How to buy your first home without giving up your avo smash

Struggling to get into the property market? You’ve probably heard them all: you have too many lattes, have an avo smash addiction, or you’re just a spoiled millennial.

Do you think these are all unfair claims? After all, you have a good job, your lifestyle is far from extravagant and you have been saving for years. So why does the Australian dream of owning your home seems to keep getting further?

You can’t even say that life is tougher these days. Older generations will tell you that back in the 80s, interest rates were through the roof, which made their mortgage repayments hard to manage.

But according to Housing affordability researcher Rachel Ong ViforJ: “Three or four decades ago, the house price to income ratio was sitting at around 3.5. Now, house prices are around six times [the] incomes nationally — and in Sydney, the ratio is more than eight times”.

With house prices outpacing income growth, it is very hard for young people to save enough for a deposit.

The media have been talking about these challenges for quite some time now, but there’s one thing they don’t focus on: the solutions.

That’s what this article is all about. We will take you through the 7 most important things to start doing today to get your foot in the door… of your first home.

7 Proven Strategies to Buy Your First Home

Not ready to give up your avo smash? Great, because with these strategies, you'll be able to brunch your way through to your first property.

Here is what you need to do:

1. Adopt a possibility mindset

2. Take a financial health check 

3. Determine how much home to buy

4. Find your deposit sweet spot

5. Become an attractive borrower

6. Choose the best grant for you

7. Use your heart and your mind

1. Adopt a possibility mindset

It is very easy to fall into the trap of believing that it’s impossible for someone your age and with your income to own a property in this market.

In truth, many people like you buy properties every year, and they don’t have “squillionaires” parents to help them out. How do they do it? 

They might not be aware of it, but they adopt a mindset that shifts their thinking from ‘life as it is’ to ‘life as it could be’.

Having a possibility mindset starts with asking yourself ‘how’ questions. How could I make this happen? How could I save enough for a deposit? How did people in my situation succeed?

The last question is particularly important. Do your research and talk to people who “made it" around you. This will give you some valuable tips, and also show you that, yes, you can do it too!

Just don’t confuse possibility mindset with positive thinking. Positive thinking means you can see the positive in any situation. It makes you feel good in the present, but it doesn’t help you achieve your goals. 

A possibility mindset helps you entertain future scenarios. 

It’s about seeing the gap between where you are and your end destination and then realising that you can actually get there. It’s not as hard as you thought it was.

Have all the smashed avo toasts you want, the way you want them.

2. Take a financial health check

Find out where you are at. It might surprise you to see your money is in better shape than you think.

This step is about knowing how much you can afford. This doesn’t mean the maximum you can borrow, it means the maximum you’re prepared to pay each month.

Take your income and deduct:

• All your current financial obligations and monthly expenses, including food, transport and entertainment 

• The likely costs of owning a property, such as rates and taxes, utility bills, insurance, repairs and maintenance.

How much do you have left? That’s the maximum you can afford to pay every month towards your home loan repayments.

Is it doable? To figure that out, ‘try before you buy’. For six months, live on how much you’d have left after making your mortgage repayments, to see how it feels.

3. Determine how much home to buy

The previous step has shown you what you can comfortably borrow (that’s why it’s also known as ‘borrowing capacity’). Now take that one step further and find out how much home you should buy by identifying your property budget.

Think about what you want and what you really need. Do you need a garage worth $75K? Do you really need a home office? With Covid, everyone seems to need one. But now that most companies are adjusting to hybrid working, mixing your days between the office and a cafe or shared space could be a more affordable (and sociable) option.

Once you’ve got your list of criteria, it’s time to prioritise! Rank each entry by importance. Is it a deal-breaker or just a nice-to-have? 

Categorise each entry as:

• Must-have: I am not prepared to buy a property without this feature, or the ability to add it, at any price

• Nice-to-have: I would like to have it and I’m prepared to pay more for it

• Would-be-good: I would like it, but I’m not prepared to pay more for it.

Consider the trade-offs you are prepared to make. Is a big yard more important than a car space? Can you trade size for distance to work?

Are you picturing a green avocado chair in your first home? Why not!

Once you’ve got this clear in your mind, you can identify the suburbs and property types that fit comfortably within your budget. 

Having a budget (and sticking to it) is very important. It helps not to fall in love with properties you can’t afford. 

Knowing you’re not buying beyond your means reduces the stress at every step of the process.

Remember that the old notion of buying the biggest house you can afford no longer holds water. That is anchored in the old mentality that your home should be a place to live and also a good investment. However, there’s a new world of investment options today that can offer you greater returns for less effort than the old bricks and mortar.

Now that you’ve got your budget, check if you’re on the right track by applying the two rules below.

How much home is enough?

1. Your home should cost no more than 4-5 times your gross income.

2. Your mortgage payment should be 35% of your take home pay (max).

4. Find your deposit sweet spot

Saving for a deposit is probably the most challenging aspect of entering the property market. 

According to the 2022 Domain’s First Home Buyers Report, it takes an average of five years and eight months for the typical capital city household to save a 20% deposit. That time frame increases to eight years and one month for a young couple of Sydneysiders on an average income saving for a house worth $900,000.

However, saving a 20% deposit isn’t essential, and doesn’t always make financial sense.

To understand why, let’s look at the reason ‌why people usually recommend a 20% deposit: avoiding lender’s mortgage insurance (LMI). 

