Posted by Ask_Josie on Nov 24th, 2008

The Government’s announcement that they would temporarily double the First Home Owner’s Grant from $7,000 to $14,000 if you purchase an existing home and triple it to $21,000 if you purchase a brand new home was welcomed by the housing industry.   They certainly need a boost at the moment.

I remember the days when I was itching to buy a home and it felt great when I was able to purchase a little three bedroom home in the burbs on my own.   This was back in the early 1990s.   I sold this house in only a few years ago and it did increase in value.  However, after I calculated interest costs and ongoing maintenance I made very little from it.    At least it forced me to save.

Purchasing a home is a major commitment and it is important to remember there are no guarantees it will increase in value.   There are plenty of examples where they have declined in value and are ruining the financial lives of many battlers.  Surf the internet and read the various articles about house prices in Western Sydney, which is a typical suburb favoured by first home owners.

Luckily interest rates are falling.  Have you done some simple maths to work out how much you would be paying the bank (and boosting their bottom line).  With interest rates around 7.5%, for every $100K you need to borrow, you have the pay the bank at least $7,500 in interest payments each year.   Assuming you need to borrow $300K, your interest payments will be at least $22,500 per year after tax (and you haven’t paid any of the principal!).   To put it another way, the bank is charging you $433 per week to borrow their money.    I won’t mention all the other expenses associated with owning a home.

As a guide, you would be stretching your budget if repayments represent more than 30% of your take home pay.   I can understand why people hate renting as you are at the mercy of the landlord.  The major advantage of renting is that you don’t have any ongoing maintenance (can you hear the landlord whinging?).

You also need to think about the future prospects of the property market which is classified as a growth asset.   Just like any growth asset, the prices go up and down.  The real value of your house is only revealed when it is sold.     Just ask yourself one question.  ’Am I better off purchasing now in order to take advantage of the $14K or $21K first home owner grant, or would I be better off waiting’?   I am not conviced young couples will be better if they purchased now.  For example, let’s say you purchased a $300K property (not including possible stamp duty, legals, loan fees etc), did you know that your home only has to decrease in value by 2.4% and you will effectively lose the extra $7K that Mr Rudd is offering?.      What if the same house was forced to reduce its price to $270K, you will be in front.   Food for thought anyway.   Do you have a decent deposit, 20% would be ideal?    If you saved $60K, your interest saving would be $4,500 per year (assuming 7.5%pa interest rate).

Following is a loan calculator to help you work out if you can afford the repayments - http://moneymap.nicri.org.au/

If you need help with a budget, the following worksheet produced by BT could be useful - budgetworksheet-bt

If you get cold feet, think about the First Home Saver Accounts which are concessionally taxed (maximum 15% tax) and you receive a bonus of 17% from the Government if you save at least $1,000 per year (max $850 per year, if you save $5K).    Assuming the First Home Owners Grant will still be around, you will also receive $7,000.   Disadvantage is that you have to leave it there for at least four years to get the benefit.  Following is a bit more for you to digest, plus a calculator produced by ASIC.

firsthomesaversaccountfactsheet1 - fact sheet

first-home-saver-account-fido-081 - calculator

Not sure if you are eligible for the First Home Owner Grant?  The $14K/$21K is administered by each State and Territory.   Following is a link with all the goss: - www.firsthome.gov.au

Please don’t get the impression that I am against young couples buying a home.  Far from it.   I am concerned that they may be taking on too much debt and could end up regretting the day they made the decision to buy their dream home which turned out to be their worst nightmare.

Happy house hunting and hope you find the right one at the right price.

Josie Kay