeable Credit Counsellors, who will be able to conduct an assessment of your current debt situation, and help you make a plan to get back on track.
*Note the information in this article is current as of January 2021.