Buying your first property is an exciting milestone and major achievement given today’s affordability constraints. Given the amount of money involved, however, mistakes can be particularly costly.
I can’t count how many times people have made mistakes when buying their first property – or how many dollars that mistake cost them (often tens or hundreds of thousands).
This is an opportunity for you, however: learn from other’s mistakes to avoid repeating them yourself. These mistakes typically fall into one of the following:
1. Forgetting purchase costs
The property purchase price is not the only number you need to factor into your calculations.
Buying property has various upfront costs including:
- Stamp duty
- Conveyancing costs
- Lenders Mortgage Insurance (LMI) – typically where you have less than a 20 per cent deposit
- Utility connection bonds/fees
- Insurance – building and contents, title, landlord (for an investment property)
LMI can often be rolled into your loan, freeing up some cash, but doing so means paying interest on it for years to come.
There will also be ongoing costs, like council rates and strata levies, plus tax on any rental/Airbnb income.
Forgetting any of these will impact how much you can borrow and your finances once you have a property.
2. Not downsizing debts
Credit cards, Buy Now Pay Later (BNPL) schemes, car and personal loans typically have high interest rates (allowing them to quickly balloon if not paid off), aren’t tax deductible, and don’t contribute to growing wealth (like a mortgage or investment loan can).
They also restrict how much you can borrow. Lenders include repayments as part of your spending calculations. In the case of credit cards, they also assume you have them maxed out when assessing your ability to service a loan.
You can counter this by paying down debts ASAP, making repayments on time, lowering your credit limit and cancelling cards you don’t use.
3. Choosing the wrong lender or loan
Going with your current bank may seem easier, however doing so likely means you’re overlooking better deals elsewhere. Even if you don’t change, threatening to leave may make your current bank do better, both on your new mortgage and your existing banking facilities.
When choosing a loan, don’t just look at the headline rate – most of these are introductory, only lasting a few months and only for new customers. Look at the ongoing rate plus any additional fees.
Other loan considerations include:
- Fixed or variable rate (or split)
- Principal and interest versus interest-only
- Loan term
- Home loan versus investment loan (important if you plan on rentvesting)
- Whether to have an offset account.
4. Wrong repayment schedule
Making loan repayments monthly costs more than if you make them fortnightly (or even weekly).
Monthly means you make 12 repayments per year, but fortnightly isn’t double (24) – it’s actually 26 repayments per year, because there are 4.5 weeks in most months.
This way, you’ll pay the principal amount off faster, meaning less interest gets applied. Plus, smaller regular repayments are easier to budget for than fewer larger ones.
5. Misusing the Bank of Mum and Dad
A 2023 survey suggested 11 per cent of Aussies received financial assistance from their parents, with the average amount being $56,231.
Cash gifts, loans or mortgage guarantees can help you overcome affordability constraints and the rental trap to get into the property market. However, it’s not without it’s risks: leaving your parents financially exposed and/or liable if you default on your mortgage, potential tax liabilities, and lost income.
Relationships can also become strained – your parents may think their assisting you to get the property allows them to interfere in its upkeep, or your siblings may feel cheated out of future inheritance.
Any assistance should be put in writing, agreed by everyone involved, and independently checked.
6. Sacrificing advice
Forgoing professional advice before you buy property can seem like an easy way to save money, but it could actually cost far more, especially longer term.
A good:
- accountant helps you minimise tax.
- financial adviser helps you maximise income and investments, reduce costs, safeguard against risks and advise you on strategies such as first-home buyer schemes.
- mortgage broker helps you find suitable mortgage options and apply for any first-home buyer grants and stamp duty discounts.
Accounting and ongoing financial advice expenses are generally tax deductible too, while mortgage brokers are usually free (they get paid by your mortgage lender).
Now that you know about these common property finance mistakes, the next step is to avoid making them – and you’ll be sitting prettier than the countless people before you who learned the hard way!
Disclaimer: The information in this article is of a general nature only and does not constitute personal financial or product advice. Any opinions or views expressed are those of the authors and do not represent those of people, institutions or organisations the owner may be associated with in a professional or personal capacity unless explicitly stated. Helen Baker is an authorised representative of BPW Partners Pty Ltd AFSL 548754.