LMI is a one-off insurance premium lenders may charge you to protect them if you default on your mortgage. LMI is based on a percentage of your loan amount. So the smaller your deposit, the larger the bill.

But while LMI can add thousands of dollars to your overall costs, it isn’t always something you should avoid. That’s because it can help you get into the housing market faster – which, when prices are rising, could be cheaper than waiting and paying more for a property. 

So how much deposit do you need?

The sweet spot is around 12%. Having less than 10% can lead to a large LMI bill, higher rates and fewer lenders willing to consider your application. But 12% gives you competitive pricing, more lender options and a moderate LMI bill. 

Whatever you do, don’t drain your emergency stash to cut down on LMI.

If you can’t get to 20% or 10% deposit, there is still a way. The recent 2022 federal budget has expanded the First Home Loan Deposit Scheme, helping those who qualify to secure a home loan with a 5% deposit.

In the 2022 budget, there are 35,000 places, plus an extra 10,000 places for first home buyers in regional areas.

Just make sure you don’t bite more than you can chew. Yes, I’m still talking about home loans here, not avo toasts. With signs of interest rates going up, economists estimate almost 300,000 mortgage borrowers are at serious risk of default.

The First Home Loan Deposit Scheme could help with your deposit, but if interest rates keep rising, a too large home loan could put you under financial stress. Make sure that doesn’t happen to you.

Grow an avocado plant and have avo smash in bed -  Photo by Maahid

5. Become an attractive borrower

Getting your home loan application approved isn’t just about your ‘purchasing power’, i.e. how much you earn or the size of your deposit. 

Lenders also want to know your serviceability, which is your capacity to repay the loan. 

To work that out, they’ll look at several factors, including your: 

• Credit file – to understand if you’re a responsible borrower with a track record of meeting repayments.

• Existing debts – such as personal loans, car loans and credit cards. 

• Ongoing financial commitments – such as childcare and school fees.

• Living expenses – to help them calculate how much you can afford to borrow. 

So if you’re wondering how to get approved for a home loan… you should make sure you’re in the best financial shape possible in the months leading up to your application.

That means: 

• Checking your credit file – so you can see if there are any faulty entries that need correcting.

• Paying down debts where possible – to boost your borrowing power. 

• Reducing or eliminating unused credit card limits – because many lenders consider the total limit as a liability (debt) even if you never hit your limit or make all your repayments on time. 

• Tracking your monthly expenses – to give you an accurate picture of where your money is going.

• Staying in your current job – as being unemployed or on probation can severely limit your options.

If you want to know more, here are the Top 9 things banks look for when approving home loans.

6. Choose the best grant for you

Both the federal and state governments acknowledge ‌it can be difficult for first home buyers to get on the property ladder. So they have several initiatives that can help, including:

• The First Home Loan Deposit Scheme – which helps eligible first home buyers purchase a home with a deposit of as little as 5% without paying LMI.

• The First Home Super Saver scheme – which allows you to save money for your first home inside your super fund (potentially reducing your tax bill).

• Stamp duty concessions and exemptions – which vary depending on where you live.

• First home owner grants – which, again, vary depending on the state where you live.

While qualifying for these schemes can help you buy your first home sooner, there might be some trade-offs. 

For example, you may be forced to buy a new property or build your own, rather than purchasing an established property.

The Avo Lover Home - Photo by 傅甬 华

7. Use your heart and your mind

It almost feels like falling in love for the first time: everyone remembers the emotion of getting the keys to their first abode. 

When buying your first home, your heart is always on the line, and so it should, despite what most people recommend.

Humans are not as rational as we think. Making such an important decision without the influence of our emotions is impossible.

After all, if you look at your home purely as an investment, you’ll end up buying in a suburb (or city) where properties are affordable and expected to increase in value, but far from where you want to live.

But don’t go too far on the emotional side either. The media often talk about your first property as the ‘biggest investment of your life’. Falling into this trap will make your decision too emotional.

Most people who buy their first property have budget constraints, which means they will not buy the perfect home… just yet. And that’s part of the game.

To keep your emotions in check, don’t send your critical mind on holiday. It is a powerful ally in your property quest, helping you consider your situation objectively and screen properties based on your list of criteria and their intrinsic value (not the stylish furniture sourced by the sales agents to make an impression).

Your mind is also in charge of one of the most important steps in the process: the research.

You want to gather as much information as possible about the suburbs you’ve identified as having potential. Research property prices and trends in the local area, using CoreLogic, Realestate.com.au, and Domain. 

You should also talk to real estate agents and your mortgage broker to get a sense of what’s happening in the local area.

A note of warning around online calculators. While they make the process seem easy, they don’t consider your specific situation and don’t make you aware of hidden costs and opportunities.

This is the time when you want to have a Sherpa by your side.

Green skies ahead! - Photo by Vlado Paunovic

Bottom line: wait for the right time

A home is one of life’s biggest expenses; saving a latte here and an avo smash there won’t help you get into the property market.

Plus, how do you expect to survive the house hunt without caffeine and good fats?

Don’t sweat the small stuff and simply apply the strategies in this article to get your hands on your first property.

And if you really want to get into the property market, but you realise your first home is out of reach, rentvesting could be a good option for you.

Most importantly, don’t rush into buying just because your friends are doing it or your parents are badgering you. You’ll see that waiting for the right conditions helps you to find the best property, live comfortably with the mortgage and enjoy your new place.

The golden rule is to buy property, not too much, only when the time is right for you.